The Hindu Business Line : Financial planning: Meeting your goals

To meet living expenses at 80 per cent of your current monthly expense, adjusted for inflation, at the age 60, you need the expert guidance of a financial planner.

Suresh Parthasarathy

Both Avinash, 36, and his wife Pavithra, 32, are employed in a software company and they earn a monthly salary of Rs 1,20,000 and Rs 90,000 respectively. As they don’t understand much about shares, they invest more in debt. They hold 15 insurance policies maturing at different periods.

The total sum assured of Rs 1 crore is equally divided between them and they pay a premium of Rs 50,000 every month. They have invested Rs 15 lakh in postal schemes. They have two children —Vandana aged 8 years and Kiran, 4 years. They recently bought a flat for Rs 75 lakh, for which they have taken a joint loan for Rs 50 lakh at an interest rate of 11.5 per cent from a bank. A piece of land in Chennai, which they bought four years ago, is now worth around Rs 60 lakh.

The family’s monthly expenses are around Rs 60,000 and Avinash’s expenses alone account for 20 per cent. The couple pays an EMI of Rs 50,000 for the housing loan and both are covered by group medical insurance.

i) They invested Rs 25 lakh in January in 20 large-, mid- and small-cap funds. ii) Pavithra’s mother, staying with her, gets pension and is financially independent. She is planning to gift her old house in Tiruchirapalli, Tamil Nadu, which she bought for Rs 10 lakh in 1995, to her daughter.

The house is now valued at Rs 20 lakh. As Pavithra has no plans to return to Tiruchirapalli, her mother may sell the house at the current market value and invest the proceeds from the sale to pay for the higher education of her grandchildren. For the sake of tax planning, Pavithra wants to know the right course of action regarding the property. They are paying a monthly rent of Rs 12,000 for the house in which they now live. Since the house-owner is not going to come to India in near future, they have taken the house on rent at a good discount to market rates.

Their financial goals are:

Avinash is keen to send both his children to Singapore for their higher education. The present cost of education for a graduation course is Rs 30 lakh and Rs 15 lakh for MBA, including accommodation.

He also intends to construct a farm house in the next five years, which is estimated to cost Rs 40 lakh at today’s prices. Though he has been advised to take insurance cover for a sum of Rs 3 crore, he wants to know the exact risk cover that is required, as his intention is to meet all his goals.

From the tax perspective, he wants to know which one will be more beneficial — whether moving to the newly purchased house or continuing to stay in the existing house. He wishes to have 80 per cent of current expenses as his monthly pension when he retires at 60. Since his savings in insurance is earmarked for his children’s education and marriage, he prefers to accumulate money for retirement.

The solution

The maturity proceeds of the insurance investments are close to Rs 1 crore and a loyalty bonus of 5 per cent will result in a corpus of Rs 1.05 crore. Education expenses at Singapore, inflated at 6 per cent, based on the age of his children, suggests a total requirement of Rs 2 crore. If Pavithra’s mother’s gift of Rs 20 lakh is invested in mutual funds, for the next 14 years, assuming a return on investment of 12 per cent, the corpus will grow close to Rs 98 lakh.

Since the entire corpus of insurance is utilised for education, he is advised to utilise his investment in postal schemes for his children’s marriage. If the present cost of marriage is approximately Rs 20 lakh for both children, the requirement after 16 years and 21 years respectively, will be Rs 64 lakh. At a 7 per cent return, the postal savings corpus will grow close to Rs 45 lakh after 16 years. For his son’s marriage he is advised to save Rs 2,600 per month for the next 240 months, at 10 per cent, to accumulate Rs 20 lakh.

Farm House

The cost of the farm-house after five years will be Rs 65 lakh and he is advised to sell his plot of land after five years to plan for his farm-house. If the value of the land appreciates at 7 per cent for next five years the plot will be worth Rs 90 lakh. He is advised to use the balance for retirement planning.

If Pavithra’s mother sells the property and gifts the money to her, then there will be minimal tax liability due to the effect of cost of inflation index on capital gains. If she transfers the property to her daughter, then there will be a one-time transfer cost. If Pavithra sells the property, then she has to pay capital gains tax after adjusting cost of inflation, from the year of transfer. The first option will mean minimal tax liability on Rs 20 lakh value.

Regarding new property, Avinash and Pavithra are advised to stay in the rented house. On the rental aspect, they will get a 30 per cent standard deduction on the rent received. The rental income of the new property can be accumulated and part payment can be made after four years to take tax advantage.

Insurance planning

It is enough if both Avinash and Pavithra take a term insurance cover for Rs 50 lakh, to insure the monthly expenses of the family. The approximate premium will be Rs 36,000 p.a.

Retirement Plan

After factoring in the expenses for meeting their other goals, the couple is left with a surplus income of Rs 30,000 per month.

From the sale of land, the surplus generated is Rs 25 lakh and if the same is invested at 10 per cent, the money will grow to Rs 51 lakh. To meet living expenses at 80 per cent of the current monthly expense, adjusted for inflation, at the age 60, they should have Rs 4.6 crore on hand. Allowing the current investment in mutual funds to grow at a conservative 10 per cent, it will grow to Rs 2.5 crore in another 24 years. The total additional savings required per month will be Rs 13,500 to achieve the remaining target of Rs 1.6 crore.

Queries can be sent to financialplanning@thehindu.co.in

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