Financial Plan - 3

Plan for your children's changing career goals

Source – Business Line

I am a businessman aged 38. I have four dependents – my wife, two sons aged 11 and 6 years, and a daughter aged two. My monthly income is Rs 1.55 lakh. After meeting my household expenses of Rs 20,000 and other liabilities and investments, I have surplus of Rs 61,700. I am planning to buy one more house in the near future, after which my monthly surplus will be Rs 26,700. I have a few business commitments. Once that is over, by 2013, my monthly income is likely to go up by Rs 3 lakh. I have a floater health plan for Rs 5 lakh.

Liabilities: I have taken a home loan for Rs 23 lakh with a tenure of 10 years and my EMI is Rs 30,500. The new house would entail a loan of Rs 27 lakh for a tenure of 10 years with EMI of Rs 35,000. I may let out this for Rs 10,000. I have a car loan for which I pay an EMI of Rs 9,800 and the balance tenure is three years. I have a term insurance plan for Rs 25 lakh for 30 years.

Investment: I have recently started investing Rs 20,000 monthly in six mutual funds. I have three life insurance policies of which two are ULIPs and the total cover is Rs 16.25 lakh for which I pay a premium of Rs 1.2 lakh. As the ULIPs are only three-year policies, my last due is next year. I am contributing Rs 3,000 a month for the last two years, for a five-year postal RD. For my investments I am open to taking higher risk.

My concerns: My elder son is planning to do Chartered Accountancy and the costs can be managed with my current savings. But for my second son's higher education, I may require Rs 6 lakh at today's value. For my daughter's education, I want to accumulate Rs 6 lakh in today's value. For my daughter's marriage I may require Rs 8-10 lakh at today's value.

After retirement, I may need Rs 20,000 for household expenses. How much should I save if my wife and I want to live comfortably till the age of 80 years? — Madhu

Solutions

With controlled monthly expenses and a substantial jump expected in your income, reaching all your goals will not be a challenge. What you need to concentrate on is asset allocation.

With good monthly cash flows, your investments are not reflecting your stated risk appetite. But note that for an entrepreneur, cash flows may fluctuate . With your current surplus you have to create a contingency fund and such funds should have liquidity.

Steady cash flows are essential to achieve financial goals. We have constructed this plan based on your current disposable income and if there is any drastic change in the income, you need to revisit your investments. Review your portfolio at least once in six months.

Higher Education: Few of us can tell what course a child in primary school will pursue when he or she grows up. But going by the common choices of today, we can plan for their education. In your case you have said that your elder son will only purse CA and you need not make any provision for that. This is not the right strategy.

It is better to assume that he may have a different choice when he grows up. Make a provision for such a change of heart. Your second son's anticipated higher education cost of Rs 6 lakh will be Rs 12.6 lakh if inflated at 7 per cent (for all the calculations, we presumed the same inflation) for 11 years. To reach the target, you need to save Rs 4,670 a month and it should earn a return of 12 per cent (same return presumed for all calculation).

Your daughter's higher education is 14 years away and the present cost of Rs 6 lakh will be Rs 15.5 lakh. To reach the target you need to save monthly Rs 3,600. For her marriage you need to build a corpus of Rs 44 lakh in the next 22 years for which you ought to save Rs 3,500 a month.

Retirement: While building the retirement corpus, it should not be watertight in accommodating expenses. Going by your likely future income, your standard of living is likely to increase, which may leads to higher household expenses.

It may not be ideal to build a retirement corpus based on present annual living expenses. It is better to re-evaluate your requirement if there is any major change in lifestyle.

The present annual living cost of Rs 2.4 lakh will be Rs 10.6 lakh when you turn 60. To have such a pension, it is ideal to have a corpus of Rs 1.74 crore at retirement. To accumulate the corpus you need to save monthly Rs 13,500 for the next 264 months.

Investment and insurance: It's surprising to see that with such good cash flows, you decided to pay premiums only for three years on your ULIPs. This is a long-term product. We often see investors selecting a wrong product and failing to reap the benefits. We suggest that you pay premiums till the maturity of the plan. Whenever you start fresh investments, earmark a goal towards the investment.

