Mukesh Kumar, 35 years, is a HR professional and his wife, 30 years, is a qualified doctor. The couple have two children aged 6 years and 2 years respectively and they stay with Mr Kumars’ parents.
Mr Kumar is leaving his current job and is planning to set up a HR consultancy firm. The parents have about Rs 5 lakh in a bank account and are entirely dependant on him. The current home loan balance is Rs 12 lakh and there is an EMI of Rs 10,800 pm payable at 7 per cent pa as fixed interest for the next 12 years. The current household expenses are Rs 75,00 pm. The life insurance payments are committed for a sum of Rs 37,500 per year with sum assured of Rs 7.50 lakh. Besides, a term insurance exists to cover the mortgage loan upto an extent of Rs 25 lakh. However, this insurance shall cease the moment the home loan is repaid in full.
Financial goals
* Education of children till post graduation in India to cost Rs 70 lakh.
* Home loan shall be serviced for the residual period as the interest rate is fixed. This is about Rs 15 lakh.
* Medical needs of their parents.
* Ms Kumar wants to set up a clinic which requires furnishing involving a capital outlay of Rs 15 lakh.
* Post retirement lifestyle with Rs 9 lakh of living expenses per annum for 50 years would mean creating a corpus of about Rs 450 lakh. The overall financial goals at present costs work out to Rs 550 lakh.
The retirement from the existing employment is assumed at the present age. The replacement of income is assumed at 50 per cent of the current salary which would last for another 20 years. Ms Kumar shall continue to practice for next 20 years.
Where is he now?
Mr Kumar and his wife have been drawing an annual post tax income of Rs 14 lakh and Rs 10 lakh respectively. Their annual expenses towards household and other living expenses work out to be Rs 9 lakh. Their annual EMI towards home loan is Rs 1.30 lakh per year. Their annual life insurance premiums work out Rs 37,500. The savings at present can be Rs (24 - 9 - 1.30 - 0.38) = Rs 13.3 lakh. The current savings and investments are the following:
1. Bank FD: Rs 55 lakh and savings bank a/c: Rs 17 lakh
2.Money back insurance plans: Rs 2.30 lakh
3.Term insurance: Rs 25 lakh.
4.The medical insurance coverage of Rs 3 lakh has been provided by Mr Kumars employer.
5.Flat is valued at Rs 75 lakh.
6.The loan liability is Rs 15 lakh. The current net worth is Rs (55+17+2.3+75 -15) or Rs 135 lakh.
Recommendations
* Continue paying the home loan as it has been obtained at a low rate of interest of 7 per cent pa. Continue paying the term insurance on time and try to top up the sum by another Rs 75 lakh involving the couple. This shall involve an outgo of Rs 40,000 pa.
* Though the quantum is small, the money back insurance plans need to be re-looked as they shall become taxable from the next financial year;
* A new floater — medical insurance coverage may be taken up involving the family of Mr and Ms Kumar and children for about Rs 5 lakh. This shall involve a premium outgo of Rs 6,000 pa. For every year of ‘no claim’, a 5 per cent additional sum shall be provided by the insurer.
* PPF account may be opened in the names of children. A yearly allocation of Rs 1 lakh per child for 15 years can fetch closer to Rs 45 lakh on maturity.
* The couple could secure their earnings post retirement, by investing Rs 1 lakh each pa in the new pension scheme, under the equity option, until the age of 60 years so as to yield a corpus of Rs 40 lakh assuming a 8 per cent tax free growth in capital which shall fetch about Rs 3.20 lakh as annuity for lifetime.
* The bank deposits of Rs 72 lakh (FD — Rs 55 lakh; savings —Rs 17 lakh) are earning lower post tax returns. About Rs 30 lakh can be withdrawn to be invested into (i.) Fixed maturity plans for 3 years to earn higher tax efficient returns – Rs 10 lakh, (ii.) balanced fund – Rs 20 lakh. Systematic investment in diversified equity mutual fund may be carried out with funds set aside to the tune of Rs 10,000 pm for 25 years. The accumulated sum shall be Rs 42 lakh with growth of 10 per cent pa.
* Systematic investment in gold exchange traded fund (ETF) may be carried out to the tune of Rs 5,000 per month for 25 years.
L.Ravindran is the founder and managing director of Wealthmax Enterprises Management Private Ltd