Personal Finance

How to save for children’s studies without sacrificing on retirement plans

Sridevi Ganesh | Updated on April 03, 2021

There is a need to prioritise long-term money goals

Vasan wanted to plan for his retirement along with few of his other goals. He is aged 41 and his wife, Radhika, aged 35. They have two kids, Sadhana (10) and Sanjay (5). Family income and expenses disclosed during the meeting are as follows:

His top priorities are to build corpus for kids’ education and provide for a peaceful retirement. Though his income is high, he was not able to save regularly due to medical expenses for his parents and other family members over the years. He is living in Bangalore and wants to relocate to Chennai post retirement. He is living in an expensive rented house. He wants to continue living at the same locality with high rent as he feels, moving to another locality would eventually increase school expenses. He is keen to build a kitty for the purpose of loan down payment for a house in Chennai.

Risk profile

We assessed his risk profile as ‘balanced’. He is ready to save using relatively high-risk instruments towards his long-term goals. Having said that, he had no prior experience of saving in equity or equity oriented products. Like every individual, he too was impressed with past returns of the stock market, which fuelled his risk appetite. As we found out he had little to no experience in equity investments, we showed him how various aggressive equity mutual funds performed. Monthly movement in prices helped him gauge the volatility of such investments. He appreciated the idea and seemed to have understood the long term thinking needed with respect to such investments.

If Vasan and Radhika want to save for prioritised goals, they must first reduce family’s living expenses which were on the higher side. After the discussion, the couple agreed to maintain a threshold on their expenses at ₹80,000 per month for the subsequent year. Hence, the annual surplus available would be ₹7,46,000.

Recurring deposit (RD) contribution was advised to be ceased. The same quantum of committed contribution was redirected towards long-term goals. Fixed deposit and recurring deposits sums were redirected towards contingency / emergency fund. We also advised them to retain the sums as fixed deposits in bank. Emergency fund worked out to be ₹9,00,000 for that year.

Education goal

An amount of ₹25,000 per month, redirected from RD savings, was advised to be invested in large-cap schemes of mutual funds with an expected return of 11 per cent for a period of 15 years. With this savings, Vasan would be able to fund daughter Sadhana’s education when she turns 18 with a corpus of ₹21.43 lakh. The continued savings for the remaining years will help him garner ₹67.53 lakh for her marriage. In addition, we asked him to continue to save ₹30,000 per year in Sukanya Samriddhi Scheme which would be handy for Sadhana’s marriage. This will fetch ₹16.70 lakh at her age of 24. This is equivalent to planning for current education cost of ₹10 lakh at 10 per cent inflation and marriage cost of ₹30 lakh at an inflation of 7 per cent.

Out of Vasan’s regular income, ₹13,000 per month, was suggested to be invested in large-cap funds in mutual funds with an expected return of 11 per cent for a period of 20 years. With this savings, he will be able to fund son Sanjay’s education when he turns 18 with a corpus of ₹34.52 lakh. The continued savings for the remaining years will help him garner ₹38.20 lakh for his marriage. This is equivalent to planning for current education cost of ₹10 lakh at 10 per cent inflation and marriage cost of ₹10 lakh at an inflation of 7 per cent.

Retirement goal

We also advised Vasan to start a PPF account and invest ₹1,50,000 per annum till retirement. Along with his PF, he will be able to accumulate ₹3.5 crore to ₹ 4 crore at the time of retirement. He can increase the contribution to retirement post his committed savings towards his children’s education and marriage needs or based on any increase in his income.

With these plans in place, he would be left with a surplus of ₹4,40,000 after a year. We advised him to use ₹1,40,000 towards family support fund. This needed to be invested in liquid funds / fixed deposits as this will be used towards any medical emergency.

He was also advised to opt for pure term insurance for a sum assured of ₹1.5 crore immediately and ₹5,00,000 health cover for all 4 family members. As he has an employer provided health cover for sum insured of ₹5 lakh, the above-mentioned personal health cover was found to be enough.

We advised him to save the balance around ₹2-2.5 lakhs towards his house construction fund. He can consider constructing new house at Chennai nearing retirement if he continues to save with discipline. Any increase in salary or change of rental expenses, after his kids go to college, will help him increase his contribution towards house purchase and retirement needs.

Understanding one’s goals, mapping suitable investments based on time horizon and saving in a disciplined manner are key to achieving success in financial planning. Planning for long term goals with an eye for short term needs is a delicate act that needs to be carried out for successful investing.

The writer, Co-founder of Chamomile Investment Consultants in Chennai, is an investment advisor registered with SEBI

Published on April 03, 2021

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