I am aged 43. Having worked aboard for several years, I feel that I have saved reasonably well for my early retirement. My wife is aged 41 and based on our family history, we expect to live up to 80 years. Beside my wife, I have three dependents — unmarried sister aged 40 years, my daughter and son aged 16 and 14, respectively .

Both of my children want to purse B. Com and MBA. Hence for their education needs, I hope not not allocate higher amounts. My current investments details are: shares and mutual funds — Rs 24.35 lakh. My current debt investments are bank fixed deposits — Rs 73.8 lakh (average interest rate of 8 per cent), NCDs Rs 7.1 lakh, company deposit Rs 3 lakh. I have recently invested in Nabard bonds for Rs 8.8 lakh and its maturity value in 2019 is Rs 16 lakh. My investment in postal schemes are Rs 15 lakh in PPF and Rs 71,000 in NSC.

I have a traditional endowment policy with sum assured of Rs 1 lakh and have covered my family's health through floater policy for Rs 3 lakh.

At present, I am living in my independent house and recently purchased a flat out of my savings and am planning to rent out the same for Rs 9,000.

After coming back to India, I have started management consultancy and my current post tax annual income is Rs 8 lakh.

My goals are:

For my daughter's marriage I may require Rs 10 lakh at present value.

I am planning to give up my consultancy from next financial year, if so how much corpus should I have now, considering my current monthly expenses of Rs 30,000. Suggest changes to make my portfolio a balanced one. I am willing to shift some portion of my bank FDs to mutual funds.

Solution

Many individuals aspire to retire in their mid-forties, but only a few work towards that goal. In your case with proper asset allocation, you can hang your boots from the coming financial year. Being in highest tax slab and most of your investments made in debt instruments are not tax efficient(barring PPF).

This will bring down your net yield far below the current inflation. In terms of real returns, they are not helping you to achieve wealth creation. Since your retirement life is longer, unless your overall returns of the portfolio outpace inflation rates, you may exhaust your retirement corpus early.

You ought to increase equity exposure in your portfolio in such a way that your debt investments have to be used for monthly consumption, while the rest can be used for the future growth and to meet the shortfall in your income arising from the age of 60.

Although your children are planning to study commerce, for which much provision may not be necessary, you need to keep some cushion to meet the expenses arsing out of the MBA course.

For an MBA in any one of the reputed colleges, you may have to spend Rs 10-15 lakh. Since your daughter is closer her MBA than your son, you can keep your investment in debt to meet the goal. For your son's education, you can start an SIP in equity scheme a sum of Rs 14,000 a month for next 72 months and it should earn 12 per cent interest.

Retirement

If you choose to retire from April 2011, to meet your monthly expenses of Rs 30,000 (Rs 3.6 lakh per annum), you should have a corpus of Rs 1.4 crore and it should earn an inflation adjusted return of one per cent to meet your requirement till your wife and sister turn 80 years. Your current investment in debt and equity together amounts to Rs 1.32 crore and you have a short fall of Rs 10 lakhs. Since you are letting out your new flat, with the rental income of Rs 9,000, you can comfortably meet the shortfall. Even if you are not considering letting out your flat, once your children become independent, your monthly requirement is likely to fall to the extent of 20-30 per cent and can help you reduce the deficit in retirement corpus.

The only concern is that since you have not made any provision for the education and marriage of your children, your rental income needs to be utilised for these goals and any shortfall in this can be offset from your retirement corpus. Once you fulfil all of your children's needs in next ten years, with the rental income you can comfortably meet the retirement shortfall.

However, if you wish to increase your standard of living, your investment should earn two per cent over and above the inflation.

Insurance

Your current health insurance is too low to cover five individuals. It's better to have health insurance cover for Rs 10 lakh to protect your retirement corpus. While buying the risk cover look out for the policy allowing an additional sum insured of 5 per cent on cumulative basis on each renewal.

Since you have sufficient corpus you need not buy any life cover, however, we suggest you buy an accident shield policy as the premium out go towards this is only a few thousand rupees a year.

If you construct your portfolio with a 60:40 ratio in debt and equity, respectively, and if the portfolio as a whole earns a post-tax return of 8.4 per cent, you can comfortably lead the rest of your life.

The years when the equity market is exuberant and if you earn well beyond the required 12 per cent in equity MFs, book profits and deploy it in gold.

Once your exposure to gold reaches 10 per cent of the portfolio, shift the profits to debt to protect your portfolio. (Queries can be sent to >financialplanning@thehindu.co.in )

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