Financial planning for retirement, charity

Here’s how this couple, passionate about educating underprivileged children, can use their resources

For 62-year old Mumbai-based Prakash Kare, who has had a successful corporate career spanning over four decades, nothing is more fulfilling than empowering orphaned children with quality education.

Prakash, who retired as a senior management executive, and his wife Shanta, 60, do not have a biological heir and want to give away a good portion of their wealth for the cause of children with no parents.

Prakash and Shanta have ₹75 lakh invested in bank fixed deposit schemes. Besides fixed deposits, Prakash has ₹1.5 crore parked in equity mutual funds. He currently resides in an apartment worth ₹2 crore, which he owns. He also has real estate investment worth ₹5 crore, which includes one property worth ₹1 crore and the other worth ₹4 crore. Prakash wants to plan and allocate his assets to meet the couple’s monthly needs over the next 20 years.

He also wants to donate a good portion of his current savings for the education of orphaned children. He also wants to set aside a corpus to meet medical and healthcare needs.

The couple incur a monthly expense of about ₹1 lakh. Prakash receives gross pension of ₹80,000 every month, which translates into ₹64,000 on a post-tax basis. He has ₹75 lakh invested in bank fixed deposit schemes, which fetches him a post-tax interest of ₹40,000 every month.

While he currently has a monthly surplus of ₹4,000, that is expected to narrow beginning next year, due to expected increase in expenses. Factoring in a 10 per cent annual increase in the monthly spend for the family, Prakash will have to dip into his investments to meet his monthly needs from next year onwards.

He can earmark the mutual fund investment of ₹1.5 crore to meet the shortfall in monthly expenses. We have budgeted a 3 per cent annual increase in pension, stable interest income, and a 10 per cent annualised return on the mutual fund investment. The mutual fund investment should help bridge the gap between expenses and income (pension and interest income) for the next 23 years, which is three years more than the 20 years envisaged by Prakash.

With respect to the corpus for charity, the couple can liquidate the ₹5 crore real estate investment. Of this they can earmark ₹3 crore for charity and invest the balance towards an emergency corpus. Relatively safe options such as debt funds or equity arbitrage funds can be considered for the emergency corpus. Investment in any debt fund held up to a period of three years will attract long-term capital gains tax of 20 per cent with indexation benefit.

Top income funds have, on an average, delivered 9-9.5 per cent over a three-year time frame. In the case of equity arbitrage fund, the tax treatment is similar to other equity funds and hence there is no tax on investment held beyond one year. Equity arbitrage funds have delivered6-7 per cent returns over the past year. Since Prakash and his wife were covered by his earlier employer for both life and health insurance, they have not taken a separate insurance cover. Given that taking a new cover now will be a bit expensive, Prakash can earmark the emergency corpus invested in debt or arbitrage funds for medical emergencies.

The writer is co-founder, RaNa Investment Advisors

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