Pradeep Singh, 42, lives in Ghaziabad near Delhi. He is a marketing professional. His wife, Rupashree Mitra, 41, is also working. They have two daughters, aged 12 and 9. Their combined monthly salary is Rs 2.05 lakh. Here is what they need to do to fulfil their life goals, which include a comfortable life after retirement.
Contingency fund: The couple is advised to build a contingency fund equal to at least three months' expenses. They have a fixed deposit of Rs 3 lakh. They are advised to use the first three months' surplus to build the fund.
The money saved should be invested in an ultra short term fund. It should not to be used for any other purpose. The key to success is discipline.
Life Insurance: Singh has five traditional plans for which he is paying Rs 79,000 a year. The internal rate of return, or IRR, of the LIC child plan (2014), after considering present surrender value, future premiums and expected maturity value based on current bonus rates, is unlikely to beat inflation. He is advised to surrender the plan.
The IRR of the other four traditional plans after considering present surrender value, future premiums and expected maturity value based on current bonus rates, is likely to beat inflation. Hence, it is recommended that they be continued as part of the debt portfolio.
As per the need-based calculations, they are not adequately covered. Singh requires an additional life cover of Rs 1.50 crore. His wife requires a cover of Rs 50 lakh. They can buy online term plans for 20 years. These will cost around Rs 37,000 per annum.
While buying these covers, they must report all the facts correctly, including health history, in the proposal form.
Health/Disability Insurance: The family has a Rs 8 lakh cover provided by their employer. It is not advisable to rely solely on this. It is better to have a separate health insurance policy also as the employer cover will lapse after retirement or when they leave the job. If a family member is diagnosed with an illness later, it will be difficult to buy a cover at that stage. Even if they manage to buy a policy, it will have a long waiting period for the disease or be very expensive.
They should buy a family floater plan for the four members for sum assured of Rs 25 lakh. This will cost them around Rs 40,000 per annum. They can use the employer cover for their parents. They can also port the same to an individual policy when they leave the job, if required.
Singh should buy a Rs 50 lakh critical illness insurance, a Rs 1 crore accident disability insurance. For his wife, he should buy a critical illness and disability cover of Rs 25 lakh each. This will cost around Rs 44,000 per year. The premium payment up to Rs 25,000 for self and family and additional Rs 30,000 for parents is available as deduction under Section 80D of the Income Tax Act.
Planning For Loan
They are paying a high interest rate on the home loan. They can switch the balance, Rs 40 lakh, to another lender (preferably a bank) for 18 years. Assuming the interest rate of 9.50 per cent, the monthly EMI will be Rs 38,750, less than the Rs 50,000 that they are paying at present. They are also paying a high interest rate of 11 per cent on the car loan. They must repay the loan from their bank balance and cash in hand. This will reduce their EMI by Rs 23,750, which can be used to build a fund for future goals.
Retirement: One should not compromise on this goal. The two plan to retire at 60. They will require a fund of Rs 5.50 crore to take care of their needs up to 80 years of age assuming present household expenses of Rs 58,000 and 8 per cent inflation.
The existing investments in PPF and EPF and a flat worth Rs 45 lakh are expected to be used for retirement goals. He is advised to invest a minimum of Rs 1,000 per annum in PPF and to review his real estate investment periodically. Additionally, he is required to start investing Rs 7,500 via a monthly systematic investment plan, or SIP, of a diversified equity mutual fund. His two pension plans can also help him reach the goals.
Daughters' Education: To build a fund of Rs 15 lakh in today's value for the elder daughter (future value Rs 24 lakh) when she is 18, the two must start a fresh monthly SIP of Rs 23,000 in a balanced fund.
To build an education fund of Rs 15 lakh in today's value for the younger daughter (future value Rs 30 lakh), they must start a monthly SIP of Rs 15,000 in the equity scheme of a mutual fund.
Daughters' Wedding: To build a wedding fund of Rs 15 lakh in today's value for the elder daughter (future value Rs 40.80 lakh) at 25 years, they must start a fresh monthly SIP of Rs 10,000 - monthly SIP of Rs 9,000 in an equity fund and Rs 1,000 in a sovereign gold bond.
To build a marriage fund of Rs 15 lakh in today's value for the younger daughter (future value Rs. 51.40 lakh) at 25 years, they need a monthly SIP of Rs 8,000 - Rs 7,000 in an equity fund and Rs 1,000 in a sovereign gold bond.
Dream Vacation: The planned vacation with family after four years will cost Rs 8 lakh. The amount received at maturity of Aviva and Exide plans can be used for this goal. They can also invest the surrender value of the LIC plan in an equity income fund to accumulate the desired amount.
Home Upgrade: The Singhs would like to upgrade their home for total additional cost of Rs 75 lakh in present value after one year. They will sell the self-occupied house for this. Their residential premises (2010) and plot of land have been allocated towards this goal. They are strongly advised to buy ready-to-move and not under-construction property.
The plan has been presented on the basis of information and details provided by the family. It assumes that dual income will continue till retirement. The family is advised to review the plan and rebalance the portfolio periodically, preferably every year.
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