Early retirement may not be the right decision
Though Kartik Sapra has a high net
worth and big savings, these may not adequately fund his retirement and he may
need to review his decision to quit working at 48.
Most people dream of an early retirement, but very few manage to realise
it effectively. After all, it is not easy to build assets that can support one
for 30-35 years into retirement without any fresh source of income. For those
who take this audacious decision, it is critical to calculate the exact amount
they will require not only to fund their goals but also the longer
postretirement life. Any error can land them in a financial fix at a time when
earning may be virtually impossible.
This is the reason Mumbai-based Sapras
would do well to review their decision to retire at 48. Though they have
managed to put together assets worth `4.78 crore and don't have any liability
in terms of loans, they still have major financial goals to achieve. They need
funds for the higher education and marriages of both their children, besides
securing their extended retired life.
Existing financial status
Kartik Sapra, 47, stays in Mumbai with
his 43-year-old wife Tarini, who is a homemaker. They have two children, 17-yearold
Karan and 15-year-old Kanika. Kartik works in an MNC and is planning to quit by
the end of this year. This means that from early next year, the family will
have no source of income.
The Sapras stay in their own home worth
`2.25 crore and have another residential property worth `75 lakh in Pune, from
which they get a monthly rent of `25,000. Real estate comprises almost 31% of
their portfolio, the remaining including 26% equity and 43% debt investments.
It translates into a very well-balanced asset allocation, with exposure to
stocks, equity and debt mutual funds, real estate, jewellery and a small
portion of cash. Will this be enough to meet all their goals in the required
time frame?
Pankaaj Maalde of Apnapaisa.com finds out by analysing their savings and goals.
Pankaaj Maalde of Apnapaisa.com finds out by analysing their savings and goals.
Insurance coverage
Maalde begins by studying the Sapras'
insurance folder. As for life insurance, Kartik has three term plans, one
traditional policy and a Ulip. These offer him a combined cover of `85 lakh,
which means that he doesn't need any further cover. However, Maalde suggests
that Kartik surrender his Ulip and reinvest the proceeds for retirement
planning. Tarini doesn't need any life insurance since she is a homemaker and
doesn't bring in any income.
On the health insurance front too, the
Sapras have done well, with Kartik insured for `5 lakh and the rest of the
family members for `3 lakh each. However, Maalde suggests that Kartik raise the
cover of `3 lakh for the other members to `5 lakh. He does not recommend any
accident disability cover for Kartik since the latter has decided to stop
working and will retire in the next few months.
Road map for the future To begin with,
the Sapras need to have a contingency fund despite the fact that Kartik will
retire soon. This corpus is being recommended to supplement any medical funding
that may be required.For this goal, the Sapras can allocate `4.5 lakh of the `5
lakh they have as cash in their bank savings account.
Next, they can focus on their
children's goals of education and marriage. To start with Karan's higher
education, they will require `18.4 lakh spread out over five years. They will
require this sum after a period of two years, when Karan is 19 years old.
Similarly, for Kanika's education expenses in four years' time, they will need `17.1
lakh spread over five years.Hence, their total requirement will be `35.5 lakh.
To achieve these two goals, the Sapras can allocate the remaining `50,000 from
their cash holding, `15 lakh from their debt mutual funds, `8 lakh from their
stock holdings, and `12 lakh from their equity mutual funds. If they invest
this amount in a combination of fixed deposits, MIP funds and balanced funds,
they will be able to achieve both the goals in the specified time frame.
After this, they can allocate their
resources for the kids' marriages. For Karan's marriage in nine years and
Kanika's marriage in 11 years, they want `50 lakh and `58 lakh, respectively.
These objectives can be fulfilled by allocating `17.2 lakh and `15.8 lakh from
their equity mutual funds. These goals can be achieved without any further
investment.
Finally, they come to the most
important goal of providing for their longer retirement.For this, Maalde
estimates they will need `3.02 crore, but after allocating their existing
resources for kids' education and marriages, they are left with only `1.7
crore. Since there is a shortfall of funds for this goal, the Sapras have two
options. One, they can reverse mortgage the self-occupied house or shift to a
smaller house after their kids' marriages. If they don't want to use their
house to meet the shortfall, Kartik can put off his retirement plan by another
five years, which will ensure enough savings to fund this goal without
depending on the house.
If, however, Kartik is intent on
retiring as planned, Maalde suggests splitting the goal into three phases of 12
years each. In the first phase, they will require `80 lakh, which can be
achieved by allocating their debt fund investment. In the second phase, they
will need `2.5 crore, for which they will have to use their second property,
the remaining stock and debt fund investment, as well as the Ulip. This amount
can be invested in diversified equity funds to get the desired corpus. However,
for the third phase starting in 24 years, they will not have any funds left and
will again have to depend on their selfoccupied house. They can either
reversemortgage it or shift to a smaller house, as suggested earlier. Financial
plan by Pankaaj Maalde, Head, Financial Planning, Apnapaisa.com
