I am employed in a Public Sector Undertaking with a monthly salary of Rs. 1 lakh. My family comprises of my wife, who is not employed, and my son, who is currently in Class 9. I have four and a half years remaining until retirement. While I own a house in my hometown, I currently reside in a flat in Ernakulam, purchased through a housing loan. The outstanding loan balance is Rs. 40 lakhs, with monthly instalments of Rs. 50,000 extending over the next nine years.
Investments and expenses: I invest Rs. 16,000 per month in various mutual funds and have bought some shares, which totals around Rs. 15 lakhs. Following loan repayments and investments, I allocate the remaining funds towards household expenses.
My primary financial goal is to accumulate Rs. 40 lakhs for my son’s education. Post-retirement, I plan to settle in Thrissur. The current market value of my Ernakulam flat is approximately Rs. 75 lakhs if sold, or it could generate a monthly rental income of Rs. 20,000. Can you help me with a good financial plan?
Gibin John, a Certified Financial Planner, replies:
Your commitment to financial discipline is evident. As a public sector employee approaching retirement in four and a half years, your primary concerns naturally centre on post-retirement expenses and financial management. While public sector employment provides pension security, it’s crucial to evaluate whether accumulated savings will maintain your current living standard. Unfortunately, it’s only when retirement is imminent that individuals gain clarity on their pension and expenses. By then, however, there is not enough time to accumulate a retirement corpus, and many are faced with a difficult financial situation. Naturally, there comes a time when they will need to lower their expenditures to match the pension amount. To avoid this situation, it would be prudent to do a thorough financial planning at least once before you turn 40 years old.
Your present monthly income of Rs. 1 lakh is allocated between your housing loan EMI of Rs. 50,000, living expenses of Rs. 34,000, and investments of Rs. 16,000 in mutual funds through SIP. Since the loan repayment will end after 9 years, you can continue with your investments the same way.
Your son will start his higher education around the time of your retirement. Therefore, the entire amount for the child’s higher education should be accumulated within the next four years. Your child who is currently studying in class 9 will enter higher education in 4 years. By that time, you need to bridge the gap between your existing investments of Rs. 15 lakhs and your target of Rs. 40 lakhs. With your current investment pattern and assuming a 12% growth rate, you could accumulate approximately Rs. 33 lakhs in four years. However, since your stock market investments are the highest and there are only a few years left for the goal, it is advisable to gradually transfer the amount to low[1]risk investments. If you do so, you will be able to save up to about Rs 29 lakh. Allocating your entire savings for one goal may result in you not being able to find the money for other needs in the future. Considering that your retirement coincides with your son’s higher education needs, it would be advisable to consider a combination of savings and an education loan to meet this goal.
Your housing loan situation requires careful consideration. With Rs. 40 lakhs outstanding and monthly payments of Rs. 50,000 continuing for nine years, you will still have significant loan obligations post-retirement. Based on the provided information, an estimated Rs. 23 lakhs would remain to be repaid at the time of retirement. A loan repayment of 50,000 rupees is a large amount even considering today’s income. So, the question is whether this repayment can be continued after retirement.
Hence, the most pragmatic approach would be to sell the Ernakulam property, which could fetch approximately Rs. 75 lakhs. After settling the remaining loan amount, you would have Rs. 52 lakhs available for investment. This sum, if placed in a fixed deposit earning 7% interest, could generate monthly returns of around Rs. 30,000, significantly exceeding the potential rental income of Rs. 20,000.
Assuming the property will appreciate at a rate of 5% annually, it would be financially prudent if you sell the flat near retirement and investing the proceeds after loan settlement. Then depending on your risk tolerance, you might consider allocating up to 20% of the proceeds to equity-based investments, with the remainder in fixed deposits for stable returns.
While a more detailed retirement plan would require additional information about your pension benefits and anticipated post-retirement expenses. But one crucial recommendation would be to secure health insurance coverage of at least Rs. 10 lakhs, if not already in place. This would provide essential protection against unforeseen medical expenses during your retirement years.
