Suresh and Pradeepa want to plan their finances to fund their goals. Suresh, 39, works for the auto industry while Pradeepa is a teacher in a private school.
Their children, Rinit and Riya, aged 11 and 5, are in classes 6 and 1 respectively. Suresh has inherited two flats from his parents that yield him a rental income of ₹35,000 a month. They are living in a flat for which they have an outstanding housing loan of ₹35,00,000.
Suresh bought a car recently, the EMI for which is ₹8,500. The couple have bought a few conventional life insurance policies and expect maturity benefits in a couple of years. All premiums have already been paid.
The couple’s annual income and expenses, as well as net worth statement, are displayed in the table.
Goals
Suresh and Pradeepa want to build an emergency fund that can cover six months of expenses along with one year’s school fees. Suresh also wants to have a career growth fund of ₹3,50,000 to complete a course over the next three years.
The couple want to provide for their children’s college fees at a current cost of ₹15,00,000, when they each turn 18. They also want to build a retirement corpus by the time Suresh turns 60, taking into account current monthly expenses of ₹50,000.
Besides, the family is looking at international vacations in 2020 to 2023 at a cost of ₹4,00,000 each.
Review and recommendations
After a review of the family’s financial position, we recommended the following. First, since they did not have adequate health and life insurance cover, we advised them to purchase these on a priority basis. We recommended that the family opt for medical insurance of ₹5,00,000. Also, Suresh should opt for life cover of ₹75,00,000 and Pradeepa for ₹25,00,000 through pure term insurance with lump-sum benefit to the nominee in case of death. The expected life insurance maturity benefits could be used to fund Suresh’s study programme.
The family had not been expecting rental income from inherited properties this early. But, since it was available, it allowed them the leeway to plan foreign vacations. After analysing their cash flow and goal priorities, we advised them to opt for a foreign vacation at a cost of ₹4,00,000 each in alternate years, funded by the rental income.
The housing loan with a current EMI of ₹36,000 will be closed in 15 years. We recommended that they use the rental income every other year to partially foreclose the loan. This will help them repay the housing loan in five or six years. Closing the housing loan early will help them save about ₹18,00,000 on interest cost apart from giving mental relief from the long-term commitment of servicing the loan.
Sundry expenses
On an analysis of their credit card statement, we observed that they were paying ₹600 per month as broadband fee through auto debit. A standing instruction that was given earlier had gone unnoticed despite the surrender of the connection three years back, when they moved from Hyderabad to Chennai. The expense may seem minor, but it is of utmost importance to look at expenses and statements line by line.
The couple were advised to correct such mistakes. Auto debit is an easy facility to avail but one should also keep a careful eye on it, exiting as needed. If exiting is not easy, it is better not to register for auto debits.
Rental income doesn’t come without costs. Suresh and Pradeepa were advised to keep a reserve fund in case of non-availability of tenants and for regular property maintenance. The latter was estimated at ₹2,00,000. Including that sum, they needed to maintain a ₹7,20,000 emergency fund for the rental property. We mapped the current value of fixed deposits for this.
Balanced portfolio
Based on the risk profile analysis of Suresh and Pradeepa, we recommended that they opt for a balanced portfolio towards their goal funding, with equity exposure not exceeding 50 per cent. They were advised to invest ₹20,000 per month towards Rinit’s education goal and ₹12,000 per month towards Riya’s. With expected annual returns of about 11 per cent, this will fetch them about ₹26 lakh for Rinit and ₹41 lakh for Riya when they enter college at 18.
Taking into account a life expectancy of about 90 years, expected annual inflation of about 7 per cent, expected annual returns of about 11 per cent in the accumulation phase and expected returns of about 8.5 per cent in the withdrawal phase, the couple will need a retirement corpus of about ₹6.13 crore when Suresh retires at the age of 60. He can expect to get around ₹1.5 crore as PF and other benefits when he retires.
Excluding the PF and retirement corpus, Suresh and Pradeepa have to accumulate about ₹4.63 crore. They can do this by investing approximately ₹48,000 per month in keeping with their risk profile. We advised them to invest ₹1,50,000 in PPF annually along with ₹35,000 per month in equity mutual funds. Suresh wants to gift his rental properties to his children after his retirement, and therefore does not want to depend on rental income in his retired life. In addition, the couple need to accumulate funds for their children’s marriage expenses; they can start building a corpus for this after closing their home and car loans.
A sound financial planning exercise not only helps one identify the right investments and savings, but also plug ‘leaks’ that were not given due importance or were ignored due to a busy schedule.
The writer is a SEBI-registered investment advisor at Chamomile Investment Consultants