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Late start will impact
achievement of goals
Despite a high savings rate and net worth, the
delayed start to focused financial planning and poor risk coverage mean that
the Shingtes may not be able to meet all their objectives.
Unless you have built a portfolio rich in assets
by the time you are in your 40s, you should start worrying. Having missed out
on the benefits of compounding in early years, you will realise that it is
difficult to catch up at a later stage despite investing aggressively. Though
rising awareness is seeing many people make an early start with their financial
planning, there's still a large population that is waking up too late.
Punebased Shingtes fall into the latter category and may not be able to reach
all their goals.However, financial adviser Pankaaj Maalde will prepare a plan
that tries to optmise their existing resources and help them meet some of their
objectives.
Existing financial status
Naresh Shingte is 48 and lives in Pune with his
45-year-old wife, Jyotsna, and two children: 18-year-old Saanchi and
13-year-old Aniruddh. Both Naresh and Jyotsna are working and bring in a
monthly salary of `1.06 lakh. They stay in their own house and have another
property worth `20 lakh that has been rented out. It provides them with a monthly
rental of `11,500, bringing the total income to `1.17 lakh.
As for their outgo, `40,000 goes as household
expenses, while the home loan EMI is a high `35,000. Besides these, they spend
`15,000 every month on their children's education and `6,600 on insurance
premium.A high chunk of `20,000 is invested, leaving them with a surplus of
`900. Their existing portfolio has a high percentage (77%) of real estate, 15%
equity in the form of stocks and mutual funds, and the remaining 8% is debt
held as PPF and EPF. The Shingtes will have to utilise these resources
judiciously to maximise their returns and reach their financial targets. These
include building a contingency corpus, saving for their children's education
and weddings, as well as for their own retirement. First, however, Maalde will
assess their insurance needs.
Insurance portfolio
As for life insurance, the Shingtes currently
have two traditional plans, one Ulip and a return of premium term plan. While
the traditional plans and Ulip are in Jyotsna's name, Naresh has the term plan.
According to Maalde, since the endowment plans are likely to beat inflation,
they should be held as the debt component of their portfolio.However, they
should surrender the other two plans given the low expected returns.
Since the couple is low on life insurance,
Naresh should pick up an online term plan worth `1 crore for 15 years, and
Jyotsna should buy one worth `50 lakh for 20 years.Together, these will result
in an annual premium of `32,000.
When it comes to health insurance, the couple
has been completely ignorant and does not have any cover. Hence, Maalde
suggests that they buy a family floater plan worth `10 lakh, which will cost
them `30,000 a year. Naresh is also advised to purchase a `50 lakh accident
disability insurance and a `25 lakh critical illness plan, which will result in
a premium of 26,000 per annum. The additional cost can be taken care of by the
premium of the surrendered insurance plans and investible surplus.
Road map for the future
Before beginning with the planning for their
goals, the Shingtes are advised to reschedule their home loan since they are
currently paying a high interest rate. So, Maalde suggests that they switch the
outstanding loan of `13.36 lakh to another lender and increase the term to 12
years to reduce the EMI. Assuming a rate of 10%, the EMI will fall to `17,200,
creating an additional surplus for investing for their goals. The Shingtes
should also consider selling their second property in order to create funds for
their children's education.
Now the couple can begin planning for their
goals, starting with the building of an emergency corpus equal to three months'
expenses. This will amount to `2.4 lakh and can be accumulated by allocating
`50,000 from their bank account and the surrender value of `2.08 lakh from
their Ulip.
They also want to ensure an amount of `12.6 lakh
when Saanchi turns 21 in three years' time. For this, they will have to
allocate `10 lakh from the sale of their second house and invest it in a
three-year fixed maturity plan (FMP) or a monthly income plan (MIP) of a mutual
fund to generate the required sum. No aggressive investment is suggested
because of the short-term nature of the goal. Similarly, for Aniruddh's
education in five years, they have estimated a need of `14.7 lakh. Again, they
will have to fall back on the proceeds from the sale of the house and invest `9
lakh in an MIP with 3040% equity exposure.
Next, they want to secure their retirement by
having a corpus of `1.8 crore in 12 years.For this, they will have to
channelise their PPF/EPF corpus of `1 lakh, the stock and equity mutual fund
corpus of `1.91 lakh, the remaining cash of `50,000 in their bank account, the
traditional insurance plan worth `2 lakh, as well as the remaining amount of `1
lakh from the sale of house. Combinedly, these investments will yield nearly
`52 lakh in the given time period of 12 years. For the remaining amount, they
will have to start an SIP of `37,000 in a diversified equity fund.However,
since they will have a surplus of only `25,000, they will have to start with
this amount and increase it after a rise in income or when the education cost
comes down in a few years.
This also means that they will have to put on
hold their other goals of saving for their children's weddings as well as a
foreign vacation till their income rises or they find other ways to supplement
their existing income.