A few of your current MF investments are inline with our regular recommendations. Once your tax saving obligations are met, discontinue the SIP in Birla Tax Relief 96 and increase your contribution to HDFC Top 200 and ICICI Pru Dynamic. Restrict your MF portfolio to four to five schemes. Discontinue your postal recurring deposit and start a fresh recurring deposit for 10 years in a bank to take advantage of the prevailing high interest rates.

As you have not disclosed your business liability, we suggest you take a term insurance for Rs 1.5 crore to secure your monthly expenses and all your goals. We suggest an asset allocation of 60:30:10 in equity, debt and gold.

Financial Plan - 2

Name: Shantanu, 31 Manjari, 27

Resides in: Pune

Profession: Shantanu is a lecturer in PU, and Manjari is pursuing a PhD

Net annual income - (Rs 7.34 lakh)

Status & goals

Their key goals are planning for the future of their child (yet to be born), buying their own home and also adequate income after retirement. Currently they do not have much investment and almost all their savings are lying in bank fixed deposits and saving bank account.

Needed

A financial plan that can help them channelise their savings towards their goals

Net monthly surplus - Rs 44,000

Current investments

Savings Bank Balance- Rs 40,000

Fixed deposits - Rs 1 lakh, PPF- Rs 20,000

Findings

Emergency Fund - Rs 40,000 is available in savings bank account for contingency. This can take care of 2 months of regular expenses.

Health insurance - Rs 1 lakh from Shantanu's institute covering the family and family floater cover of Rs 3 lakh covering both of them.

Life Insurance - Shantanu has combined insurance cover of Rs 5.10 lakh from 3 LIC policies where as wife Manjari has insurance cover of Rs 50,000 from TATA AIG.

Investment Asset Allocation - All their monthly investments are lying in safe investment vehicle, thus compromising on growth aspect.

Recommendations

Emergency Fund

Increase saving account balance to Rs 85,000 as emergency fund, which will cover 5 months of regular expenses in any adverse situation. Additionally Rs 4,500 per month should be put in a recurring deposit account to pay for future maternity expenses. The same amount will be used for the increased monthly cost after the child is born.

Express Tip: Don't keep more than 3-6 months of expenses in ready to use form for emergency fund. Excess amount lying there will hamper long-term growth of overall portfolio.

Health Insurance

During renewal they should consider converting their existing family floater cover of Rs 3 lakh to individual cover for both of them. This should cost around Rs 7,600 per annum. Shantanu should also consider taking individual health for his parents of Rs 2 lakh each costing around Rs 21,200 per annum.

Express Tip: Relying on Employer provided insurance completely can be risky, especially at a higher age.

Life Insurance

Shantanu and Manjari should discontinue their respective endowment and money back plan. A term insurance of R 60 lakh and R 28 lakh is recommended for Shantanu and Manjari respectively. They should go for an online policy which offers low premium. However they need to review their insurance needs upon birth of their first child and taking house loan.

Express Tip: Segregate insurance and investment needs. Insurance is meant for family protection. Capital growth can be compromised due to high charge structure.

Child education and marriage

Current income is not enough to allow for any saving towards this goal.

Express Tip: In the absence of adequate income, planning for lower priority goals can wait till an increase in income or a windfall gain such as an bonus or an inheritance.

Retirement

The inflation linked corpus required for them will be Rs 2.60 crore. To accumulate the said corpus they require investment of Rs 2,700 per month in good diversified equity mutual fund and Rs 500 in a gold mutual fund.

Express Tip: This should be considered as most important goal.

House Purchase

In order to accumulate corpus of Rs 44 lakh towards down payment (40%) of house purchase in next 7 years and then afford the EMI for the balance amount of loan, they require monthly investment of Rs 33,500 in a MF.

Express Tip: Own house purchase is a very important goal that requires proper and thoughtful planning. Be focused and keep saving and investing.

Car Purchase

The current income is not enough to allow for any saving towards this goal. The existing fixed deposit of Rs 1 lakh can be kept towards the down payment of the car should the income in future allow for a car loan.

Existing Investments

Continue with their existing investments in MF schemes and PPF. However, there should be higher allocation towards equity for their long term goals. Exit Endowment and Money Back plans as they do not meet your insurance objective. Instead go for online term plan.

