Financial Planning . When you have to provide for your parents

‘A’ is 26 years old and works with a software company in a tier-1 city. Over the past two years, he has been able to save ₹ 5 lakh for his emergency fund. Now, he wants to start planning for his other goals.

He wants to create a retirement fund for his parents. A’s father is retired, and his mother is a homemaker. They own a house in their home town and stay there. A’s father receives pension. However, A transfers ₹10,000 per month to bridge the cash-flow deficit.

He plans to purchase a house after 10 years. He expects the cost to be around ₹1 crore after 10 years. In addition, he plans to start saving for his retirement. He can invest ₹50,000 per month. He and his employer contribute a total of ₹12,500 to his Employees’ Provident Fund (EPF) account every month.

Protect

The first step in financial planning is to ring-fence the finances. A has already created an emergency fund — ₹5 lakh is a reasonable sum for his age and level of expenses. In addition, he needs to purchase adequate health and life coverage.

A’s parents have certain health ailments that prevent them from purchasing health cover at a reasonable and affordable cost. Therefore, he must rely on health coverage through an employer and a medical fund to meet any hospitalisation needs for his parents.

His parents are covered for ₹2.5 lakh per annum from his father’s ex-employer. A’s employer covers him and his parents for ₹5 lakh per annum. Even though it is difficult to purchase health cover for his parents, A must purchase a private health plan for himself. This way, he can leave his employer cover for his parents. He must purchase a health plan with a sum insured of ₹5 lakh.

This plan would cost him about ₹7,500 in the first year. In addition, he must target a medical fund of ₹ 10 lakh in the next five years. For this, he can set aside ₹14,000 per month in a debt fund or a recurring deposit.

A also wants to provide for his parents’ retirement. Ideally, he would want to set aside some money that his parents can use to generate regular income.

However, that is not possible since he does not have any lump-sum amounts.

Therefore, A must transfer ₹10,000 per month to his parents’ bank account.

Moreover, in such cases, it becomes extremely important to purchase a term life cover. Without this, his parents would face financial hardships in his absence. He must purchase a term life cover of ₹1 crore. This would cost him about ₹8,000 per annum. It may seem a big amount given that he transfers only ₹10,000 per month. However, he must consider that his parents would need a cushion to meet any emergency requirements.

The life cover requirement is dynamic and increases as you add liabilities or go through life events such as marriage, childbirth, etc, and decreases as you amass wealth and fulfil your responsibilities. Therefore, he must reassess his life cover as he goes through the life events.

He plans to purchase a house after 10 years for around ₹1 crore. Assuming he would fund 25 per cent of the cost through his own funds, A needs to create a corpus of ₹25 lakh in 10 years.

For this, he can invest ₹12,000 per month in an aggressive hybrid equity fund.

Discipline

At his age and life stage, it is difficult to make an accurate assessment of his retirement needs. Therefore, the key is to start investing with discipline and make adjustments over the years. The remaining money, ₹22,500 (₹50,000 – ₹1,250 for insurance – ₹14,000 – ₹12,000), can be invested for his retirement. As mentioned, he, along with his employer, is contributing around ₹12,500 per month to his EPF account. For the retirement portfolio, he can target an asset allocation of 60:40. He can make incremental investments in this ratio.

This means he must invest ₹21,000 per month in equity funds and ₹14,000 per month in fixed-income products. He is investing ₹12,500 in EPF. He can park ₹1,500 per month in the public provident fund (PPF) or a debt mutual fund. The equity allocation can be divided equally across a large-cap index fund, a multi-cap fund and a mid-cap fund. He must increase exposure as his cashflows permit. Note that his investments for purchase of house and retirement can double up as parents’ retirement fund, too.

The writer is a SEBI-registered investment advisor at personalfinanceplan.in

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