Planning Whiz – February 2024

Financial Planning

Geojit’s Investment Analyst, Gibin John, helps an individual working for a private firm find out how much corpus he would require to maintain a comfortable retired life. He also explains the need for contingency funds, health insurance and how to invest to build a sizeable nest egg for post-retirement years. Gibin John analyses the client’s current investments to help him invest and plan ahead for life. 

I am Dinesh, 49 years old and my wife is 48. I am working in a private firm and I am planning to retire at the age of 57. We have two sons. Both are married and they are staying separately. My monthly salary is Rs. 1,20,000 and rental income is Rs. 23,000. Monthly expenses are around Rs. 45,000.

My investments include mutual fund investments of Rs 23,00,000, shares of Rs. 12,00,000, bank fixed deposit of Rs. 13,00,000, land worth Rs. 55 lakh and gold ornaments worth Rs. 35 lakh.

I am planning to retire at the age of 57 and I want to know whether my investments are sufficient for a financially peaceful retirement? I would also like to know if it is possible to retire early, perhaps at 55?

Gibin John, a Certified Financial Planner replies:

Dear Mr. Dinesh, your current age is 49 and you are planning to retire at the age of 57. You have made many investments during your career and many of your important life goals have been achieved. Now we can analyze whether the corpus that you are left with is sufficient to meet the retirement goal.

Your current salary income is Rs. 1,20,000 and your rental income is Rs. 23,000. Therefore, your total monthly income is Rs. 1,43,000. Your monthly expense is Rs. 45,000 and the balance surplus is Rs. 98,000. This amount can be invested for creating retirement corpus.

Firstly, you have to create an amount to meet the contingency requirements. You have not mentioned the savings account balance or any other liquid funds in the letter. Hence, in your case, we suggest you create a new fund for contingency purposes by using the existing surplus amount. Ideally, everybody has to keep an amount equal to three to six months’ expense as an emergency fund to meet an unexpected financial emergency in the life. In your case, this amount is Rs. 3 lakh. You can allocate Rs. 3 lakh to a fixed deposit for this purpose.

You have achieved your major life goals. Now you want to plan for your post-retirement life. Like you, most individuals wait until they have achieved other life goals and plan for retirement towards the end of their careers. But from a financial planning point of view, one should prioritize retirement planning from the beginning of the career since you may not get any income during this period. If you have not accumulated sufficient funds for retirement, it is difficult to manage your living expenses during the post-retirement period.

Your actual retirement age is 57 but you are exploring the possibility of retiring at the age of 55. Currently you are getting rental income of Rs. 23,000. Here we assume that the rent will grow by at 5% rate and this income you will continue to get during your entire post retirement period. If we consider this income, you will require a corpus of Rs. 1.30 crore to meet the post retirement life expenses. Else, this amount will be around Rs. 1.40 crore.

You have already accumulated Rs. 45 lakh financial assets in mutual fund Rs. 23 lakh, shares Rs. 12 lakh and fixed deposit Rs. 10 lakh  (after allocating towards contingency fund). Along with this, you have an investment in the property worth Rs. 55 lakh and gold investments worth Rs. 35 lakh. These investments are sufficient to meet the post-retirement expense. However, you may create additional wealth by utilizing current surplus amount. You may invest the surplus amount of Rs. 98,000 in the ratio of 40:60, that is, 40% in equity-oriented investments and 60% in fixed return products like debt mutual funds or bank recurring deposits. If this equity and fixed income investments provide an average return of 12% and 6% respectively in the future, then you can create an addition wealth of Rs. 40 lakh from equity-oriented investments and Rs. 50 lakh from fixed-income investments at the time of retirement.

You have not mentioned health insurance.  As you may be aware, medical inflation has been rising globally, and India is no exception. Any kind of medical care, including visits to the doctor or hospitalization, can have a significant effect on your finances. Health insurance covers certain medical expenses without dipping into your retirement savings and other plans. So, if you don’t have insurance, you should think about getting a health insurance policy right away with coverage of at least Rs. 10 lakh.

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