Helping a working couple live it better

Sandip and Shilpa can achieve their goals with a little planning

Cash flow  
In Rs Per month Yearly
 Salary (Mr & Mrs Sandip) 208333 25,00,000
 Monthly expenses 28,450 3,41,400
 Add-on education exp 5,000 60,000
 Housing loan EMI 13,337 1,60,000
 Yearly one-time exp* 5,708 68,500
 Total expenses 52,495 6,29,900
 Available investible (Income - exp) 1,55,838 18,70,100
 * Including approx insurance premium

Neelam Jagani 
Sandip Ray (30), a resident of Pune, works for an IT firm. His wife Shilpa is also working, and together they earn a salary of Rs 25 lakh p.a. They have a 3-year-old daughter, Shreya. The family include’s Sandip’s parents. Sandip’s father, 61, has pension income and post office savings worth Rs 2 lakh; his mother is 56.

Financial goals
Buying a new house, worth Rs 75 lakh today, in the next 4 years;
Buying a new car worth, Rs 10 lakh today, in the next 4 years (the car he currently owns is worth Rs 1,00,000);
Providing for his daughter’s schooling and foreign education worth Rs 40 lakh, in the next 20 years (effectively in 17 years)
Building a retirement corpus of Rs 10 crore over 30 years

All goal values have been assumed with inflation.
Savings and investments
Saving instrument Amt. (Rs)
Mutual fund 1,50,000
Shares 6,00,000
Post office savings 10,00,000
Bonds 60,000
PF 4,00,000
Other valuables 5,00,000

Expenses
Sandip’s current annual  expenses add up to Rs 4,10,000, inclusive of monthly and annual requirement. Assuming Shreya’s education expenses at Rs 60,000 p.a., the expenses are set to go up soon.

His current house is worth Rs 40 lakh for which the EMI on the outstanding housing loan of Rs 12 lakh is Rs 13,337. Initially, the floating rate loan was at 7% interest, but has since gone up as the rate of interest is 12% today. Since he has chosen to keep the EMI constant, his term has increased from 15 years to 18 years. The annual outgo on servicing the loan is under Rs 1,60,000 p.a.

Insurance
Sandip has insurance policies worth Rs 23 lakh sum assured (S.A.). These include two term insurance policies, one of Rs 10 lakh S.A. maturing on October 9, 2031 and another of Rs 10 lakh S.A. maturing on September 10, 2031, and an endowment policy of Rs 3 lakh S.A. for a 16-year term.

He is paying yearly premium for all the policies. Over and above this his employer provides group insurance worth Rs 20 lakh S.A..

He has covered his house for 5 years with a general insurance for fire, theft and earthquake.

Sandip has medical insurance from the company medical family floater for Rs 2 lakh p.a. He is also covered under a medical insurance family floater for Rs 5 lakh S.A. His car insurance is for Rs 1,25,000.

Recommendation
The couple has Rs 2,00,000 cash in hand, which can cover their basic monthly expenses for nearly five months and is adequate to maintain the same in future.

With their current annual income and expenditure not exceeding over Rs 8 lakh p.a., their investible amount is assumed at around Rs 17 lakh (factoring in their daughter’s education  expenses of Rs 60,000 p.a.).

The goals are achievable, albeit with the following recommendations.
i. Insurance planning:
It is assumed that the home loan stands on Sandip’s name. Considering his income (assuming Rs 12.5 lakh p.a.) and family expenses, and the fact that his current insurance coverage is for Rs 43 lakh, it is recommended that he go for a 30-year term life insurance for Rs 1 crore S.A.

Being the head of the family, and since he has not covered himself for his housing loan liability, he should get a cover at least 10 times his annual income. He should also go for separate accident cover policy as his existing policies do not cover accident benefit.

Assuming he will retire at the end of the next 30 years, only the endowment policy for Rs 3 lakh S.A., which will have a maturity value of Rs 5 lakh after 16 years, will come in handy. This could be used as a buffer for his daughter’s education planning. It is also recommended that they go for a term insurance of Rs 1 crore S.A. on Shilpa’s life. Assuming that she earns Rs 12.5 lakh p.a. and that she is not covered, Shilpa has an earning potential that needs coverage.

If Sandip’s parents are not covered under the medical insurance policy stated above, it is recommended that he arrange for it.

The following assumptions have been made here:
Rate of interest for less than 5 years will be 8% p.a. on portfolio.
Rate of interest for more than 5 years will be 12% p.a. on portfolio.
Equity and equity oriented mutual funds will give 15% p.a. approx average for five years and above.
Debt and debt mutual funds (including bank FD) give approximate return of 8%
(Expected salary growth is at 10% p.a., which can take care of higher/ abnormal inflation and enhancing his lifestyle requirement.

ii. Financial goal planning:
According to his goals, if he buys a new house and a car in the next 4 years, his mutual fund saving, shares and bank FD would have to be encashed after 4 years (assuming average appreciation at 8% p.a. due to slowdown in the market) and he should save Rs 1,13,567 p.m., which will give him a corpus of Rs 75 lakh. The balance Rs 10 lakh can come from a housing loan assuming he is not selling his current house.

He can go for a housing loan with his wife so that both can get tax benefits. He can buy the car by making upfront full payment. 

iii. Education planning:
His daughter’s regular schooling education will be provided from regular income, but her foreign higher education requirement of Rs 40 lakh in the next 17 years can be achieved by saving Rs 6,050 p.m. Assuming 60% in equity and 40% in debt mutual funds, their saving portfolio will earn return on investment of 12% p.a. As it is long-term goal, he can go for moderate risk.

iv. Retirement planning:
For retirement corpus, he and his wife can take advantage of Section 80C, which offers a relief of Rs 1,00,000 on investments in ELSS/ PF/ PPF/ 5-year FDs/NSCs. Since they need the corpus after 30 years, they can take moderately high risk by investing 60% of their savings into equity oriented mutual funds and the rest in debt.

The retirement benefits from gratuity and PF accumulation, etc are assumed to be Rs 2 crore, which is conservative. The balance Rs 8 crore can be accumulated by saving Rs 22,900 p.m. for the next 30 years in the above suggested manner.

Altogether, the couple needs to invest Rs 17,10,200 p.a. for achieving all their goals.