S Badri (56), a businessman, lives with his wife and younger son in Mumbai. He plans to retire in 2009 after handing over his business to his elder son.
Jagdish Bhatt
S Badri (56), a businessman, lives with his wife and younger son in Mumbai. He plans to retire in 2009 after handing over his business to his elder son who lives away from them with his wife. Though Badri is clear on his financial goals, it is only now that he has decided to get a proper financial health check-up done to see if he is on track to achieving those goals. Let us see how we can help him.
Like most investors, Badri has invested regularly in life insurance policies during his career, planning a future cash-flow from the maturity benefits of the policies and partly investing in equities through mutual funds. He now wants to find out if he has enough to retire with and enjoy a good retired life.
Financial goals
1. To receive an annual income of Rs 2 lakh from 2009 through 2028
(20 years) to meet his expenses post-retirement.
2. Provide Rs 5 lakh for his younger son’s marriage in 2009
3. Go on a world tour with wife in 2010, which is expected to cost Rs 5 lakh
4. Repay bank loan of Rs 10 lakh in 2011
5. Pay equal monthly instalment (EMI) of Rs 25,000 for housing loan availed till 2028 (principal outstanding Rs 25 lakh)
Financial prognosis
On his goals
To achieve his financial dreams, Badri should ideally start with a corpus of nearly Rs 66 lakh in 2009 (considering CAGR of 8%). In current terms, he needs to start with an investment of around Rs 57 lakh.
His present financial condition is not very good, since the current value of his investments is only about Rs 46 lakh, most of it illiquid and low-yielding.
Though the maturity value is a healthier figure, it does not reflect a true picture because the life insurance policies are maturing over a period of 15 years.
On his cashflows
Badri’s cashflow analysis paints a similar picture. The mismatch is higher as his outgo increases over the years.
On other shortcomings
An extremely important point that emerges on analysing the investments is that Badri’s investment of around Rs 3 lakh in mutual fund equity schemes over a period of 10 years is now valued at around Rs 20 lakh — a growth of over 20% p.a.
However, Badri’s investments during his consolidation phase were highly skewed towards life insurance and debt. He has invested nearly Rs 14 lakh over the same period in life insurance premium and post office schemes, which has earned him a CAGR of less than 6% p.a.
The positive aspect of his life insurance policies is that they are mostly limited premium paying term plans, so there is no future cash outflow to be considered for the same (except for one policy).
The debt-equity composition of his present portfolio is 60:40. While this may be ideal for a person nearing retirement age, Badri will need to increase the equity exposure to at least 50% to meet his stated objectives.
Badri has not factored inflation while planning for his annual expenses. The retirement corpus required by him will be Rs 94.15 lakh if inflation of 5% is considered.
He has also not considered other expenses for medical emergencies, contingencies, etc, which are crucial while planning for retirement.
Badri is inadequately insured. His current liabilities amount to Rs 35 lakh (home loan and bank loan), whereas his insurance cover is only about Rs 30 lakh.
Prescription
Badri will have to take some strong financial measures if he has to rectify the situation.
1. He is expecting a maturity sum of Rs 14.37 lakh by paying the life insurance premium of Rs 30,000 p.a. for a balance period of 5 years. He should discontinue this policy immediately and invest the surrender value of Rs 3,65,422 received in an equity mutual fund. If his fund grows by 15% p.a., he stands to get about Rs 30 lakh in 15 years. This will also reduce his future cash outflows on account of premium payment.
2. He has a high-cost long-term outstanding liability of home loan (his revised floating rate is now 11%). This he can reduce by part pre-payment of principal when his PPF a/c matures (in 2009). This will reduce his cash outflow burden.
3. He can also consider taking loans against some of his life insurance policies and pre-pay a part of his home loan. Since the rate of interest charged for such loans is 9% and only interest is payable regularly (loan amount can be adjusted from maturity proceeds), it would make sense to reduce his higher cost borrowing and reduce the cash outflow.
4. Buy a Rs 10 lakh sum assured nine-year term insurance policy, which will cost around Rs 13,000 p.a. This will provide some benefit to his wife in the unfortunate event of his absence.
5. Invest any surplus cashflow during the year immediately in high-yielding short-term debt mutual funds or bank FDs, which will earn 9.5%.
6. He may have to scale down the planned expenditure on his son’s marriage and save the money for future.
7. For the present, he may have to drop plans to see the world and instead compromise by taking a South East Asia tour at 15-20% of the planned cost.
8. Immediately buy medical insurance policies of around Rs 5 lakh sum assured for himself and his wife which should take care of any hospitalisation expenses and avoid financial burden on this account.
9. He can also consider postponing his retirement by a couple of years and continue his business till his personal financial position stabilises.
10. Most crucially, Badri must keep monitoring his financial health on a regular basis.
Conclusion
Going forward, austerity and detailed financial planning, with positioning, would help Badri live a peaceful life with his family and surely, he will be able to see the world with his wife.
Badri, being on the verge of retirement, may not be able to do much about his situation except for trying to make the most of what he has. But, for all those who have ignored their financial health so far, the time is now to get your financial check-up done by a certified financial planner. A small beginning will turn out to be a huge savings in the end.
The writer is a Certified Financial Planner and an associate of the Insurance Institute of India. The financial plan has been constructed based on the data available. Views expressed are of the author and do not necessarily represent those of FPSB India. Feedback may be mailed to myplan@fpsbindia.org
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