If corpus is ample, buy a larger house earlier

I am aged 28 and my wife is 26. My wife is employed with a Government department and I work in a private sector bank. Our total monthly take-home salary is Rs 78,000. We have one son who is 4 years.

Expenses: My monthly household expense is Rs 10,000. I had bought a single bedroom flat by taking a loan of Rs 5 lakh and my EMI is Rs 9,100.

Savings: We are investing Rs 38,000 in SIPs in diversified equity funds and our current fund value is Rs 3.5 lakh. Recently we started a recurring deposit for Rs 10,000 for three years at 9.5 per cent interest. I take direct exposure to equity blue-chip stocks and invest Rs 10,000 monthly. My current portfolio is Rs 3 lakh.

I hold SBI Bonds worth of Rs 50,000 and corporate deposits for Rs 1 lakh.

Assets: I own a flat worth Rs 10 lakh and in a Tier-2 city. I own three plots worth of Rs 10 lakh. I also have a parental house worth Rs 25 lakh and agriculture land valued around Rs 10 lakh.

Insurance: We have two term insurance policies for Rs 50 lakh and Rs 20 lakh. We are now enhancing the cover to Rs 1 crore for me and Rs 50 lakh for my wife. With enhanced cover, our premium outgo would be Rs 14,000. We are planning to meet the premium with other income.

Medical: From my bank my family is covered for Rs 2 lakh; and from her organisation we are covered for the actual expenses incurred.

Goals: Within the next five years, I am planning to buy a house worth of Rs 40 lakh. For my retirement and for my son's education (Rs 8 lakh present value) I need to save Rs 1 crore. From my salary Rs 2,450 is deducted every month towards employee provident fund. From my wife's salary Rs 3,500 is deducted. I would also like to buy a mid-sized sedan worth Rs 5-6 lakh in the next five years.

Our current household expense may increase significantly as we move up the ladder in our careers. Please let me know if my current savings is sufficient. What should be the quantum of my retirement fund?

Chaithu Kiran

It is nice to know that you have such control over your expenses and have used your surplus to build a reasonable corpus with good asset allocation. However, instead of rushing to buy a single bedroom house, you could have give yourself a few more years and build a bigger corpus for buying a larger home.

Given the growth rate of real estate in Tier-2 cities, the cost of flats there is likely to go up. If 40-50 per cent of the upfront cost is accumulated from your savings, it is better to freeze the opportunity to buy a larger flat rather than waiting. As you have sufficient investments in real estate, you can ignore this asset class while building corpus for other goals.

House: If you wish, buy the house entirely from your savings in another five years. To reach the target of Rs 40 lakh, you ought to save Rs 49,000 a month and it should earn a return of 12 per cent. But if you wish to avail loan for just 40 per cent of the cost, then you ought to save Rs 29,400 a month and it should earn 12 per cent return (same return is assumed for all the calculations).

Higher education: The present cost of Rs 8 lakh at an inflation of 7 per cent will be Rs 19 lakh when your son turns 17. To reach the target you ought to save Rs 5,100 every month.

Car: If your current accumulation in mutual funds is allowed to grow at 10 per cent for the next five years, it will help you fund 90 per cent of the cost. So earmark the investment for this goal.

Retirement: You have stated that as your income increases, your standard of living too is likely to go up. If your current monthly expenses double in five years, the annual living cost of Rs 2.4 lakh when you are 33 will be Rs 13 lakh at retirement, if the inflation continues to average at 7 per cent. To meet the annual living expenses of Rs 13 lakh at retirement, you should have a corpus of Rs 2.29 crore and it should earn inflation adjusted return of 2 per cent.

We assume that your wife's and your current provident fund contributions would grow at the rate of 5 per cent. Together with your employer's contribution, at retirement, your provident fund accumulation will be Rs 2.15 crore. Also, the employee provident fund should continue to pay interest at the rate of 8.5 per cent.

Hence, the shortfall for your retirement will be minimal. Even if you plan to buy a house with a home loan, you will have sufficient surplus to meet all your goals.

All the calculations we have done is based on your current standard of living. It is advisable to review your investment at least once every six months. The current term insurance is sufficient to meet any untoward happenings.

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