rediff.com

NewsApp (Free)

Read news as it happens
Download NewsApp

Available on  

Rediff News  All News 
Rediff.com  » Business » How to save for a peaceful retirement

How to save for a peaceful retirement

January 03, 2007 11:50 IST

Avinash Datar, aged 35 years, is a software professional, working for an IT company. He draws an after-tax salary of Rs 800,000. He got married to Amrita six years ago. Amruta (31) is a teacher by profession and draws after tax salary of Rs 250,000.

The couple has two kids - four-year old daughter Ayesha and a two-year old son Ameya. Both, Avinash and Amruta, are in good health.

Avinash's parents - father retired from an MNC firm and received hefty retirement sum and mother a housewife - are not dependent on him. Amruta, whose parents are well-settled, has also no liabilities.

Avinash bought a flat in a suburb for Rs 15 lakh (Rs 1.5 million) 10 years back. For this, he had taken a housing loan of Rs 12 lakh (Rs 1.2 million) from a bank.  The flat now worths Rs 25 lakh (Rs 2.5 million).

The outstanding loan on the flat is Rs 800,000. He is paying Rs 150,000 per annum towards the housing loan.  Avinash's annual household expenses are Rs 200,000. His entertainment and leisure trip expenses are Rs 100,000.

The two have invested Rs 300,000 in bank FDs and Rs one lakh in NSC. Avinash is contributing Rs 50,000 per annum and Amruta Rs 25,000 in provident fund. The total provident fund corpus of the two is Rs 500,000.

They are regularly contributing to PPF account, and at present, their joint contribution is Rs 200,000. Avinash had taken a money back policy of Rs 500,000, for which he is paying a premium of Rs 45,000. Avinash has got a Maruti Esteem, whose depreciated value is Rs 300,000.

Goals: Avinash and Amruta want Ayesha to become a doctor and Ameya to become an engineer. The cost of education of each child is around Rs 500,000 in today's term.

They want their children to marry as per their tradition and by present estimates, wedding expenses are around Rs 500,000. Avinash want to gift a car to his wife Amruta after 3 years.

And above all, they both want to continue the same lifestyle after retirement. Avinash's dream is to buy a retirement home, which will cost him Rs 1 crore (Rs 10 million) at that time.

Current Portfolio: Table 1

Assumptions: We have assumed inflation at 5 per cent and the   rate of return on bank FDs, NSc, PF,PPF at 8 per cent. Further, we have assumed that in long run, equity mutual fund will give a return of 12 per cent per annum.

Table 1:

Current portfolio Rs Lakh
Flat 25
Bank FDs 3
NSC 1
PF 5
PPF 2
Jewellery 3
Car 3
Total 42

Our Recommendations:

Risk Level: Considering Avinash's investment, we can very well infer that he is a risk- averse investor. But considering his goals and his background, we recommend a balanced strategy for him. According to this strategy, we recommend him to invest 30-40 per cent in equity, 40-60 per cent in debt, and 5-10 per cent in cash.

Insurance: Avinash had taken a money-back policy of Rs 500,000 for 20-year term at the time of purchasing his flat. The amount of insurance is inadequate.

The reason behind this is that his outstanding loan amount is Rs 800,000 and in case of his untimely death, the insurance amount would fall short to repay the loan and to fulfil the responsibilities of his family.

Hence, we recommend him to take a term insurance of Rs 50 lakh (Rs 5 million), since it is very cheap and will have to pay a premium of just Rs 19,000.  Amruta has not taken any life cover. So, we recommend her to go for a term-insurance of Rs 25 lakh (Rs 2.5 million) for which she will have to pay a premium of Rs 7,000.

Today, medical expenses have substantially gone high, and hence, it is always better to opt for a mediclaim policy at early age.

Though Avinash and Amruta are both in good health, we recommend him to take a mediclaim of Rs 200,000 with family floater, for which, he will have to pay a premium of Rs 9,000 per annum.

In all, his life insurance premium will be Rs 26,000, medicliam premium will be Rs 9,000 and money back policy premium is Rs 45,000, all adding up to Rs 80,000.

Investments: Avinash's and Amruta's total after tax annual income is Rs 10.50 lakh (Rs 1 million). Total expenses, including housing loan EMI, are Rs 450,000. Besides, their total contribution towards PF is Rs 75000.

Thus, they are left with Rs 525,000 for investment. From this amount they will be paying Rs 80,000 towards insurance, leaving them a sum of Rs 445,000 for further investments.

We recommend him to invest Rs 200.000 in various equity-based  mutual funds,  Rs 20,000 each in annuity plan, and Rs 20,000  each towards PPF. It is also advisable that he open PPF A/Cs in the name of both his children and contribute Rs 10,000 per annum in each account.

We further recommend him to invest Rs 50,000  in RBI bond and Rs.50,000 in bank FDs. We also advise him to keep cash of Rs 45,000 for emergencies.

