Planning his son’s studies, his own retirement


Nishant is 36 years old and works for an IT company in Pune. He has a 5 year old son. So far, he has focused his energies on repaying the mortgage, which he fully repaid 2 months ago. So, he doesn’t have a lot of investments. In addition to this house, he has Rs ₹ 5 lakh in term deposits and ₹ 13 lakh in employee provident funds.

His net monthly salary is 80,000. He can invest around 35,000 per month. In addition, his monthly contribution to the EPF account, including the employer’s contribution, is 11,500.

He wants to invest for his son’s higher education, which he thinks he needs around 20 lakh (current cost) after 12 years. Besides, he wants to save for this retirement. He has not yet purchased insurance.

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Insurance is the first pillar of financial planning. In his case, having a good insurance portfolio is even more critical since he is the only winning member of the family. There are three main types of insurance plans that every active member should purchase: life insurance, health insurance and accidental disability insurance.

While there are many ways to calculate the life insurance coverage requirement, a simple rule of thumb is to purchase coverage for 10 to 15 times annual income. With his income level, he can opt for life coverage of 1.25 to 1.5 crore.

A term insurance plan is the best way to purchase life insurance. It will cost him around 18,000 to 20,000 per year. He can also choose to pay the annual premium in monthly installments.

He has ₹ 3 lakh health coverage from his employer. Coverage is clearly not enough for a family of three. He has to buy ₹ 10 lakh floating family health insurance plan. It will cost him around 15,000 per year.

He can purchase accidental disability coverage as an endorsement with a term plan or as a stand-alone plan. A rider with the temporary plan is cheaper because the scope of coverage is limited to total and permanent disability.

A stand-alone plan is more expensive, but it covers both partial and total permanent disability, temporary disability and accidental death.

These insurance plans (life, health and accidental cover) will cost around 5,000 per month or 60,000 Rs per year.

He has a fixed deposit of 5 lakh which can be considered as a medical and emergency fund.

The education of the son

For his son’s education, he needs 20 lakh (current cost) in 12 years. At the inflation rate of 6% per year, the nominal target corpus will be 40 lakh in 12 years.

Assuming a 10% return on the portfolio over 12 years, he should invest 15,000 per month.

He can put that money into a hybrid fund or a multicap fund through SIP. He must gradually transfer that money to debt as he gets closer to the goal.

For his retirement, he mentions that only 2/3 of his current expenses will continue in retirement.

Her current expenses are $ 45,000 per month, but that includes transportation, tuition, and her son’s tuition.

His planned retirement expenses will be ~ 30,000 per month (cost). Assuming a life after retirement of 30 years, inflation of 6 percent per year, and that he can earn inflation-matched returns during retirement, he should accumulate 4.3 crore in 24 years.

His current EPF corpus will reach ₹ 80 lakh in 24 years. At an assumed pre-retirement yield of 10% per year, he must invest 32,000 per month.

He already puts in 11,500 per month via EPF. After taking into account regular expenses, insurance payments and investments for his son’s education, he can invest an additional 15,000 per month (35,000 – 5,000 – 15,000).

His retirement portfolio is already heavily in debt. It can split this amount between a large cap fund and a mid cap fund, with a larger allocation for the former. He invests less than he should. He should invest more when his cash flow permits. This shouldn’t be a problem since his best years of earnings are ahead of him.

He should understand that all of the above goal calculations are based on heavy assumptions about inflation and expected returns.

He must continue to review these assumptions and the growth of the portfolio and make adjustments accordingly.

The author is a SEBI registered investment advisor and founder of personal

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