The Hindu Business Line : Planning helps to achieve goals

Devinder, aged 35, is married; his wife is a home-maker and he has two children. He stays at the outskirts of Pune with his family. His current net annual income is Rs 4.5 lakh. His son, aged 8, is studying in standard IV and his daughter is in kindergarten.

Out of the net income of Rs 38,000 p.m, he spends close to Rs 22,000. His current investments include an insurance plan with an annual premium of Rs 80,000, which includes sum assured of Rs 2 lakh for his son and Rs 4.5 lakh for his daughter and the rest in multi-plan policies maturing at different intervals from 2012. His current balance in the savings account is Rs 2.5 lakh.

He recently started to contribute Rs 10,000 a month in a scheme, which will mature in 25 months. His current balance in his provident fund account is Rs 3.5 lakh, Devinder and his employer together contribute Rs 72,000 every year to that account. His family is covered by group medical, offered by his employer. Since his parents enjoy good health at 73 years, he expects his life expectancy to be around 80.

Goals

He wants to surrender the multi-plan insurance policies, as he is not happy with the returns. He pays an annual premium of Rs 49,000. Instead, he prefers term insurance. He intends to invest the balance in mutual funds to increase his returns. He also wants to start a separate SIP for his children’s education and marriage and towards his retirement. He hopes to buy a house with his savings in the bank and PF account. Devinder wants to know if it is possible to buy a house for Rs 30 lakh (present value) in 3 years time, within his monthly budget.

He wants to accumulate a sum of Rs 10 lakh in 8 years for his son’s higher education and Rs 15 lakh in 14 years for his daughter’s education (including his current saving in insurance).

He wishes to accumulate for his daughter’s marriage a sum equal to Rs 5 lakh at today’s value over 20 years. His current surplus is around Rs 5,000.

He wants to know if his current saving in PF will help receive 80 per cent of his expenses as pension, when he retires in 2031. If not, he wants to know how much he has to save to reach the target.

Solution

If he wants to buy a property at today’s value of Rs 30 lakh, he can first utilise the cash in the bank account and savings in his PF account (90 per cent).

For the remaining Rs 24.5 lakh, he can avail a bank loan. Even if he opts for a loan, with a tenure of 20 years, at an interest of 10 per cent annually, he may have to shell out an EMI of Rs 23,600.

Going by his current earnings, he may not be eligible for a loan beyond Rs 21 lakh. After adjusting his monthly commitments, he is left with a surplus of only Rs 14,400, considering his present rent of Rs 6,000, he may still fall short of the target. If the tax benefit is added back, he may be closer to the requirement, but by doing so, he may have to sacrifice all his other financial goals. Hence, he is advised to stay at rented accommodation for now. With his current savings and the balance, which he will receive from the surrender of insurance policies, he can buy a plot and construct a house, once his other commitments get reduced.

Insurance

If he plans to surrender all his multi-plan policies, he may be left with a surplus of Rs 49,000 every year. As a protection measure, he can buy term insurance. For income replacement and his daughter’s marriage, he has to buy a plan for Rs 45 lakh; the annual premium outgo may be Rs 18,000. He can buy two different policies for the son’s and daughter’s education for Rs 8 lakh and Rs 10 lakh for terms of 8 and 14 years respectively (after adjusting for the existing policies). The premium for the both the plans may work out to Rs 5,550. The remaining Rs 25,450 can be invested in mutual funds to get a higher returns.

Education and marriage

Since he has already taken an insurance policy worth Rs 2 lakh for his son’s education, he needs to accumulate a sum of Rs 8 lakh. If he can save Rs 4,950 per month for next 96 months and if the investments earn a return of 12 per cent, he can comfortably reach the target.

For his daughter’s education, after adjusting the insurance, he has to save Rs 10.5 lakh in 168 months at the rate of Rs 2,400 every month. It is assumed that the investment earns a return of 12 per cent. For the son’s marriage, it is assumed that he will have his own savings once he is employed. The daughter’s marriage expenses of Rs 5 lakh at today’s value, if inflated at 6 per cent, will amount to Rs 16 lakh at the end of 20 years. In next 240 months, if he can accumulate Rs 1,600 at a return of 12 per cent, the target can be reached. If the assumed returns are not reached in the first few years, he should revisit his monthly savings.

Retirement

Going by the life expectancy, he has to accumulate Rs 1.65 crore at theage of 60 (assumed inflation of 6 per cent and a return of 7 per cent). Assuming he maintains the same standard of living and requires 80 per cent of present expenses, say Rs 2.11 lakh a year, for his living expenses on retirement, if the same is inflated at 6 per cent for next 25 years, he will require a sum of Rs 9 lakh every year from 2031. Going by his current savings in PF, he may accumulate a sum of Rs 57 lakh and still may be left with a short fall of Rs 1.08 crore. For the next 300 months, at the rate of 12 per cent, he has to save Rs 8,600 a month.

From the current surplus of Rs 15,000, including his new savings plan, to reach all his goals, he has to save Rs 17,550 a month. Along with the surplus, if he adds balance of Rs 25,000, saved by means of closure of his multi-plan, he can reach all the goals comfortably.

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