As far as his money-back policy is concerned, we advise him to invest the proceeds of the policy in bank FDs from time to time.

Investment Details: Table 2

As the years pass by, their salary will increase, hence, they are advised to increase the asset allocation in the above range only.

Table 2:

Investment details Rs portfolio Per cent
Equity Mutual Fund 2 lakh 38.5
PF 75,000 14.4
PPF 60,000 11.5
RBI bond 50,000 9.6
Bank FDs 50,000 9.6
Annuity Plan 40,000 7.7
Cash 45,000 8.7
Total 5.2 lakh 100

Achieving goals
: As Avinash wants to gift a car to his wife after 3 years, this short-term goal can be achieved by investing the proceeds of money back policy - Rs 100,000 which he gets after every 5 years - in a money market mutual fund.

Assuming 8 per cent rate of return, the amount will become Rs 125,000 after 3 years, which he can use to make down payment to buy a car.

Assuming 5 per cent inflation, the education expenses of both Ayesha and Ameya after 15 years will be around Rs 10 lakh (Rs 1 million) each.

We have recommended him to invest Rs 200,000 p.a in equity mutual fund regularly, assuming it will return around 12 per cent p.a., this amount will grow to Rs 75 lakh (Rs 7.5 million) in 15 years time.

He can withdraw Rs 25 lakh (Rs 2.5 million) from the equity mutual fund for the education and related expenses like hostel etc. for both the children. We advice him to continue to invest the balance Rs 50 lakh (Rs 5 million) in equity mutual fund.

Taking into account inflation rate of 5%, the marriage expenses after 22 years will become Rs 15 lakhs (Rs 1.5 million) each.i.e Avinash has to make provision of Rs 30 lakhs (Rs 3 million) for the wedding expenses for both the children.

We recommend him to close the PPF accounts of both the children at the time of their wedding. This will fetch him Rs 10 lakh and the rest Rs 20 lakh can be met by liquidating equity mutual fund.

Now the most important thing i.e retirement. After 25 years their PF will accumulate Rs 70 lakh (Rs 7 million) and PPF Rs 50 lakh (Rs 5 million). Assuming he is reinvesting in bank FDs, it will grow to say Rs 40 lakh (Rs 4 million). We assume that he will withdraw the interest of the RBI bond.

So at the end of 25 years he will be having RBI bond worth Rs 12.50 lakh (Rs 1.2 million) which will pay 8 per cent p.a i.e Rs 100,000 p.a.. His equity mutual fund investment will grow to Rs 1.50 crore (Rs 15 million). Their annuity investment will become Rs 30 lakh (Rs 3 million) after 25 years.

At the time of retirement the annual living expenses will be Rs 700,000 considering inflation of 5 per cent.

We advice both Avinash and Amruta to invest Rs 15 lakh (Rs 1.5 million) each in senior citizen bond after retirement which will pay 9 per cent interest, i.e Rs 135,000. So they will receive Rs 270,000 altogether.

This investment should be met from annuity investment. Further, we recommend both of them to invest Rs 600,000 in post office MIS which will give them Rs 48,000 p.a..This amount should be invested from equity mutual fund.

As per our recommendation they will invest Rs 12.50 lakh (Rs 1.2 million) in RBI bonds till the time of retirement. At that time we recommend them to invest another Rs 37.50 lakh (Rs 3.75 million) in RBI bond, i.e total Rs 50 lakh (Rs 5 million) in RBI bond, which will earn them Rs 400,000 p.a. So in all they will receive Rs 718,000 p.a, which will definitely be sufficient for them. To invest in RBI bond they should withdraw equity mutual fund.

As Avinash's dream is to buy a retirement home for which he will have to spend Rs 1 crore (Rs 10 million), we advice him to use the entire proceeds of PF, i.e Rs 70 lakh (Rs 7 million), further to liquidate Rs 10 lakh (Rs 1 million) from bank FDs, further to withdraw Rs 20 lakh (Rs 2 million) from PPF.

So after all these liquidations he will be left with Rs 1 crore (Rs 10 million) in equity mutual fund, bank FDs of Rs 30 lakh (Rs 3 million) and PPF of Rs 30 lakh.

In order to invest the left-over at that time we have advised him to stay invested in equity mutual fund to the extent of Rs 50 lakh (Rs 5 million) and further by systematic transfer plan to transfer Rs 100,000 p.a in Debt fund, and to invest balance Rs 50 lakh (Rs 5 million) in debt fund. He is advised to continue FDs of Rs 30 lakh (Rs 3 million) and PPF of Rs 30 lakh (Rs 3 million) after retirement.

Conclusion: Taking into consideration the above suggestions and recommendations we hope that Avinash will be able to fulfil his dreams and have a peaceful retirement.

Rahul Shringarpure
Source: