Vinit Gulati aged 31 is a probationary officer with a leading PSU bank at Jaipur. He keeps getting transferred every 3-4 years. His wife Ruchika is a homemaker and they have a 5 year-old daughter Udi and a 3-year old son Ritesh. The family includes Vinit’s parents. Vinit’s father, 55, has pensionable job with leading PSU bank and his PPF savings worth Rs 15 lakh; his mother is 51 and she is also homemaker.
Vinit has a gross income from salary including all perks of Rs6.65 lakh. His take home income is 5 lakh p.a. after taxes and other statutory deductions. He expects his income grow by 8% annually. His monthly household expenses are around Rs 22,000 and other expense include life insurance premium of Rs 36,000 for coverage of Rs 8 lakh only.
Personal Balance Sheet
|Tax Savings Bonds||20,000|
|Employee Provident Fund||7,00,000|
|Cash balance & Savings||1,50,000|
|Liabilities||Amount (in Rs)|
From the above table, his total financial asset is at Rs19.46 lakh and liabilities at Rs5.65 lakh, which leaves him with net worth of Rs13.81 lakh. He has purchased 2BHK house in Ambala a year back on loan, which is vacant as he is staying rented accommodation in Jaipur now owing to his job. His outstanding loan on the house for 14 years involving an EMI payout of Rs3,700 pm. His other liabilities include a personal loan.
- Buy a house after 20 years. At today’s cost, this would require Rs40 lakh in Ambala.
- Take a dream vacation after 3 years, which would cost at least Rs1 lakh
- Build a retirement corpus of Rs 310 lakh at the age of 60 as to be able to enjoy the same life style for another 20 years
- Provide for Children’s education: For Udi, Rs 8 lakh 13 years from now and for Ritesh, Rs 10 lakh 15 years from now.
Insurance is the one of most valuable aspect of any financial plan. Vinit is the sole earning member in his nuclear family and seems to be inadequately covered for life risk as he has already covered a paltry sum of Rs8 lakh only. He should take a 30 year term insurance of Rs78 lakh to provide life risk cover to meet his current total income and existing liabilities. He would need to review the risk cover in future, based on changes in his earnings and liabilities.
Currently, he has no health cover for himself and his family, he should take a family floater medi-claim policy himself, spouse and both the kids and need to be enhanced the sum assured in every 3 years. It is also advisable to go for a separate accident cover and critical illness cover as well.
The maturity of his endowment plan is coinciding with the requirement of the fund for both his kids’ education, so the maturity proceeds can share some burden of the funds.
Emergency Fund Planning
Emergency funds are required to meet any urgent liquidity requirements. It’s advisable to keep contingency corpus of 6-7 months’ expenses. Vinit’s cash balance and savings will serve the purpose of being an emergency fund and need to be enhanced according to increase in his monthly expenses in every year.
Children’s Education Planning
|Name/Target Year||Today’s Education Cost||Future Value(in Rs)*|
*Education inflation is assumed to be 10% p.a.
A systematic investment approach through mutual funds is the best route to get accumulates the above mentioned required future corpus. An SIP of Rs 17,000 per month in diversified equity funds should be invested, which should grow at 12% till the children become 18 years. The money already invested in direct equity mutual funds and fixed deposits can be utilized for funding Ritesh’s education requirements, if he meets any shortfall. Till now, Vinit has not made any provision of marriages of his children.
This can be funded completely through own funds- 80-85% from the proceed of sale of existing 2BHK house in Amabla. In the event of any shortfall, he can withdraw from the Employee Provident Fund account, given that the objective is to stay in new house post-retirement. It is also recommended that he should rent out the existing house as this would generate an additional income, which can help fund the existing EMI. Also, this property will act a good hedge against the increase in property rates for buying the other property after 20 years.
At the vesting age of retirement, he needs a corpus of Rs 310 lakh to be able to enjoy the same lifestyle for another 20 years. While considering inflation @ 7% p.a., his yearly expense would have grown close to Rs18.78 lakh p.a. at the time of retirement. Vinit would expect earning the monthly pension of Rs50,000 after getting his retirement and it would reduce his retirement corpus to Rs226.70 lakh. His savings in PPF of Rs5.45, growing 8.50% p.a. will also help to shell out the retirement corpus by Rs25.68. So, the net retirement proceeds would be required of Rs201.02 lakh, which could meet out by his EPF and expected gratuity at the time of his retirement. Any shortfall can meet by liquidate his existing shares and have a proper diversified portfolio to reduce the risk involved in investing in one or two scrips as he does now.
Dream Vacation Planning
Vinit intends to invest take his dream vacation with his wife after 3 years. He would like to incur Rs1 lakh on this. He can utilized his recurring deposit of Rs1,21,000 for this over the next 3 years.
Though, EPF withdrawal is not recommended before its maturity as it must be utilized to meet the retirement corpus. However, in the event of any shortfall of following goals, it may be funded as alternative source in your EPF account.
Withdrawal Allowed (%)
|Education of Children||
|Marriage of Children||
3 months Salary
*Withdrawal a year before retirement or at the time of superannuation and for housing can be from the accumulated balance including employer’s contribution, whereas withdrawal for other purposes would be only from accumulated contribution of the employee as per conditions apply.
The above plan needs to be reviewed every year to account for changes in assumptions and your financial condition.
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