Planning Whiz- April 2021

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Geojit’s Investment Analyst, Gibin John, helps an individual working in the private sector with retirement planning. He has been investing for many years to fulfil his goals like children’s higher education, daughter’s marriage, loans, etc. But he is not sure if retirement corpus is large enough to meet the needs of his retired life.

I am Subhash, age 51. I have a daughter and a son. They are 23 and 19 years old respectively. I am working in a private firm and am planning to retire at the age of 56. My salary is Rs.1.6 lakh per month. I have two flats which I have rented out at the rate of Rs. 18,000 per month. Currently I have a few investments and now my doubt is whether the investments being done are enough for my retirement. My living expense is Rs. 50,000 and EMI is Rs. 35,000. There is a loan outstanding of Rs. 21 lakh that will end by May 2028. My equity investments are Rs. 25 lakh in mutual fund and Rs. 12 lakh in stocks. I also have an FD of Rs. 12 lakh in an NBFC with interest rate of 11.25%. I am   investing Rs. 30,000 per month through SIPs and depositing Rs.12,000 per month in recurring deposit. Existing accumulated amount in RD is Rs. 2,16,000 and the maturity date is July 2023. I have already created the corpus for children’s education and my daughter’s marriage. So, I am not showing those investments here. I am writing this letter to know how much amount is need to live a stress-free post-retirement life.

Gibin John, a certified financial planner replies:

We appreciate that you have created separate corpus for goals like for children’s education and their marriage. But you haven’t specifically invested or accumulated an amount focusing on retirement. Actually, this is an important goal as most people do not have any other source of income during their post-retirement period. In such a situation it will be difficult to survive and even to fulfill ones’ minimum life requirements. During your working years, even if you have no corpus for other important goals, you may fund those goals by taking loans but retirement is the only goal for which one can never get a loan.

Here we assume that all investments mentioned in the letter are for retirement purpose. You are planning retire at the age of 56 and your current age is 51. So, you will retire in the next 5 years. Your current expense is Rs. 50,000 and EMI is Rs. 35,000. The home loan will end only three years after retirement. Therefore you have to provision an amount for paying home loan during the post-retirement period. Moreover, if you need to maintain the same standard of living, you need to consider inflation also. If we assume an inflation of 6% then the living expense will become Rs.59,500 after five years. For getting the inflation adjusted amount till the age 80 you need to create a corpus of Rs. 1.54 crore. If you get an average rent of Rs. 25,000 from your second flat then the target corpus can be reduced to Rs. 1.35 crore.

Your existing investments are Rs. 25 lakh in equity  mutual fund, Rs. 12 lakh in direct equity, Rs. 12 lakh in fixed deposit and Rs. 2.16 lakh in recurring deposit. Firstly, you have to create a contingency fund. For this purpose, you may utilize your existing and future investments towards the recurring deposit. After the maturity of this account you may shift 60% of the amount to  liquid mutual fund.

Your net monthly income from salary is Rs. 1.6 lakh and rental income is Rs. 18,000. After deducting living expense and EMI, you have an investable surplus of Rs. 93,000. You already have an investment commitment of Rs. 30,000 towards SIP and Rs. 12,000 to  recurring deposit. The balance Rs. 51,000 you may invest in debt mutual fund as SIP for building retirement corpus. If this investment fetches an average return of 6.5%, then the investment will become Rs. 36 lakh in 5 years. Your existing equity SIP investments and direct equity will become Rs. 61 lakh and Rs. 18 lakh respectively, assuming the return is 9%. Thus, the total corpus you could be able to create is Rs. 1.15 cr. Your home loan will end in May 2028 but you will retire three years prior to the loan end date. I recommend you close the loan before retirement. After the maturity of the recurring deposit you may use that sum of Rs. 12,000 to pay towards loan amount. Thus, at time of retirement there will be a loan balance amount around Rs. 6.5 lakh. This amount could be paid from the retirement corpus. But this corpus amount will be insufficient to meet the living expense. The shortfall you have is around Rs. 27 lakh. Hence, you might have to postpone the retirement by two years so as to create sufficient amount for comfortable retirement.

After the retirement you will not get the corporate health insurance cover. So, you should take a health insurance coverage of Rs. 10 lakh with top ups.

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