Planning whiz – August 2023

Plan for retirement

Geojit’s Investment Analyst, Gibin John, helps a couple working in the private sector plan for their life goals which include saving for their children’s higher education, daughter’s marriage, buying a car and early retirement. Gibin John analyses the client’s current savings to help them invest and plan ahead for life. 

I am 40-year-old and working as a Systems Engineer. My family includes wife (40), son (10), and daughter (7). Children are studying in 5th standard and 2nd standard, respectively. My monthly salary is Rs 70,000 and wife’s salary is Rs 50,000. We have taken a home loan of Rs 30 lakh at the rate of 9.5% and are paying Rs 28,000 as EMI. The loan tenure is 20 years and we had made some additional payments towards the principal and so this loan will end in June-2026. The property is approximately valued at Rs 1 crore.  Our monthly living expense is Rs 50,000 including children’s education fees. We are currently investing Rs 10,000 every month in mutual fund and paying insurance premium of Rs 5,000 annually. Our savings account balance is Rs 3,50,000.

Both of us are working in private sector therefore we have no defined pension plans after retirement. So mainly we need your advice on retirement. We are planning to retire at the age of 55. After retirement we will require around Rs.25,000 per month to meet living expense. We have a few other goals which are,  

  1. Accumulate an amount of Rs. 10 lakh each for kids’ higher education.
  2. Build a corpus of Rs 15 lakh for daughter’s marriage.
  3. Buy a new car worth Rs 10 lakh after 4 years.

Request you to give us a road map to reach these goals.

Gibin John, a Certified Financial Planner replies:

It’s good that you have decided to plan and invest for your goals. Especially since you have only 15 years for retirement. Building a house was one of your goals, which you have now achieved.  We assume that your investments till now was used for constructing the house. Your existing investments of Rs 3.50 lakh in bank account has to be kept as emergency fund. This amount can be used to meet any unanticipated expenses which may come up in the future.

Let us see how you can create a corpus for kids’ education.  You estimate that each of their higher education expenses will be Rs. 10 lakh. But considering education inflation of 8%, the cost of education, will be Rs. 17 lakh for your son and Rs. 21.50 lakh for your daughter, by the time they become eligible for higher education. For accumulating this amount, you need to invest Rs 14,300 and Rs 10,700 respectively in equity oriented mutual funds.

Based on your current financial situation, if you allocate the available surplus amount to fund the full corpus of these goals it will affect other goals. So, you may accumulate 50% of the corpus through investments and for balance amount you may consider taking an education loan. As per existing norms, loan repayment won’t begin until the children start working, giving them plenty of time to repay the loan with their salary. For accumulating 50% of the cost of son’s education, you need to invest Rs 7,000 per month in equity mutual funds for next 7 years and for creating 50% corpus for daughter’s higher education you may invest Rs 5,400 in equity-oriented mutual fund for next 10 years.

Additionally, you want to build up a corpus so that when your daughter becomes 25 you may pay for her wedding. The estimated cost is Rs. 15 lakh in today’s money. We suggest you rethink this expense and if possible, reduce this cost to Rs 10 lakh. If the inflation is 6%, then this cost will rise to Rs 28.50 lakh at the time of marriage. As this goal will be realized after your retirement  you will have to invest Rs 6,000 per month in equity oriented mutual fund till retirement.

The next goal is to purchase a car worth Rs 10 lakh after 4 years. We suggest you extend the period by one more year then you will get more time to create the corpus for this goal. Also reduce the goal amount to Rs 8 lakh. This goal amount will become Rs 10.70 lakh at the time of realizing your goal. After you have paid off your home loan, you can put the Rs 28000 set aside for EMI towards this goal for two years. You can create a corpus of Rs 7 lakh from this investment and you can accumulate the balance amount  by investing the existing surplus of Rs 5,200 in equity oriented mutual funds.

Your next but important goal is to build your retirement corpus. You are planning to retire at the age of 55 and you expect  post-retirement expense of Rs 25,000. When we take inflation into account, this monthly expenditure will increase to Rs 60,000 after 15 years, that is the time of retirement. For accumulating this inflation adjusted corpus for post-retirement expenses till the age of 80 you will have to create a corpus of Rs 1.60 crore by the time of retirement.  To build this corpus over the next 15 years, you must invest Rs 40,000 per month till retirement. After assigning the money to other goals, you only have a surplus of Rs 18,000 to invest towards the retirement corpus. After buying the car you will be able to allocate Rs 33,000 towards this goal till retirement. Additionally, you can reassign Rs 7,000, which was set aside for building the corpus for your son’s higher education after five years, towards this goal. Assuming you would get 10% return from this equity-oriented investment you will be able to create a corpus of Rs.1.50 crore at the time of retirement. This amount will meet the expense which will be equal to the current monthly expense of Rs.23400

You have not mentioned about the holding value of current mutual fund SIP. So, we have not considered this value for our calculation. Hope you got some clarity and direction to manage your surplus.

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