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EMI burden to impact retirement
corpus
As recommended by ET Wealth,the Navlurs have maintained a high investment
rate and bought adequate insurance.However,they will have to wait for a rise
in income to plan for retirement.
AMIT KUMAR
The main objective of financial planning is to help people understand how
they can use their existing and future income to achieve financial goals.When
36-year-old Rajeev Navlur wrote to us seeking help,it was evident that his
portfolio suffered from the usual shortfalls: low and expensive insurance,and
limited income,which meant that his goal of buying a house would have to
wait.However,a year later,things have changed,and how.The family income has
nearly doubled,they have bought a house worth 1.5 crore,and the couple has
adequate insurance.However,their rush to buy the house and the massive
EMI,which will eat up about 60% of their income from next year,poses a
problem: it has pushed back their retirement planning.
The original plan
Rajeev,a marketing manager in a pharma company,lives with his 32-year-old
wife,Smita,and their two-year-old daughter Riya,in Mumbai.When the couple
wrote to us,their monthly income was 43,500,and after accounting for
household expenses,mutual fund SIPs,PPF and insurance premium,they were left
with a surplus of 6,094.Though this amount wasnt high,they held nearly 70% of
their investments in equity.So,goals like their daughters education and
marriagebuilding a corpus of 33 lakh after 15 years and 1.03 crore after 25
years,respectivelywere already taken care of.
The
surplus was enough to plan for their retirement.However,they wanted to buy a
house worth 1 crore,and even though 80% of the household expenses were to be
paid by Rajeevs father,their income wasnt enough to take a home loan and pay
the EMI.
Pankaaj Maalde,chief financial planner of Apnapaisa.com,recommended some important changes in the portfolio,besides advising how to invest for retirement.He first addressed the issue of inadequate health insurance.They had a family floater plan of 3 lakh from ICICI Lombard.Maalde suggested they move from floater to individual policies,including one for their daughter,for a cover of 3 lakh.They were also asked to buy individual top-up plans worth 5 lakh,which would cost them around 13,000 per annum.Besides,they were advised to buy a 25 lakh critical illness cover and disability cover of 25 lakh for Rajeev,costing around 12,000.
The
couple had done slightly better with life insurance and had a cover of 55
lakh through two term plans and two moneyback policies from LIC and
ICICI,worth 5 lakh.This,along with their liquid investments of 16 lakh,gave
the Navlurs a cover of 71 lakh,which was adequate.
However,we
suggested that they switch their term plans to the online mode to save on
premium.Though the money-back policies were expensive at an annual premium of
24,042 for a cover of 5 lakh,Maalde suggested that they continue with these
to form the debt component of their portfolio.Also,the Navlurs were advised
to get a term cover for Smita as and when she started working.Given their
investments worth 11 lakh in mutual funds,they had laid the base for
achieving the goals of education and marriage of their daughter.
SUGGESTIONS
IMPLEMENTED ...
Investing in equity via SIPs.Buying a term plan for Smita. SUGGESTIONS IGNORED Not buying critical illness and personal accident covers.
Not
waiting to buy a house and ready to pay an EMI that is 60% of their income.
Our suggestions & the follow-up The present situation of Navlurs is remarkably different. Smita started working in May 2012 as an electrical designer, and now the couple brings in a monthly income of 95,000.After accounting for household expenses,mutual fund SIPs, PPF and insurance premium,they are left with a surplus of 20,903.This amount seems impressive, especially if you consider the fact that 30,000 of the expenses are in SIPs and the PPF.
However,
since the family has bought a house, the couple will have to let go of some
of their SIP investments to pay the EMI. The house, bought in Mumbai and
available for possession in June 2014,will result in a monthly outgo of
55,000.The couple is already bracing for the high EMI by saving for it. We
plan to accumulate about one years EMIs by December 2013 and have started
working towards it from February this year. We have already accumulated 3.25
lakh by redeeming some mutual fund investments.We will get 1.4 lakh from a
recurring deposit, which will mature by December 2013.We also plan to
accumulate the balance 2.35 lakh by selling additional mutual fund units and
cutting down on SIPs, says Rajeev.
This
seems like sound planning on their part,but after the EMI kicks in,nearly 60%
of their income will be directed towards it.Given the other
expenses,including the domestic financial outgo and insurance premium,it
means the couple will have to cut down the SIPs by more than half.This
will,of course,have an adverse impact on their retirement planning.As
mentioned earlier,the couple need not worry about their daughters goals as
they will be taken care of by their existing investments.
As for
the goal of 3.3 crore for their retirement,about 1.93 crore will come from
their mutual fund investments,the PPF and both insurance policies.For the
rest,the couple needs to invest 13,000 per month,but there is no surplus available
and they will have to wait for an increase in salaries to work towards this
goal.However,Rajeev is not worried about the shortfall.A rise in
incomes,along with the rental income from our current house,will ensure that
we have enough to build a retirement corpus with, he says.
The
couple was also recommended moving from offline to online term policies,but
they have rightly bought a term plan of 1 crore for Smita.They are once again
advised to move to online term plans as it will save them a sizeable amount,which
can be used to pay for the added health cover.Other goals,like building a
contingency fund,have been met and sustained.Maalde also suggests that in
case the couple does not manage to build a retirement corpus,they can reverse
mortgage their house.
Are they on the right track
Maalde
has been impressed by the couples investments and,though they are still short
of meeting an important goal,he believes that a rise in income and additional
rental income will help them sail through.However,while ending their mutual
fund investments next year,they must be careful about redeeming the laggards
and retaining the outperformers.
Financial plan by Pankaaj Maalde,CFP,Apnapaisa.com |
