Poor investing may hurt
retirement plan
With no proper investment planning and heavy reliance on cash, the Raos
may have to worry about their sunset years if there is no adequate rise in
salary in the coming years.
DMadhusudhana Rao is late. At 46, he has merely 14 years left to retire,
and all major financial milestones lined up be fore him. He has to educate and
marry his daughter, buy a house and plan for his sunset years. Approaching a
financial planner at this stage would have seemed a desperate, futile plea to
set right his financial life, especially when he has not invested in the right
instruments in the right proportion. In fact, he has barely invested,
considering that nearly 45% of his portfolio, or a massive `20 lakh, is lying
idle in his savings bank account as cash. The next big chunk of portfolio, 38%,
has been taken up by real estate, while a negligible 4% is in equity and 13% in
debt. Rao's insurance planning is also askew, but what works for him is the
reasonably high income and investible surplus. If deployed in the right
instruments in a disciplined manner, he is likely to achieve most of his goals.
In coming to an adviser for guidance at this juncture means that Rao may not be
too late to get back on track.
Existing financial status
Rao works as an assistant manager in a
private firm in Chennai, while his wife, six-year-old daughter, Bramhani, and
father live in Tirupati. Lakshmi, his 40-year-old wife, is a homemaker, and his
70-year-old father is dependent on him.
Rao brings in an income of `88,725
every month, of which nearly `18,000 goes as household expense, `17,000 as
rent, and `5,000 as miscellaneous expenses. He spends another `6,000 on the
education of his daughter and `6,203 as premium for his insurance policies.
This leaves him with an investible surplus of `36,522. Pankaaj Maalde of
Apnapaisa.com believes Rao can meet his goals provided he alters his asset allocation and
overhauls his insurance portfolio.
Insurance coverage
Before charting a financial course for
the Raos, Maalde wants to analyse the family's insurance requirements. Rao has
four traditional plans--which give him a very low combined cover of `9.5
lakh--and one Ulip. After considering the present surrender value, future
premiums payable and expected maturity value based on the current bonus rates,
he thinks that the policies (except for one money-back plan) are unlikely to
beat inflation. Hence, Maalde suggests that Rao surrender these plans and
instead buy an online term plan worth `1 crore, which will cost him `22,000 per
annum. Since Lakshmi is a homemaker, she doesn't need any insurance.
As for the health insurance needs, Rao
and his family are covered by his employer for `3 lakh. While this is enough
for now, Rao should supplement it with `3 lakh individual covers for the family
and a top-up plan of `10 lakh with a deductible of `3 lakh, which will cost him
`24,000 annually. Maalde also suggests that Rao buy an accident disability
insurance worth `50 lakh and a critical illness plan for `25 lakh, which will
result in an annual premium of `24,400. The additional cost of premium can be
funded by the savings from the surrender of his traditional policies.
Road map for the future
Now, Rao needs to focus on his goals,
the first of which is to have a contingency corpus in place. He needs to have
`1.8 lakh, which is equivalent to his three months' expenses. Besides this,
Maalde suggests that he keep aside `2 lakh for his father's medical needs. For
this goal, Rao can allocate the surrender value of `2.5 lakh from his insurance
policies. To this, he can add `1.2 lakh, which will come to him as maturity
value of his money-back plan in 2017. Till then, he will have to rely on `2.5
lakh for emergencies.
Next on agenda is buying a house in one
year's time. “I want to buy a flat worth `55 lakh in Chennai through a home
loan, but don't know if this is a wise decision at my age. This is one of the
reasons I approached a financial planner,“ says Rao.
Maalde thinks Rao can achieve this goal if he sells his two plots of land worth `17 lakh and uses this money, along with the `20 lakh in cash, to make the down payment. For the remaining `18 lakh, he can take a loan, which will result in an EMI of `19,500. This amount can be funded from the `17,000 he saves on rent once he moves into his new house and from his investible surplus.
Rao also wants to plan for his
daughter's education and marriage. He wants to save `25 lakh for her education
in 12 years, and `65 lakh for the wedding in 19 years. However, since he will
retire in 14 years, he should confine the investing term for the latter goal to
the same period. For the first goal, he should start an SIP of `8,000 in a
balanced mutual fund. For the marriage, Rao needs to start a `10,000 SIP in a
balanced fund and a `1,000 SIP in a gold fund. These investments will yield the
desired amount in the given time frame.
As for retirement, the family shall
need a corpus of `2.05 crore in 14 years. This will be partly funded by Rao's
EPF contribution, which will amount to `26 lakh, and the existing mutual fund
investment, which will grow to `5.5 lakh. For the remaining amount, he will
have to start an SIP of `42,000 in a balanced fund. Since his investible
surplus is not enough to fund this SIP, he can start with a partial SIP of
`14,000 and raise the amount with an increase in his salary. He can also
reverse mortgage his house to fund his retirement needs if he falls short of
the required amount. Financial plan by Pankaaj Maalde, Head, Financial
Planning, Apnapaisa.com
