Planning whiz – November 2023

Financial Planning

Geojit’s Investment Analyst, Gibin John, helps a working couple plan for their life goals which include building a house and saving for their daughter’s higher education and marriage. He also explains to them the need for retirement planning and how they can invest to build a sizeable nest egg for their post-retirement years. Gibin John analyses the client’s current investments to help them invest and plan ahead for life. 

I am 33-year-old, working for a private firm and my wife is also 33 and she is a government employee. We have a daughter who is studying in the first standard. My salary is Rs. 55,000 and wife’s salary is Rs. 40,000. Our living expense is Rs. 23,000 and rent Rs. 10,000. I am investing Rs. 15,000 per month in mutual fund SIP. Our existing investments are Rs. 3,50,000 in stocks, Rs. 1,80,000 in mutual funds, Rs. 50,000 in bank savings account and Rs. 3 lakh in fixed deposits (FDs). I have 3 insurance policies. One policy each in my name and wife’s name with Rs. 10 lakh as the sum assured. One policy is in the name of our daughter and the sum assured is Rs. 2 lakhs. I am paying Rs. 18,000 per annum towards all the policies.

My first aim is to build a small house worth Rs. 55 lakh in the next five years. I have already purchased 4 cents of land for building a house. Other important goals are our daughter’s higher education and marriage. The expected cost to achieve these goals are Rs. 15 lakh for education and Rs. 15 lakh for wedding expenses. My company provides health insurance coverage of Rs. 5 lakh. Please give your valuable advice for full filling my dreams.

Gibin John, a Certified Financial Planner replies:

We are happy to respond to your email for guidance on financial planning. You want to make sure that your investments are on track and that you will have sufficient money in the future to meet your financial goals. Your current total income is Rs. 95,000 and the expense is Rs. 33,000 so the surplus amount is Rs. 62,000. Your current investments are in banks, mutual funds, stocks, insurance and in property. It is good to note that you have already invested in various types of investment products and this diversification will help reduce the risk.

Firstly, you should set aside an amount which is equivalent to the six months’ expenses as a contingency fund for meeting unexpected expenses, which will affect the cash inflows. In your case, this amount will be equal to Rs. 2,25,000 and you can earmark your existing fixed deposits for this purpose. After maturity of the existing FD, you may invest half the amount in liquid funds and the balance amount can be kept in fixed deposit to earn better returns from this parked fund.

Your immediate goal is to build a house in the next five years. The expected cost for this goal is Rs. 55 lakh. For raising this amount, you may invest Rs. 45,000 per month for next five years in debt mutual funds or in recurring deposits. If this investment fetches 7% return you can create around Rs. 32 lakh during this period. Along with this corpus amount you may utilize the existing stock and mutual fund investments for this purpose. If these investments generate 9% return during this period, the current value of existing equity investment of Rs. 5,30,000 (stocks and mutual funds) and ongoing SIP of Rs. 15,000 will become Rs.19.40 lakh in five years. So, you can create an aggregate corpus of Rs. 51 lakh for this goal. Considering your current financial situation, we suggest you try and budget the construction cost to Rs. 50 lakh. Then you can avoid taking loans and creating any liability.

Your next goal is daughter’s higher education. The expected cost of this goal is Rs. 15 lakh. If the education cost increases by 8% every year, this cost will become Rs. 35 lakh in eleven years. To accumulate this amount, you may invest Rs.13,300 in equity oriented mutual funds.

The expected cost for daughter’s marriage is Rs. 15 lakh. Again, taking inflation into account, this cost will become around Rs. 48 lakh in next twenty years. After you have accumulated the corpus to build your house, you may invest Rs. 10,200 per month in equity oriented mutual fund for creating this corpus.

You have employer provided health insurance of Rs. 5.5 lakh this may be sufficient to meet current medical expenses. You should also consider taking a term insurance of Rs. 1 crore. You have not provided the details of insurance plans; hence the maturity amount of the existing insurance policies has not been allocated towards any goals.

You didn’t mention any retirement planning goal. As you know, a retirement plan is designed to take care of your post-retirement days by provide a regular income and help you lead a stress-free life. As this is an import life goal, we are providing you with some retirement planning options based on your current living standard. Your present living expense is Rs. 23,000. If you are retiring at the age of 55 years, this cost will become around Rs. 83,000 per month when taking inflation into consideration. If you want to get the inflation adjusted amount, to maintain the current lifestyle till the age of 80, you need to create a corpus of Rs. 2.22 crore by the age of 55. Here we assume 6% inflation and 7% return during the post-retirement period. For creating this corpus, you can invest in equity-oriented mutual funds. You can utilize the surplus amount you’ll have after accumulating the corpus to build your house and investing for daughter’s marriage. As your wife has a state government job, she may get pension after retirement. That amount has not been considered in this calculation.

We are happy to let you know that your existing investments and future cash flows are sufficient to meet your goals. But you must practice extreme discipline in your financial life. We also request you to periodically review and make changes to your financial plan as and when needed.

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