Personal Finance

Financial Planning – How a single parent can meet her goals

Sridevi Ganesh | Updated on August 18, 2020

Good planning and proper asset allocation will help

Nirmala, aged 37, single parent to two daughters aged 9 and 7, wanted to plan for her financial goals. Her monthly income was ₹1.4 lakh and expenses were ₹60,000 including travel and medical needs. She owns an apartment in South Chennai valued at ₹80 lakh. Nirmala began working since the last two years and has limited financial resources. Her goals were the usual ones, and she wanted to reach these comfortably without exposing the capital to risks in the long term. That said, she was willing to invest in large-cap equities for long-term goals such as retirement and wealth creation.

Goals, assets, risk profile

Nirmala

wanted to prioritise the following goals. She first wanted to set up an emergency fund of ₹7.2 lakh and also get health insurance for herself and daughters. Next, she intended to build a fund of ₹10 lakh each, at current cost, to be gifted to her daughters when they would turn 24. Nirmala also wanted to purchase gold worth ₹50,000 every year till her retirement. An annual retreat trip for ₹60,000 per annum was on her wish-list too. For the long-term, Nirmala wanted to set up a fund to provide for her retired life from 60 years of age, at a current cost of ₹30,000 per month, and also wanted to create a surplus fund at current cost of ₹50 lakh at her retirement in addition to the retirement corpus.

Nirmala’s asset position was as follows. Her EPF balance was ₹3 lakh with annual contribution of ₹1.6 lakh, and her PPF balance was ₹1.5 lakh with annual contribution of ₹1.5 lakh. She had cash in hand of ₹10 lakh, gold worth ₹20 lakh, a house valued at ₹80 lakh and a car worth ₹6 lakh.

Nirmala was focused on safety of capital but understood the importance of allocating a portion of investments to equity towards her long-term goals. But she was very particular about keeping the balance money in avenues that would avoid capital erosion despite opportunities for better returns.

Review and recommendations

We advised Nirmala to keep ₹7.2 lakh in fixed deposits (from her cash balance of ₹10 lakh) towards emergency funds. She could reserve the balance ₹2.8 lakh for her career growth needs that was imperative under the present conditions. We recommended that she take medical insurance with sum insured of ₹10 lakh for herself and her daughters, in addition to the employer-provided health cover. Nirmala is a divorcee and both her daughters are staying with her. Their education and other expenses are to be managed by the father and hence, Nirmala need not opt for life insurance.

To provide for the fund gift to her daughters when they turned 24, we advised Nirmala to invest in large-cap funds. She needed to invest ₹7,800 per month for 15 years towards the gift to the first daughter and ₹7,200 per month for 17 years towards the gift to the second daughter. At an expected annualised return of 9 per cent, Nirmala should be able to build a corpus of ₹27.6 lakh and ₹31.60 lakh respectively.

Taking into account her provident fund contributions, Nirmala had to invest ₹34,000 per month towards her retirement. She needed to accumulate ₹4.48 crore to retire at the age of 60, assuming a life expectancy of 90 years. It was assumed that her expenses till retirement would increase at 7 per cent annually. After retirement, with intended moderation in lifestyle, it was assumed that her expenses would increase at 6 per cent per annum. With Nirmala particular about avoiding capital erosion, it was suggested to set an expected return of 7 per cent per annum. Though this is achievable in the current environment, an exposure of 10 per cent to equity-related investments was advised to ensure adequate returns.

We advised Nirmala to use voluntary PF contribution and NPS to manage her fixed income allocation towards retirement, and large-caps and mid-caps for equity investments. The retirement corpus with 50:50 equity and debt allocation was planned with these products. Based on her cash flow with allocated investments towards her multiple goals, it may be difficult for Nirmala to start building her surplus fund, if some money has to be kept aside for unexpected expenses. But she could increase her savings in subsequent years to build a surplus fund at current cost of ₹50 lakh that would translate to ₹2.37 crore at her retirement. The PPF, not mapped to any of her goals, could also be used towards building the surplus.

Cash flow (₹)

Monthly

Income

1,40,000

Expenses

60,000

Surplus

80,000

Annual surplus

9,60,000

Funding needs & goals:

Annual retreat trip

60,000

Gold purchase

50,000

PPF

1,50,000

Gift to Daughter 1

93,600

Gift to Daughter 2

86,400

Retirement

4,08,000

Total

8,48,000

Balance

1,12,000

After funding the goals, the balance money could be used towards building long-term surplus fund or to have a better lifestyle. The choice was Nirmala’s to decide about how to deploy the money.

Planning for the future within three years of employment, especially for a late entrant on to the employment scene, was a wise thing for Nirmala to do. By adhering to the plan, she could avoid costly errors. We advised her to seek professional help to draft a will at the earliest.

It would take four to five years for Nirmala to reach the planned asset allocation of 40:60 in equity:debt in the pre-retirement phase. We advised her to maintain a ‘behaviour journal’ during this time to study her emotions on the volatility induced by equity-oriented investments. This would help her gauge her risk tolerance better and adjust asset allocation accordingly to equity, debt and other investments.

Asset allocation is the key to a successful financial plan. “History shows you don’t know what the future brings” is a quote to be recalled while thinking of asset allocation.

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

Mind it!

A behaviour journal can help study emotions, gauge risk tolerance, and adjust asset allocation accordingly

Published on August 18, 2020

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