Retiring early with just FD income is not viable

I am 43, and live in Mysore. I worked in Singapore for 15 years and returned to India in June for good. I have four dependents — my wife (40), son (9) and aged parents. Our monthly expense is Rs 35,000. From my employment, I had savings of Rs 1.20 crore, out of which I have invested Rs 55 lakh in FD in my mother's name, and Rs 45 lakh in my wife's name; the balance Rs 10 lakh I hold in an SB account. From deposits, I earn a monthly interest of Rs 65000.

I have two insurance policies, namely, Jeevan Anand with Accident benefit riders, and Whole life Jeevan Tarang, for which I have to pay a yearly premium of Rs 1 lakh for 20 years.

My other investments are Rs 2000 a month in each of the following funds for the last three years. HDFC Top 200, Franklin India Flexi cap, and Kotak Opportunities fund. From last month, I am investing Rs 5000 in HDFC Prudence Fund.

I am staying with my parents in their own house. My father is a retired Central Government employee, and receives a monthly pension. I have medical insurance for my family and am paying a premium of Rs 6000. Last year, I have taken a car loan of Rs 2.5 lakh, and I will be repaying it in January. In future, I don't have the intention of buying a house and creating a liability. I have a plot in Mysore, which is worth Rs 30 lakh.

My concerns are: I want to know if my FD interest is enough for our future expenses to lead a comfortable middle-class life without having to work. Based on our family health history, I and my wife may live for another 35 years. My other concern is to provide for our son's education and marriage. — Chetan Gurkhi Ramachandra

With stressful work life these days, we often come across individuals eager to call it a day in their early 40s. It is important to start planning in the early part of their working life if the individual wants to retire in the mid-40s. This will allow them to park surplus in appropriate avenues to build a sufficiently large retirement nest. Even if the life expectancy is more than anticipated, with a bigger corpus, they can mitigate the risk of living longer.

Deciding Corpus: If you continue to invest only in fixed deposits, you run the risk of not meeting the monthly income on two accounts. One, at any point in time if your investment returns fall short of inflation, you need to sell the plot to meet the shortfall. Two, if your standard of living increases from the current level, you may be forced to take up employment in your late 50s.

For instance, your annual living cost of Rs 4.2 lakh will become Rs 13.2 lakh when you turn 60, if inflation is at 7 per cent. Whereas, if you continue to earn a post-tax return of 7 per cent, then your annual income will be Rs 8.4 lakh for an investment of Rs 1.2 crore. To neutralise this risk, you need to earn returns matching or ideally exceeding inflation. You should invest the monthly surplus in equity till you face the shortfall when you turn 53.

Once you clear your car loan, you may have a monthly surplus of Rs 19,000. If this is invested at 12 per cent for the next ten years, at the end of the period the accumulated fund value will be Rs 43.7 lakh. Along with the Rs 8.5 lakh of maturity proceeds of insurance, you can meet the shortfall to some extent.

New investment style: If you change your asset allocation pattern to say 60 per cent in debt and 40 per cent in equity, you can meet the shortfall. For instance, if you invest Rs 72 lakh in debt and earn an interest of 9 per cent, it will take care of your monthly needs till 50. If you invest the rest in a diversified equity mutual fund and earn a 12 per cent return at 50, this will be worth Rs 1 crore. With the years, as the number of dependents comes down, your monthly needs will come down, and this corpus will be enough to see you through life.

Meeting son's needs: As you haven't disclosed higher education needs, we go by the popular choice of engineering. The present cost for the course will be around Rs 5 lakh. When your son turns 16, if the current education cost is inflated at 7 per cent, engineering education expenses would be Rs 9.2 lakh.

If you break your SB savings and invest Rs 5 lakh at 10 per cent interest, in 7 years the accumulated value will be Rs 9.7 lakh. Your son's marriage, being a long- term goal, invest Rs 2 lakh in diversified equity schemes such as HDFC Equity, IDFC Premier Equity and the like. If your investment earns a return of 12 per cent, by the time he is 24, it will be Rs 11 lakh. Since your insurance policies are going to mature simultaneously, it can cushion any shortfall.

All the recommendations are based on the present input and it may be advisable to revisit your portfolio once in a year.