Disciplined savings will put goals within reach

I am 39 years old, and work in a private sector company. My take-home salary is Rs 42,000. My wife (37) is a homemaker. My son is studying in Class IV. My father is a retired Government employee and he is getting a monthly pension of Rs 20,000, out of which we draw Rs 15,000 for our monthly expenses. From my salary, I use Rs 5,000 for family expenses.

Currently I have Rs 15 lakh in bank deposits, post office monthly income schemes and NSC, Rs 1 lakh in equity and Rs 1.9 lakh in six equity MF schemes. I am running two SIPs of Rs 3000 each.

In addition to these, I have SBI Life Unit Plus Child Plan for Rs 12,000 a year for 10 years (started in 2008). I have two LIC policies for a sum insured of Rs 10 lakh and my annual premium outgo is Rs 51,106. Both the policies are maturing around 2026.

I have taken an insurance plan in my wife's name for Rs 5 lakh.

My premium outgo is Rs 20,978 and it is maturing in 2030. For my son's education I have taken Komal Jeevan for Rs 2 lakh and the annual premium is Rs 15,044. The policy will mature in 2021. I have taken a single premium ULIP for Rs 1 lakh.

To protect the health of family, I have taken family floater health policy for Rs 3 lakh.

For son's higher secondary school education, I may require Rs 2.5 lakh a year. For his graduation I may require Rs 10 lakh in today's value in 2019.

I am planning to retire at 55. after which I may require Rs 15,000 a month in today's value. How much do I need to accumulate to take care of my pension till my wife turn 80 years? For all my investments I wish to take moderate risk.

Srinivasa Rao

Solutions: With limited goals and disciplined savings you can easily reach all the goals. Besides you can leave an estate for your son. However, you require to spruce up your portfolio with an ideal asset allocation for a bigger corpus. With structural inflation being high, your savings in traditional insurance will not give you returns that beat inflation. Despite your savings, you will find it difficult to create wealth.

Cash flow: After meeting your household expenses, you have the potential to save Rs 4.4 lakh a year. After provisioning for the savings of Rs 1.7 lakh you are still left with a surplus of Rs 2.7 lakh. To meet all your goals, your need to save Rs 1.3 lakh per annum.

We have not factored in the scenario of stoppage or reduction of income from your father because of any unfortunate occurrence.

Education: For your son's intermediate needs of Rs 2.5 lakh, use the NSC savings as this will not fetch you any tax incentive from 2012-13. For the first two years of higher education, utilise post office monthly income savings. For the third and fourth years of college, use the proceeds from Komal Jeevan life insurance and single premium plan.

Retirement: The present monthly expenses of Rs 15,000 if inflated at 7 per cent will become Rs 45,800 by the time you are 55. If you need this pension for the rest of your life, you should have a saving of Rs 1.08 crore and it should earn 2 per cent return over inflation.

The maturity proceeds of your life insurance will be close to Rs 28 lakh. The current monthly savings of Rs 6,000 in mutual funds, if continued for 120 months to earn a return of 12 per cent, will give you Rs 13.8 lakh. After using the current investment in the debt for education, you will still be left with Rs 10 lakh.

After all the investments, you will still be short by Rs 57 lakh. To reach the target you need to save every month Rs 12,110 for the next 192 months and it should earn a return of 12 per cent.

Investment: A retirement portfolio at accumulation phase needs to be constructed with higher equity allocation. At your age you need to minimise exposure to equity. But your current portfolio is skewed towards debt.

We suggest you construct a portfolio with allocation at 60:30:10 in favour of equity, debt and gold. If each of the asset classes earns a return of 15 per cent and 8 per cent (for debt and gold) respectively, you can reach the targeted return of 12 per cent comfortably. However, after retirement it will be a challenge to earn 2 per cent over inflation. If you need to achieve such a return, you should invest at least 20-30 per cent in equity.

If you are not game to invest in equity and get 2 per cent above inflation, you should have higher corpus at the time of retirement to take care of your monthly requirement.

Insurance: As you have not mentioned if your father and mother are covered by any Government medical scheme, we presume that you have taken medical claim floater policy for Rs 3 lakh to cover the family of five.

Given the age of the parents, it is prudent to increase risk cover to at least Rs 10 lakh to protect your savings. To protect retirement goals, we suggest you take term insurance for Rs 60 lakh for 16 years. The premium outgo will be Rs 11,080.

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