Geojit’s Investment Analyst, Gibin John, replies to an army personnel’s query on how to effectively utilise his retirement benefits. He is also looking for advise on how to manage his home loan and living expenses after retirement.
I am a 43 year old Army man from Kerala. I could not create wealth till now due to family financial problems. Currently I am getting Rs.62500 per month as salary. After deducting PF and group insurance I am getting Rs.53500. I will retire from service on March 31st 2022 after completing 24 years of serving the armed force. My wife is not working now.
I am paying Rs.15000 as home loan EMI for Rs15 lakh housing loan which was taken in 2013 from HDFC bank at 8.6% interest rate. This will end only in 2028. Monthly living expense is Rs.12000. I have a term insurance cover for Rs 30 lakh and am paying a premium of Rs.7500. I also have an LIC policy of Rs 1 lakh which will mature in April 2020 for which I am paying a premium of Rs.6452 per annum. Health insurance premium of Rs.4200 for Rs 2 lakh coverage for my wife. I have KSFE chitty of Rs.5 lakh which I have already participated in the auction and got an amount of Rs. 3.5 lakh. In this 32 instalments of Rs. 5000 each are left.
I have 1400 square feet two storied house in a 4 cent plot. This is the main wealth I have created. Also I have ancestral property of 15 cents worth Rs.70000/cent and I have 10 sovereigns of Gold.
My daughter’s marriage is my next big ambition. She is currently studying for graduation. We are expecting her marriage expense to be Rs.10 lakh. A serious problem which I also would have noticed is that my home loan will not end even after my retirement. There will be Rs 14 lakh home loan balance at the time of retirement. Please suggest a solution for this. I am also planning to buy at least a second hand car after retirement.
I am expecting to get approximately Rs 25 lakh as retirement benefits and also around Rs.15000 as a pension every month. I am planning to take up another job after retirement on a monthly salary of minimum Rs.15000 and also I can let out first floor of my house from which I expect Rs.5000 per month as a rent.
Please provide a expert advice on effective utilisation of my retirement benefits. Also give an advice on how to manage my home loan and living expense after retirement.
Gibin John, a certified financial planner replies:
I appreciate your decision to seek a financial planner’s service in managing your finances. Based your requirements, I understand that you want to know about financial planning to safeguard your retirement against liabilities, want to plan for your daughter’s marriage and a plan to utilise the retirement benefits. You have two more years to retirement but you have not created enough wealth to secure your future life. Loan term going beyond your retirement age is what haunts you the most.
Lack of proper retirement plan is not just your problem but also of most of the people. Most people think about it only towards the final years of their working period. In this short period they will try to amass some amount but it would not be sufficient to meet the living expenses after retirement. Ideally, everybody should start their retirement plan at the beginning of one’s career.
You are getting the salary of Rs.53500 as take home salary after all the deductions. Subtracting housing loan EMI, living expenses, and other monthly expenses from this you can save up to Rs.20000 monthly. From this amount you should move Rs.10000 to recurring deposit or debt funds to creating emergency fund for meeting special situation expenses.
Besides the above mentioned investment you should start another recurring deposit or debt mutual fund investments of Rs.10000 for next two years till retirement. If this investment gets 7% return you can accumulate around Rs 2.5 lakh. By using this amount as well as the maturity proceedings of insurance amount, you can fulfil the dream of buying a second hand car or a new one.
The most welcome cash flow is the Rs 25 lakh which you will get as retirement benefit. But more important is how you manage this amount properly.
After the retirement your main source of income will stop. So it is better to reduce the liabilities which you will have to pay in future. You are expecting Rs.15000 as pension and Rs.5000 as a rental income during post retirement period. But this is not sufficient to pay current home loan EMI, chit fund monthly payment and meeting living expenses.
At the time of retirement the balance payment to the housing loan will be Rs 14.5 lakh. The current interest rate of this loan is 8.6%. At any given point of time, loan interest rates will be higher than deposit rates. So it is better to pay off the loan at the earliest, which will help to save the higher interest portion which will cause unnecessary financial burden during post retirement years. Your other liability is to pay off your chit fund. With total 32 installments pending, till retirement you would have completed another 24 installments and the balance installments to be paid will be eight. You have to set aside Rs.40000 from the retirement benefits to pay these installments.
Your foremost goal is the marriage of your daughter. For this goal you are expecting an expense of Rs.10 lakh. You may find this amount from your retirement benefits and invest in risk free instruments like bank FD or in debt mutual funds. From this investment you may get the amount required for your daughter’s marriage. We urge you to invest since the money should cover the inflation risk to retain its value till the date of marriage.
When you will retire from current service your age will only be 45. At that time you may get Rs.15000 as pension but this will not be sufficient to meet your family expenses. Also you cannot assume to work beyond 60 years. Here we assume that you will work till age 55. Since expenses grow every year, to sustain long years of retirement, you need to find a job which will pay a monthly income of at least between Rs 20000- Rs 25000 so that you can meet your expenses and at the same time invest something to meet future expenses. So, out of this salary you will have to invest a minimum of Rs.13000 in aggressive hybrid mutual funds. If you get 10% return on this investment you would create a corpus of Rs.25 lakh at the age of 55. This can ensure a peaceful retirement life.
You should continue the current term insurance as well as the health insurance in the name of wife also.
Wish you all good health and prosperity!!