Financial Planning

I'm 31 and work for a private bank. My spouse is a State Government employee. My son is studying in class I.

Of my two home loans, the first will be repaid by 2017 and the other by 2033. We have term insurance policies for ₹75 lakh and ₹50 lakh, and health insurance for ₹3 lakh. After retirement, my wife will be eligible for pension of ₹25,000.

My goals are to accumulate ₹1 crore for my son’s education by 2025; ₹650,000 to buy a plot in 2015; and manage a monthly retirement income of ₹50,000. Is my asset allocation appropriate?

- Chaitu Kiran

Asset allocation is important to ride out market cycles and achieve long-term goals. Factoring your share in the ancestral property, your real estate allocation stands at 84 per cent of your portfolio. Any investment should be measured by two returns. First is the yield from the investment and the other is capital appreciation.

Your flat on the outskirts of Hyderabad gives a yield of 1.6 per cent, which reveals that a bulk of future appreciation has been factored in. Stop further investment in real estate.

Son’s education: Since it is a long-term goal and you have good monthly savings, you can reach the target comfortably. To reach the target of ₹1 crore, you need to save ₹36,800 every month for the next 11 years and it should earn 12 per cent returns. Earmark your mutual fund investment for this goal; for any short fall, use your surplus. Construct a portfolio with 70 per cent in equity and 30 per cent in debt.

Retirement: Your current monthly household expenses stand at ₹12,000. If the same is inflated at 7 per cent at 58, it amounts to ₹74,500. To receive such an income at retirement, you need to have a corpus of ₹1.4 crore, after factoring in your wife’s pension. This corpus should earn one per cent return over and above inflation to sustain you till 85.

If your current EPF balance and future savings along with your employer’s contribution earn an interest of 8.5 per cent, it will total ₹1.73 crore. Hence, you need not save separately for retirement. Since you have not stated how much your spouse saves towards EPF, we have not factored it in. If your EPF returns fall short of estimates, your wife’s contribution will come in handy. Given the rising aspirational levels of the middle-class, it’s better to save beyond the immediate needs. Once your home loan is over by 2017, save at least half of it for retirement. Buy a super top-up health plan for ₹5 lakh.

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