The Hindu Business Line : Planning vital for less affluent

I am aged 34, working in a Gulf country as an engineer earning Rs 1.5 lakh month. I can save Rs 20,000 a month after utilising my income for family expenses. My wife (32) is employed and her salary is Rs 1 lakh a month. For all our investment purpose we utilise my wife’s salary, plus the surplus of my income. We have two children — aged six and four.

Immovable assets: We have two houses valued at Rs 15 lakh and Rs 40 lakh. The former is fetching a rent of Rs 3,500 a month and the second one is occupied by my parents. As part of long-term investment we have invested in residential plots valued at Rs 20 lakh, Rs 8 lakh and Rs 1.5 lakh.

Financial assets: Five years ago, we invested Rs 1 lakh in KVP, maturing in another 3.7 years. We have an LIC policy taken in 1999 for a sum insured of Rs 1 lakh, maturing in 2024. I am paying an annual premium of Rs 5,000 towards this. Another LIC policy in the name of my child was taken in 2002 for which I am paying premium of Rs 6,000 per annum. The maturity proceeds will be received in 3 instalments of Rs 1 lakh in 2017, Rs 1 lakh in 2020 and final instalment in 2025 with accumulated bonus.

I have taken a policy with a private insurer for a sum assured of Rs 18 lakh maturing in 2016.The premium outgo is Rs 1 lakh per annum. I have taken a ULIP and paid three instalments totalling Rs five lakh (limited premium payment) for which the maturity proceeds will be available in 2017.

Goals

We would require Rs 25 lakh for each child in another 12-14 years towards their education.

We are planning to settle down in India by 2015. Post retirement (seven years later) we may require Rs 10 lakh per annum (adjusted for inflation) for our living expenses. In India, we are planning to start a business and the capital required would be around Rs 50 lakh.

Please let us know how to save for the same (suggest some suitable plan based on current surplus). Ignore any income arising from the business for calculating our surplus. We expect a life expectancy of 74 to 78 years.

We wish to own a car in 2015 for which I would need Rs 10 lakh. For our children’s marriage we may require Rs 4 lakh each (current value) when they turn 26.

Name withheld on request.

Solution

Financial planning is more crucial for the lower- and middle-income group than the affluent. In reality, the former segment seldom attaches importance to making the best of the limited surplus that they can generate.

Coming to your portfolio, the investment pattern followed by you is not balanced. Of the total assets, Rs 76 lakh accounts for real estate and balance Rs 30 lakh is in fixed instruments such as KVP, insurance and ULIP. As you have not mentioned your risk appetite, we assume it to be moderate.

In ULIP, you have opted for limited payment option; having taken up this option, had you gone for the top-up route, you could have saved substantial charges in the first few years. If you are looking for a risk cover, it is advisable to use term insurance. Going by the data provided it is not clear how much risk cover is shared between you and your wife. Either way, you appear under insured. Since both of you are in your early thirties try to take a term cover at the earliest based on your ability to tackle financial risk. Once you return to India cover your entire family with medical insurance.

Education

You have only seven years left (based on your retirement plan) to accumulate money for your elder’s son’s education. If you can save Rs 16,000 a month for the next 84 months and if the yield on the investment is around 10 per cent, it can grow to Rs 19.5 lakh. Since your requirement arises only in 2020, you can park your money in any short term instrument yielding 5 per cent annually adjusted for tax. On the targeted year you can reach Rs 25 lakh. For your younger son, if you allow all the maturity proceeds of insurance policies barring ULIP to grow at nominal interest of 5 per cent post tax till 2022, you can reach the target.

Retirement

As women tend to have a higher life expectancy it is better to plan your finances till 78. As you are planning to accumulate your requirement within seven years the monthly savings commitment is likely to go up.

If you want an inflation adjusted sum of Rs 10 lakh per annum from 2015 as retirement income you need to have a corpus of Rs 2.75 crore that earns an inflation adjusted return of 2 per cent to take care of your expenses for the rest of your life. If you plan to save this amount in the next 84 months with the investment earning 10 per cent interest, you need to accumulate Rs 2.25 lakh per month.

Based on your current surplus it may not be feasible to save such a sum. A better alternative is to accumulate Rs 1.5 crore over the next 84 months by way of Rs 1.22 lakh a month to reach the target at 10 per cent interest. For the shortfall you can sell your plots after 10 years. Assuming it to grow at 7 per cent (long term average), you can sell the same for Rs 58 lakh and also utilise the maturity proceeds of ULIP (which is likely to be Rs 10 lakh if it grows at 10 per cent for the next 8 years). Current surplus after adjusting your premium payments is Rs 13.2 lakh per annum. Hence you ought to plan accordingly. Any increase in salary can be used to step up the contribution towards this purpose.

Other goals

Other goals such as starting business and purchasing car may have to be shelved for now. The other alternative is to reduce your pension requirement till your kids are employed. If you still prefer to fulfil your dream of buying a car and running a business, utilise the sale proceed of the plots. Once your children start earning and become independent, your monthly requirement is likely to fall.

For your children’s marriage, accumulate your monthly rental income (Rs 3,500) for 20 years and invest it at an interest rate of 10 per cent to reach the goal with a surplus Rs 5 lakh. Any increase in rentals can be routed to your retirement kitty.

Queries can be sent to ,a href="mailto:financialplanning@thehindu.co.in">financialplanning@thehindu.co.in

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