Planning whizz – December 2023

Financial Planning

Geojit’s Investment Analyst, Gibin John, helps a working couple plan for their life goals which include saving for their son’s higher education and buying a car. He also explains 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.

My name is Raji, aged 37 and my husband is 40 years old. We are working for a private company. We have a son who is 10 years old. Our monthly net income is Rs. 1 lakh each. Also, we are getting Rs. 12,000 as rental income. In addition to our monthly house loan EMI of Rs. 27,000, our living expenses total about Rs. 60,000. The outstanding loan amount is Rs. 17 lakh with an end date of May 2031.
Currently, we have no structured investment. Our investments are as follows: five-year bank fixed deposit of Rs. 5 lakh at 7.5% interest rate which will mature on 14th March 2025; savings bank account balance of Rs. 3 lakhs; insurance policy started in 2016 sum assured Rs. 10 lakh with a yearly premium of Rs. 26,192 for 20 years; Monthly deposit of Rs. 20,000 in RD for two years
at an interest rate of 7%. It will mature on 20th February. Our house in which we currently reside is worth Rs. 1 crore. We also own a flat worth Rs. 40 lakh and land worth Rs. 30 lakh. Additionally, we have 100 sovereigns of gold ornaments.

We are investing based on the opinions of various sources. Now, I have a doubt whether these investments are sufficient. Our main goal is son’s education for which we are expecting a cost of Rs. 25 lakh. We are planning to buy a new car after four years and the expected cost is Rs. 15-
20 lakh. I am planning to retire at the age of 55 and expect a monthly income of Rs. 60,000 from our investments to meet our expenses at that time. Also, we need to close the home loan. Please guide us to achieve our dreams.

Gibin John, a Certified Financial Planner replies:

Despite your busy schedule, both of you have found time to plan your finances and invest money. This is commendable and with some financial discipline and planning you will be able to achieve all your financial goals. As mentioned, your current total income is Rs. 2,12,000. After deducting the total expense of Rs. 87,000 from the income, you have an investable surplus of Rs. 1,25,000.

Firstly, you must set a side certain amount for meeting contingency situations. For this purpose, you need to keep a minimum 6 months’ expense. In your case, the amount is Rs. 5 lakh. For creating this amount, you can utilize your 2-year RD account balance. If you utilize this amount fully
or partially during a financial emergency, don’t forget to refill the emergency fund.

Your main goal is to accumulate a corpus for your child’s higher education. You expect a cost of around Rs. 25 lakh towards this goal, after 7 years. But taking into consideration education inflation of 8% every year, after seven years the cost of education will become Rs. 43 lakh. For accumulating this amount, you have to invest Rs. 33,200 every month. This goal is for long term and therefore you can choose equity oriented mutual fund. The expected average return from this investment is 12%.

As you may know, post-retirement period is more critical than the working period as you will no longer receive a regular pay cheque. Given that, having a retirement plan will help you create a regular flow of income after retirement. You are expecting the living expense to be Rs. 60,000 during the post retirement period. Again, taking inflation into consideration, by the time you retire at age
55, this amount would have increased to Rs. 1,71,000. While planning to accumulate your retirement corpus you can consider the rental income, which is currently Rs. 12,000. If this rental income increases by 3% then the rent will be around Rs. 20,000 at the time of retirement. You should create an additional Rs. 4.50 crore after taking this rental income into account to cover inflation-adjusted expenses till you reach the age of 80. For creating this corpus, you may invest Rs. 63,500 in equity oriented mutual fund.

Buying a new car after 4 years is a short-term goal. The
expected cost for this purpose is Rs. 15 – 20 lakh. You may utilize the fixed deposit maturity amount of Rs. 7 lakh for down payment. For the balance amount you may depend on vehicle loan, the EMI for this loan will be around Rs. 10,000. If you choose to sell your old car, then you can
add the money you receive to the down payment and thus reduce the loan amount.

Your existing insurance policies are not giving sufficient insurance coverage for meeting the expenses in your absence. So, both of you should consider taking term insurance of minimum Rs. 1 crore each. We assume that the home loan has been already insured. If this loan is not insured, then that amount also needs to be added to the coverage.

We have not considered your salary increment in this plan. You should invest the incremental part of your salary towards your financial goals to accelerate your wealth creation as well as to inculcate financial discipline.

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