Sandhya Mishra’s financial plan

Monthly Income (After Tax)

Rs 50,000

Other Income (Annual)

Rs 3,00,000

Monthly Expenditure

Rs 58,000

Domestic Expenses

Rs 38,000

Mutual Funds SIP

Rs 10,000

Bank RD Rs 10,000

Other Annual

Expenses

ppf Rs 70,000

Health Insurance

Rs 22,000

Life Insurance

Premium

Rs 1,11,000

Investments

Rs 39.90 lakh

Balance in Savings Bank Rs 1.3 lakh

F D Rs 1 lakh

Recurring Deposit

Rs 1.80 lakh

PPF Rs 13.50 lakh

Postal Scheme

Rs 3.30 lakh

Employees

Provident Fund

Rs 3 lakh

Mutual Funds

Rs 10 lakh

Stocks Rs 6 lakh

Property House

(current residence)

Rs 1.25 crore

Liabilities NIL

Investment Assets

(Position at retirement,after implementing of suggestions)

Rs 72.37 lakh

PF Rs 6.26 lakh

PPF Rs 21.52 lakh

Postal Schemes

Rs 4.49 lakh

Mutual Funds

Rs 30.66 lakh

Stocks Rs 9.44 lakh

Goals

Retirement Planning (2015)

(Assuming inflation at 8 per cent per anum and life expectancy 80 years)

Current Monthly Expenses Rs 38,000

Future Value

Rs 51,698

Corpus required

Rs 1.04 crore

Findings

Emergency fund

Sufficient funds available to meet contingencies.

Life Insurance

There is a ULIP and several endowment policies. The premium on these policies continues beyond retirement age. There is a huge outgo towards life insurance which is not required.

Health Insurance

Sandhya has a health insurance for Rs 2 lakh and her mother is covered for Rs 4 lakh. There is a shortfall in health insurance for Sandhya.

Retirement

Looking at all existing investments Sandhya will have a corpus of Rs 63.37 lakh when she retires. Her requirement is Rs 1.04 crore.

Foreign travel

Sandhya wishes to keep Rs 5 lakh towards a foreign trip when she retires.

Recommendations

Emergency fund

Rs 1.30 lakh in savings account can be kept in the form of linked deposit to earn a better interest. Rs 1 lakh FD can be moved into an FMP to earn tax efficient returns. This will act as second level of emergency fund. A higher level of emergency fund needs to be maintained because she is the sole earner and has an aged dependent.

Express Tip

Always maintain emergency funds depending on your requirement subject to minimum of 3-6 months of monthly expenses.

Life Insurance

There is no need for life insurance. Discontinue the ULIP when the surrender charges are none. For the traditional endowment plans,look at reducing the term of the policy to get the maturity at age 60 and then make the policy paid up. This will reduce the annual burden of premium payment and give the maturity early. She will have to pay the difference in premium to compensate for reduction premium paying term. The RD maturing in December 2011 can be utilised for this purpose. Balance funds remaining from this can be added to the mutual fund portfolio.

Express Tip

Insurance is required only if there are dependents who cannot manage in absence of the earning member of the family.

Health insurance

Sandhya should increase her health insurance immediately to at least Rs 5 lakh. This will entail an additional payout of about Rs 8,000 per annum.

Express Tip

Medical emergency can eat up into valuable corpus if adequate insurance is not in place.

Retirement planning

There will be a gap of about Rs 41 lakh at retirement. It is not possible to cover this gap in the short time of four years at current level of income and expenses. Sandhya will have to reduce her expenses and boost her investments in SIP.

Recurring deposit is maturing in December 2011. It should not be continued. The funds should be redirected to SIP in a balanced mutual fund till retirement.

PPF contribution should be continued at the maximum permitted levels.

She has a huge positive in terms of her own property in a prime location. She can bridge the gap in retirement by having a paying guest or availing of reverse mortgage on her flat. A monthly income of Rs 6,000 from either of these options will reduce the gap to Rs 26.69 lakh.

At retirement she can avail of Senior Citizen Saving Scheme(SCSS) for R 15 lakh which will give her Rs 1.35 lakh per annum. Annuity bought for Rs 22 lakh should give her about Rs 15,000 per month. Her mutual fund investments should be worth Rs 30 lakh (if the RD funds are re-routed to SIP),which should be set up for a systematic withdrawal plan of

Rs 17,000.

With these investments and a little control over expenses,Sandhya will be able to manage her retirement.

Express Tip

Time is an important factor for retirement planning. Less time on hand will mean drastic measures to meet goals.

Foreign Holiday

If returns on investments are as expected (12 per cent on equity),Sandhya can use R 5 lakh from her stock investments at retirement to fund this goal. There will be some amount received from surrender of ULIP and the maturity of the endowment policies. This can be used to support the goal in case of shortfall. This objective will have to be forfeited if there is a major shortfall in the primary goal of retirement planning.

Will

Since Sandhya is a spinster,it is all the more important to make a will,as there are no immediate legal heirs in case of her demise,except her mother.

Express Tip

Medical emergency can eat up into valuable corpus if adequate insurance is not in place.

CONCLUSION
It is important to plan early to adequately fund goals. Compounding of returns can give great results only if you have sufficient time. If there is a shortage of funds and time,goals will be compromised