Conclusion

It is important that you follow the recommendations diligently and be patient with your investments to bear fruit. Follow asset allocation, make provisions for the emergencies and review your Financial Plan periodically.

Source – Indian Express

Financial Plan - 1

Name: Prabhudas Mohanty,35

Resides in: Gurgaon

Profession: Planning Manager with a private firm

Net annual income (Rs 8.64 lakh)

Other details: His wife is a home maker and they are expecting their first child

Status & goals

His key goals are planning for the future of his yet to be born child, and adequate income after retirement

Needed

A financial plan that will ensure adequate funds for maintaining financial well-being and also providing for his goals

Net monthly surplus Rs 30,200

Retirement planning (2036)

Adequate monthly income after retirement

Current Investments

Life insurance cash value: Rs 6.11 lakh, Cover: Rs 59.41 lakh

EPF:           Rs 50,000

Real estate: Rs 10 lakh

Cash:          Rs 50,000

Observations

A review of his investment portfolio reveals that Prabhudas has been misguided by insurance agents. He has a heavy insurance portfolio and high property investment through purchase of land. Apart from this he has not made any other investment. His high monthly surplus is not being utilised effectively. His current financial situation is creating the risk of not meeting his life goals.

Findings

Emergency fund:         Rs 50000 maintained in savings bank account.

Health Insurance:        Rs 2 lakh from employer covering the family.

Life Insurance:            Rs 59.7 lakh

Existing Insurance:      Rs 59.7 lakh

Requirement by Human Life Method Rs 1.31 cr

Existing Investments:

Most insurance policies held are not providing adequate returns. Real estate exposure in three lands is more than required. Investments are ad hoc and hence not meeting life goals.

Recommendations

Emergency Fund: Increase emergency funds up to Rs 2.5 lakh which will cover six months expenses in any adverse situation. Invest Rs 2 lakh in money market mutual funds and keep rest in saving accounts or FD. Dispose one of your land investments to achieve this.

Express Tip: An emergency fund is created to meet uncertain expenses arising in future. It is necessary that you have adequate liquid surplus to avoid dipping into your long term savings.

Child’s education and marriage: Invest Rs 9,000 per month in SIPs for education and Rs 5,000 per month for marriage. The real estate holdings too can be utilised towards this goal. Return assumed 12 per cent p.a.

Express Tip: There are extra costs associated with child education apart from school fees, which also tend to increase. While budgeting for their expenses do take these into consideration.

Health Insurance: Buy standalone health insurance coverage to R5 lakh for the family.

Express Tip: Employer health insurance benefits are being reduced and they ceases with job change. Relying upon it completely can be risky, especially, at a higher age.

Life Insurance: A term insurance of Rs 80 lakh is recommended from any life insurance company with low premium rates and good claim settlement.

Express Tip: Life insurance is an investment, for family protection and not for capital growth. Know the right coverage required and buy the right product.

Retirement Planning: As per expense replacement method he will need a corpus of Rs 3.7 crore, to maintain his current lifestyle, post retirement. EPF can meet this goal partially if the contribution continues to grow at a good rate. To meet the remaining corpus, an investment of Rs 11,000 per month will be required assuming return of 12 per cent per anum.

Express Tip: EPF is an effective tool for retirement. To maximise it, continue your contributions till your retirement and do not withdraw funds in between.

Existing Investments: Planning your life goals through insurance is the biggest mistake. Traditional plans do not yield high returns and ULIPS have their own drawbacks. Review your insurance policies and exit ones which will not generate desired return on maturity. The savings on premium will help in buying protection cover for life insurance and health insurance, along with investments for your other goals. Real estate is a highly illiquid instrument. Dispose some of your property and utilise the proceeds for your goals through investment in other liquid instruments.

Express Tip: Asset allocation is the right approach for investments. It helps you in maintaining the right exposure to any asset class and protecting the downside during bear markets.

Conclusion

Goal based planning is the correct approach for managing your financial well-being. Identifying your goals is very important. Make provisions for emergencies first and then align your savings towards your life goals. A good asset allocation strategy will help in selecting the right instruments towards reaching financial goals.

Source – Indian Express