Investment ideas for a middle-aged couple

Sridevi Ganesh | Updated on January 21, 2020

Krishnan, 49, and Aruna, 47, approached us to understand the risks in their existing financial plan. They had the typical concerns of working couples — Are we on track towards our goals? Are we investing enough?

Many goals

The couple’s list of goals was long. One, they wanted to create an emergency fund that would cover 12 months’ income. Two, they wanted to ensure they had adequate life insurance and health insurance. They already had term insurance cover for ₹2 crore each and health cover for ₹40,00,000.

Three, they wanted to provide for their son’s college education (₹40,00,000 in the year 2022) and for his higher studies in the US (₹75,00,000 in the year 2027). Four, starting from 2020, they wanted to go on international vacations for three years at a cost of ₹4,00,000 per annum. Five, they wanted to buy an apartment for about ₹2 crore, in 2023. Six, they wanted to buy new cars (Krishnan’s at a cost of ₹7,00,000, in 2022, and Aruna’s at a cost of ₹5,00,000, in 2023).

Seven, they wanted to retire in 2030 with a corpus of ₹5 crore. That year, Krishnan would be 60; Aruna planned to quit her job that year, at the age of 58. Eight, they wanted to provide for their son’s wedding expenses at an estimated cost of ₹15,00,000, in 2030. Nine, they wanted to buy diamond jewellery for ₹4,00,000, in 2023. Ten, they wanted to allocate ₹50,00,000 towards a charity fund as a one-time payout in the year of retirement. Last but not the least, they wanted to allocate ₹2,00,000 each for family celebrations in the years 2023,2025 and 2027, and ₹7,00,000 in 2030.


Conservative investors

Krishnan and Aruna are conservative investors with little appetite for risky investments such as direct equity or aggressive mutual funds. They wanted to limit their overall exposure to equity to 30 per cent of their financial assets.

They had used debt mutual funds over the past five years to generate better-than-FD returns but were highly worried about the recent volatility in such instruments. They expressed willingness to settle for an 8 per cent post-tax returns from their investments in the long run.

Review, recommendations

As both Krishnan and Aruna hold relatively stable jobs, it was recommended that their emergency fund cover just six months’ living expenses. We advised them to create this corpus through liquid funds, by moving a portion from fixed deposits. We also felt that it was sufficient to have ₹1 crore in term insurance for each of them, considering the assets they have created over time. They had two ₹1-crore policies each; we asked them to stop renewing one each.

Krishnan and Aruna were dependent on employer-provided health insurance. We advised them to opt for their own health cover for a sum insured of ₹5,00,000 as a family floater and ₹10,00,000 additional cover through a top-up policy, considering their age, family medical history and lifestyle.

The couple were advised to allocate from their FDs and savings this year towards their celebration needs starting from 2023. These funds could be deployed in liquid/short-term debt funds. Their PF and NPS accumulation thus far, along with further contributions and equity mutual funds portfolio, would fetch them ₹4.35 crore at the time of Krishnan’s retirement.

Though they wanted to have ₹5 crore as their retirement corpus, our calculations showed that they would need ₹6.4 crore, estimating their retirement expenses as ₹85,000 per month at current cost.

They were making incorrect assumptions on life expectancy and expected returns, which resulted in the difference. By investing ₹97,000 per month from now, they would be able to fund the deficit in the retirement corpus. It was also recommended that they use voluntary provident fund (VPF) and large-cap equity mutual funds to build this corpus to ensure the right asset allocation.

Their existing investments in debt mutual funds would ensure adequate funding for their son’s college education. To fund his higher studies abroad, we advised them to opt for an educational loan. We observed, based on an analysis of available data, and considering the courses their son planned to take up, that they had over-estimated the cost of his undergraduate programme. His college education would cost about ₹46.65 lakh and studies abroad, about ₹87.5 lakh.

The current available resources in debt funds would be sufficient to fund both goals. But this would be at a cost of under-funding their retirement phase “support fund”, which was aimed at managing their various needs post retirement.

Return expectations

We advised Krishnan and Aruna to reduce their exposure to risky investments, explaining the mark-to-market feature of debt funds. We also explained to them the impact of chasing 100-200 bps (basis points) extra return that exposed them to credit risks. They were fine to bring down their return expectations and moving to relatively safer avenues in the debt space.

Their lifestyle expenses and jewellery purchases could be planned out of savings from their monthly surplus over the next three or four years. It was time for them to start building wealth to protect their lifestyle and long-term goals.

Many a time, people underestimate retirement planning by allocating funds only towards their expenses and commonly discussed needs. But planning to have a corpus predicting life changes for more than three decades in retirement is not easy. There are many assumptions; hence, stress-testing the retirement corpus is essential to prepare for the future. We advised Krishnan and Aruna to invest routinely from their regular savings towards building a corpus that would stand resilient against unknown events.

The writer is a SEBI-registered investment advisor at Chamomile Investment Consultants

Published on January 21, 2020

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