There’s hope for Shyam’s daughter

Shyam Sunder has always led a contended life. He is working in a respected firm as a senior manager, has his own flat in Mumbai and a family where peace and contentment reigned. His family leads a typical middle class existence in which conspicuous consumption is far and few. This translated to a good savings buildup. Overall,  a pretty picture.

But then, there were issues which haunted Shyam, too. Shyam’s elder daughter Priya is mentally challenged.  The 15-year-old is not going to regular school and goes to attend the school for slow learners. Shyam and his wife are constantly worried about her future after their lifetime. Anandi, their younger daughter,  who is about to be 12,  may take care of her, but when she marries it may not be feasible to expect her to take care of Priya for a lifetime.  One does not know whether Anandi will stay on in India, after marriage.

It is in this predicament, that Shyam wanted to consult me. We decided to go through a plan for Priya. 

Shyam’s current situation

Shyam draws about Rs 11 lakh per annum after tax and statutory deductions. He is 43 now and has about 15 years to retire. Shyam has judiciously invested in a range of investment avenues like equity, mutual funds, fixed deposits, public provident fund, recurring deposits, infrastructure bonds etc. Apart from this he is also contributing to the employees provident fund and super annuation fund. The current value of all these savings is about Rs.19.07 lakh. Shyam’s salary has gone up by 17% year-on-year in the past 8 years. For our calculations, it is assumed that there will be a 10% increase year-on-year in salary and in the  provident fund contributions ( of the individual and matching contribution by the company ).  Shyam’s wife Vinita, a post-graduate, conducts tuitions for college students. She has income ranging from Rs 1.5 - 2 lakh per annum.   But this was not taken into count for calculations as Shyam felt she may give it up whenever she chooses to. 

Financial goals

• Provide for upkeep of Priya, for  her lifetime
• Provide for Rs.1.5 lakh as tuition expenses from 2010-11 onwards for 4 years for Anandi, from her 9th to 12th standard
• Education up to post graduate level for Anandi - Rs 5 lakh per annum for 6 years from 2014-15 onwards
• Rs 15 lakh for Anandi’s marriage in the year 2020-21

Retirement planning for the couple

Expenses and surpluses

Their regular domestic expenses work out to Rs 1.96 Lakh.  This includes education expenses of both daughters and the expenses towards singing and dance classes of Anandi. Apart from that, there are other expenses - annual holiday expenses are Rs 75,000, insurance premia is Rs 66,000 and miscellaneous expenses of Rs 30,000. In all, the expenses are Rs 3.67 lakh and the surplus is Rs 7.58 lakh. The surplus is huge and needs to be invested properly.

Inflation is assumed to be 5% for most items. In case of certain expenses like cable, electricity, gas, home repairs etc, the expenses are assumed to grow at 8%. Other expenses like school fees and bus fees as well as fuel, they are assumed to grow by 10% year-on-year.

Cash flows

There are three streams of income for Shyam Sundar. 

• During his working life, there are surpluses after expenses, which compound
• Also insurance payouts will be there, which could add to a handsome sum with reinvestment
• Then there are current investments, which keeps growing and hence meeting goals and cash adequacy after retirement.

All these three income streams together will amount to Rs 2.88 crore by the time Shyam Sundar retires.  Assuming he moves the entire corpus to safe investment avenues like NSC, government bonds, in which a return of 6% after tax is expected, he will be able to generate Rs 17.28 lakh from his corpus. His regular expenses in that year is only Rs 7.78 lakh.  I would consider any income which is at least 1.5 times the expenses, at the time of retirement and later, to be adequate.  Mind you, we have assumed only 8% returns throughout the period even for equity and mutual funds. It could be far higher. Also, Vinita’s income has not been considered.  Hence, it is a conservative workout.

Risk assessment

The human life calculation throws up a figure of Rs 145.11 lakh. Shyam’s net worth is Rs 45.17 lakh. His present insurance cover is Rs 29.5 lakh. That leaves a figure of Rs 70.45 lakh as risk exposure for the family, by income replacement method.  

Recommendations for Shyam

• Shyam is not availing of income tax benefits ( through Sec 80 DD, Shyam will get full deduction of this amount up to a cap of Rs.50,000p.a. ) available for people with handicapped dependants.  It is recommended that he take a Jeevan Aadhar policy of LIC for a sum assured of Rs 9 lakh, with a premium paying term of 15 years. The premium will approximately be Rs 50,000 per annum and he should opt for the salary savings scheme. Here the nominee will be Priya or a trust set up for her benefit. The money will come back after the lifetime of Shyam.
• Term insurance for Shyam to the extent of Rs 60 lakh, the premium for which will approximately amount to Rs 29,000 per annum, for a term of 15 years. He should opt for the monthly mode of premium payment.
• Setup a trust for the benefit of Priya, with Vinita as the trustee. Later on it can be changed, if required. Sridhar, Vinita’s brother, who is 34 now, can also be appointed the trustee. Divert approximately 20% of your current savings to it. Also, 20% of recommended monthly investment can go into it.
• The monthly investment recommended - Rs 19,500, which is the surplus available on a monthly basis. This includes payments for the two new insurance schemes recommended. The balance is recommended to be invested in diversified equity mutual funds, index funds and balanced funds in the ratio of 50:25:25
• An amount of Rs 5 lakh comes during the course of the year in the form of reimbursement, incentives, variable pay, bonus etc. This needs to be deployed as and when they come in.

myplan@fpsbindia.org