Pairing up to meet financial goals

I am 32 years old and my wife is 31. Both of us are employed in a software company in Bangalore. Our monthly take-home pay is Rs 1,10,000. We have twin daughters, who are a year old.

Currently, our monthly expenses towards house keeping are Rs 30,000 and our home loan repayment is Rs 30,000.

We are investing in few SIPs to the tune of Rs 25,000 and payments towards life insurance policies are Rs 8,000 a month.

We expect our salaries to increase by 8 per cent every year and we are planning to work till the age of 60.

Our assets, liability, investments and savings are as follows:

Our equity portfolio is worth Rs 12 lakh and we expect to earn a 12 per cent compounded return annually.

We have invested in mutual funds to the tune of Rs 6 lakh and we expect a similar return. Provident fund net balance amounts to Rs 6 lakh totally.

We are currently contributing Rs 8,500 towards PF (including company’s contribution).

We have two insurance policies maturing in 2025 and 2026 and the total maturity value will be Rs 24 lakh.

At the time of availing home loan, both of us took term insurance for Rs 15 lakh each. Our employer took a term insurance for Rs 15 lakh each when we joined the company. We purchased an apartment two years ago and the loan is likely to run till 2020.

The current loan outstanding is Rs 23 lakh. For emergencies we have flexi-deposit to the tune of Rs 5 lakh. We are covered for Rs 3 lakh each under group health insurance.

Our Primary investment objectives are as follows:

Meet the graduation and post graduation expenses of both our children. This may cost Rs 12 lakh for each child in today’s value.

We may need Rs 1 crore each for our daughters’ wedding in 2032

We are planning to retire at 60 and settle down in Chennai. At today’s value, we may require Rs 5 lakh an annum including medical, travel and living expenses.

As both of our parents are healthy, we expect to live till 85. After achieving the above, we would like to pursue our secondary goals as given below:

To buy an apartment worth Rs 80 lakh by 2011 after selling our present house and using the proceeds to clear the existing loan, use the remaining for down payment and take a fresh loan

To leave an estate for our children if possible. — Name withheld on request

Solution

It is good to earmark investments for specific goals. You have not mentioned the end use of the investments made so far. Hence, we have resorted to some assumptions in our working.

Education: Your daughters’ education expenses of Rs 24 lakh (Rs 12 lakh each) inflated at 6 per cent would amount to Rs 61 lakh.

We assume that the insurance amount of Rs 24 lakh (maturing in 2025 and 2026) mentioned by you is the maturity value and not just the sum assured.

This can be utilised for the education. To meet the shortfall of Rs 37 lakh, you will have to save a sum of Rs 7,800 totally (a part of the existing SIPs can be ear-marked for the same) for the next 192 months.

This should earn an interest of 10 per cent an annum to reach the goal.

Marriage in year 2032: If you wish to have Rs 1 crore for each of your daughter’s marriage, then it is better to earmark the current savings in equities and mutual funds for the same.

Assuming your current savings of Rs 12 lakh in equities grows at 12 per cent compounded annually over the next twenty four years, the corpus would add to Rs 1.82 crore.

If your investment in mutual funds too provides similar returns, the current value of Rs 6 lakh can grow to Rs 91 lakh. After utilising Rs 2 crore for the marriage, the remaining sum of Rs 73 lakh can be shifted to your retirement kitty.

Retirement in year 2037: You have stated that you need Rs 5 lakh a year for your retirement kitty.

At the time of your retirement at 60, a corpus of Rs 5.37 crore that earns an inflation-adjusted return of 2 per cent will meet your needs for the next 25 years.

To accumulate this money, the surplus of Rs 73 lakh (arising from your equity and mutual fund portfolio)can be invested effectively.

If this investment provides a compounded return of 10 per cent for five years, it will grow to Rs 1.12 crore.

Your current balance of Rs 6 lakh in PF growing at 8.5 per cent every year would total to Rs 64 lakh at the end of 29 years (year 2037).

Your current savings of Rs 8,500 a month, growing at a similar rate would fetch Rs 1.29 crore on your retirement. But still you may face a shortfall of Rs 2.32 crore.

To achieve the full target, you ought to save Rs 11,300 every month for the next 348 months and invest to earn a return of 10 per cent (you can earmark a part of your SIP for the same).

Secondary goals

Given your current income, your secondary goals does appear to be little challenging, especially given that your loan outstanding is more than Rs 7 lakh.

If you live up to the age of 85, you can leave the current house as estate.

But beyond this age, the value of the estate can go down (assuming you opt for reverse mortgage) as the estate may become your primary source of income.

Conclusion:

All your expenses are taken at today’s value.

In fact your surplus might reduce once our children start their schooling. Further, while in today’s value, your annual expenses is Rs 3,60,000, your post-retirement expectation is high and can be moderated.

However, if your children are going to be employed post their education, any supplementary income from them may offer comfort.

A moderation in spending plans for the marriage may also help. Once your home loan is closed in another 12 years, you can step up savings.

To protect your goals, it is mandatory to take term insurance to the tune of Rs 3.4 crore (Rs 1.7 crore each) after adjusting your existing term insurance.

The total premium required for you and your wife will be Rs 1,10,000.