Express Clinic

Resides in Hyderabad

Profession: Working for a pharmaceutical company in research division

Annual income (R9.84 lakh)

Status & goals

Prerana is an ex-banker. She has currently taken a career break to bring up their twin daughters Piya and Riya who have turned one. The last year has been one of transitions for Rajesh and Prerana. They went from double income no kids family to single income family with twins. They also took a home loan. The current position is that all savings have been used up to buy the property. Income has gone down and responsibilities have increased. They want a clear direction to build up their finances again and meet their goals.

Monthly Income Rs 82,000

Monthly expenses Rs 25,000

EMI on loans Rs 30,000

Needed

Comprehensive plan to build up their finances and provide for current and future goals including a retirement corpus

Net monthly surplus Rs 27,000

Goals in order of priority

Daughters Education (2029)(inflation 10%)

Current Value R 20 lakh

Future value R 92 lakh

Daughters Marriage (2037) (Inflation 8%)

Current Value Rs 10 lakh

Future value Rs 63.40 lakh

Retirement Planning (2037)

(Life Expectancy 85 years,Post Retirement Inflation 7%,Growth of Corpus at the rate of 8%)(Pre-retirement inflation 8%)

Current Value per annum Rs 3 lakh

Future value per annum Rs 19 lakh

Cor pus required per annum Rs 4.26 crore

Current Investments

Property (Current Value) : Rs 50 lakh

EPF : Rs 10 lakh

PPF : Rs 2.40 lakh

NSC : Rs 60,000

Recurring Deposit : Rs 90,000

Savings accounts : Rs 50,000

Life Insurance coverage:

Rajesh: Rs 8 lakh endowment and other savings policies. Term plan of Rs 30 lakh purchased with home loan

Prerana: Rs 2 lakh endowment

Total premium paid: Rs 56,000 per annum

Health insurance: Employer provided cover for Rs 3 lakh individually to all four members of the family.

Findings

Emergency Fund: There is adequate liquidity in the form of savings bank balance and recurring deposit. Current total amount available is Rs 1.4 lakh

Health insurance: Health insurance of Rs 3 lakh looks insufficient in the current times,especially when there is only one earning member in the family

Insurance: Rajesh is grossly under-insured. Though home loan has been covered by a single premium policy offered at time of loan,the rest of the risk is open

Investments: Most investments have been utilised in the property purchase. The only major chunk which was left untouched is Rajeshs EPF. The property is self-occupied,hence it is not an income generating asset

Retirement: Currently only EPF and PPF balances are available towards retirement planning. Rest of the corpus has to be built up

Liabilities: Current home loan outstanding is Rs 30 lakh. It is a 20-year loan with an EMI of about Rs 30,000. There are no other liabilities.

Recommendations

Emergency Fund: Savings account balance and RD can be used as contingency fund. The RD has six instalments to go. Hence at maturity the balance will go up to Rs 1.20 lakh. That in addition to the savings account balance should be sufficient to cover expenses and EMI of three months. On maturity move the RD funds to a fixed deposit.

Express tip: Always keep 3-6 months of expenses in ready to use form. If funds are available,insurance premiums can also be kept aside.

Health Insurance: Rajesh should go in for a family floater health insurance of Rs 10 lakh. It will cost him about Rs 20,000 per year. A recheck should be done on the insurance amount every

4-5 years to review the requirement for increasing the cover

Express Tip: Employer provided cover might not be adequate. It is better to have a personal health cover too

Life Insurance: Currently they are a single income household. Hence the risk cover required is about Rs 2crore. Prerana plans to rejoin work after a few years. At that point in time the requirement will go down substantially. Looking at the cashflow situation,Rajesh should take a term plan of at least Rs 1crore. It will cost him about Rs 22,000 per year for a policy with a five-year tenure. He should also consider surrendering his existing endowment policies,as they are not adding much value and are a drain on the cashflow. One of his policies will start a monthly payout of Rs 2000 per month next year onwards for next 15 years. This amount should be used to invest for long term goals only

Express Tip: In case of one spouse moving out of a job,the insurance requirement of the earning spouse increases

Child Goals: To meet the education requirements of Piya and Riya,they need an investment of Rs 24,000 per month and for their marriage they need an investment of Rs 5,000 per month earning at least 15 per cent rate of return. In the current cash flow,this is not possible. Currently,after implementing the insurance recommendations,surrendering the existing policies,start of inflow of Rs 2,000 per month from one of the policies and completion of tenure of RD,the surplus available is Rs 25,000 per month. This should be invested in equity diversified mutual funds through SIP. They can choose 3-4 funds for this purpose

Retirement: Retirement will be funded through EPF,PPF and other investments. EPF should contribute about Rs 2.40 crore,PPF at the current balances and new investments of only the minimum required should yield about Rs 15.50 lakh. The balance has to be built up using equity fund investments of Rs 6,000 per month. Current cashflow is insufficient for this.

Express tip: Company PF and voluntary PPF are great investment tools for retirement planning.

Other aspects: On most occasions,goal-based investments will show a shortfall in the amounts available to fund the goals. In a less than ideal world,income increase brings increase in lifestyle expenses without providing additionally for goals. Rajesh and Prerana will be able to meet their goals if they follow the simple strategy of increasing their investments every time they have an income increase. Next few years though,will be tough for them. Rajesh should remember to save his bonuses,as soon as he gets them for that will be the additional funds required for his daughters admissions,schooling etc

Conclusion

Rajesh and Prerana just need discipline to keep increasing their investments over time. When Prerana starts working again,the pressure will ease out substantially. But even without the additional income,disciplined investing will help them achieve their goals

Plan By Kiran Telang

Certified Financial Planner,Member of the Financial Planners Guild,India.

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