Gunasekar andVasundara want to plan their finances. Their current lifestyle aspects and goals are as follows:

·        Both work in the IT sector and lead comfortable lives.

·        Their daughter is studying in Std 12 and plans to take up medical studies in the UK, which may cost around ₹3 crore.

·        Both want to continue working for the next 20 years. But they want to assess their readiness for a comfortable retirement in the next 10 years. They are keen on a worry-free retired life, factoring in monthly expenses of ₹2 lakh for the next 40 years from the date of retirement.

·        They had set up a trust to support community welfare in their hometown for which they would like to set aside ₹1 crore in the next seven years.

·        They also expect their income to grow by 10 per cent every year.

Both have a good understanding of financial instruments and how they perform. They are aggressive in their investment style and invest in direct equity, mutual funds, and Provident Fund.

Review and recommendations

Gunasekar and Vasundara’s financial needs and resources were assessed and directives given accordingly, as follows:

1.      They have adequate life and health insurance to protect their current lifestyle and their goals.

2.      They were advised to reserve ₹25 lakh towards emergency fund.

3.      Out of the current investments, ₹2 crore is reserved for daughter’s education. As the expenses are over the next five years, 50 per cent of this fund will be invested with moderate risk investments to manage the last two years of expenses.

4.      They were advised to opt for an educational loan of ₹1.5 crore to support the first two-three years of expenses along with the balance amount reserved. This will ensure that they can manage the rise in costs in the UK, currency depreciation and other challenges. As and when they draw from the educational loan, their monthly EMI will increase, which will be funded from the reserved fund for education. Educational loans are offered to them at 10 per cent by one of the leading banks.

5.      For their retirement life of 40 years, they need ₹6.78 crore with monthly expenses of ₹2 lakh on the assumption of inflation post-retirement at 6 per cent and expected growth of 8 per cent from the retirement corpus.

6.      They were advised to construct a portfolio for ₹90 lakh from the current financial investments with an expected return of 12 per cent in the next 20 years. If they want to retire in the next 10 years, they need to invest ₹1.65 lakh more per month. They do not need any additional funding if they want to retire in the next 20 years. This plan gives them a basic understanding of when they can retire, what needs to be done to retire early and what are the assets that could help them take a decision in this regard.

7.      Inflation is a key factor in retirement working. If they want to maintain the same lifestyle of ₹2 lakh after 10 years, they need around ₹12 crore with an expected inflation of 6 per cent per annum. To achieve this corpus, they need to invest₹4 lakh per month in addition to ₹90 lakh of initial investment. This might be challenging to fund other goals.

8.      If they retire after 20 years from now, they need ₹21.6 crore. They need to invest ₹1.2 lakh per month to reach the corpus, which is comfortable with the kind of commitments they have.

9.      They will be able to close the housing loan in the next 13 years with the current EMI. This also costs them ₹1.2 crore of interest cost in the next 13 years at 9 per cent interest. As they are keen to have additional property, they were advised to close the loan with income growth in the next five-seven years. This will help them to reduce the interest cost to ₹60 lakh. Once they close the housing loan, they may use the rental income to build the corpus for the charity need. EMI can be redirected towards early retirement.

10.  Rental property and rental income may help them to manage the lifestyle expenses post-retirement as additional resources.

11.  They have ₹75 lakh to ₹1 crore from the current investment to be invested towards wealth creation. It was advised to invest this in an aggressive portfolio with a time horizon of 10-20 years. This will help them to manage other goals such as travel, closing all liabilities before retirement and daughter’s marriage.

From the outset, this couple is in a comfortable position to reach their goals. They have almost 60 per cent of their assets in real estate. They have committed 32 per cent of their income to loan servicing. They depend more on income growth to reach all their goals. They had higher expectations on the investment growth based on their recent experience in the investment performance. It was explained to them that realistic expectations, consistent performance and right rebalancing will help them reach their goals.

The ‘one thing’ that the couple needs to concentrate on at this point is to ensure the income is growing as expected. This in turn means ‘focusing on upgrading skills in their domain’ and remaining highly employable even during challenging times (like a recession). This is in line with their purpose and should sit atop their priorities! This has to be their biggest takeaway from the exercise.  

The author is a SEBI Registered Investment Adviser