News Analysis

What a dual income-new kid family needs

Deepesh Raghaw | Updated on January 07, 2020 Published on January 07, 2020

Adequate life insurance, an inflation-adjusted education fund and careful retirement planning are among the essentials

Vikas and Kirti are both 30 years old. Vikas works with an IT company while Kirti works with a financial services firm. The couple is expecting a baby in two months.

Having recently bought a home, part of which was funded by a home loan, Kirti and Vikas pay an EMI of ₹35,000 per month.

They have not bought any life insurance till now since they don’t have financial dependents yet. Their respective employers provide them with health cover of ₹5 lakh and accidental disability cover of ₹50 lakh each.

They have augmented their health insurance coverage with a family floater plan of ₹10 lakh.

Their monthly expenses (excluding loan EMI) are ₹40,000. Though their expenses are set to increase after the baby is born, they think they can invest ₹55,000 on a monthly basis.

They have ₹2 lakh each in their savings accounts, which they want to retain as ‘comfort cash’. Apart from that, they have ₹10 lakh in fixed deposits and liquid funds and ₹3 lakh in equity mutual funds. Besides, they have ₹12 lakh in their EPF accounts, with a monthly contribution of ₹22,000.

Their primary goals include planning for their kid’s higher education (expected cost ₹25 lakh in 17 years) and providing for their retirement income, for which they are not sure about the amount needed. Though a vacation is not a top priority now, they would still want to earmark ₹1 lakh a year for that.

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Vikas and Kirti are about to add a new member to the family. They have no life insurance except for what came bundled with their home loan.

That life cover will shrink as the outstanding principal goes down per the original amortisation schedule. Therefore, it might be prudent for them to purchase life insurance covers.

While there are many ways to calculate life insurance requirements, a thumb rule is that they should purchase life cover that is 10-15 times their annual income. This means Vikas must purchase a term life cover of ₹1.5 crore while Kirti must purchase one of ₹1 crore.

The two already own a health insurance plan of ₹10 lakh. They must include the newborn in their respective policies at the time of next renewal.

Emergency corpus

The couple can earmark its investment of ₹10 lakh in FDs and liquid funds towards its emergency corpus. Kirti’s marginal tax rate is 20 per cent while Vikas’ is 30 per cent. Therefore, it will be better if the FD investments are held in Kirti’s name, thereby reducing the family’s overall tax liability.

When it comes to goals, the child’s education goal is not adjusted for inflation. Assuming the education fee will go up by 6 per cent per annum, they will need ₹67 lakh in 17 years. At an assumed return of 10 per cent per annum, they will need to invest about ₹13,300 a month. They can put this money in an aggressive hybrid equity fund, and revisit the asset allocation as they move closer to the goal.

For their vacation, they can earmark ₹8,000 per month and put this money in a recurring deposit or a liquid fund.

Retirement planning

For retirement planning, there are many ways to calculate the corpus required at the age of 60. The simplest is to project the current expenses into the future. However, it involves a number of assumptions that may not hold. Hence, the couple has to revisit these numbers every few years.

Kirti and Vikas’ current expenses are ₹40,000 per month, or ₹4.8 lakh per annum. In 30 years (by the time they turn 60), a inflation of 8 per cent will increase this amount to ₹48 lakh.

If they plan for 30 years of retirement and assuming they can generate inflation-matching returns during retirement, they will need about ₹14.5 crore.

The existing equity MF investments of ₹3 lakh and EPF of ₹12 lakh can be earmarked for retirement. Assuming existing investments earn 8 per cent per annum over the next 30 years and the fresh investments earn 10 per cent per annum, they will need to invest ₹63,000 per month to reach their target.

They can invest only ₹55,700 (₹55,000 + ₹22,000 – 13,300 – ₹8,000) a month. While they can’t invest the required amount yet, they are quite close to it. They can consider increasing their investment allocation as their incomes grow.

Currently, about 80 per cent of the couple’s retirement corpus is in EPF. Of the incremental investments, 40 per cent (₹22,000 out of ₹55,700) is going towards debt. Therefore, they can route the remaining amount towards equities. They can pick up a multi-cap fund or divide their allocation between a large-cap, a mid-cap and a small-cap fund at a 50:30:20 ratio.

They must also open PPF accounts and make token investments in them so that the 15-year investment period starts right away. Vikas can consider investing up to ₹50,000 a year in NPS for additional tax benefit under Section 80CCD(1B).

The writer is a SEBI-registered investment advisor at personalfinanceplan.in

Published on January 07, 2020
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