Plan for your children's changing career goals

I am a businessman aged 38. I have four dependents – my wife, two sons aged 11 and 6 years, and a daughter aged two. My monthly income is Rs 1.55 lakh. After meeting my household expenses of Rs 20,000 and other liabilities and investments, I have surplus of Rs 61,700. I am planning to buy one more house in the near future, after which my monthly surplus will be Rs 26,700. I have a few business commitments. Once that is over, by 2013, my monthly income is likely to go up by Rs 3 lakh. I have a floater health plan for Rs 5 lakh.

Liabilities: I have taken a home loan for Rs 23 lakh with a tenure of 10 years and my EMI is Rs 30,500. The new house would entail a loan of Rs 27 lakh for a tenure of 10 years with EMI of Rs 35,000. I may let out this for Rs 10,000. I have a car loan for which I pay an EMI of Rs 9,800 and the balance tenure is three years. I have a term insurance plan for Rs 25 lakh for 30 years.

Investment: I have recently started investing Rs 20,000 monthly in six mutual funds. I have three life insurance policies of which two are ULIPs and the total cover is Rs 16.25 lakh for which I pay a premium of Rs 1.2 lakh. As the ULIPs are only three-year policies, my last due is next year. I am contributing Rs 3,000 a month for the last two years, for a five-year postal RD. For my investments I am open to taking higher risk.

My concerns: My elder son is planning to do Chartered Accountancy and the costs can be managed with my current savings. But for my second son's higher education, I may require Rs 6 lakh at today's value. For my daughter's education, I want to accumulate Rs 6 lakh in today's value. For my daughter's marriage I may require Rs 8-10 lakh at today's value.

After retirement, I may need Rs 20,000 for household expenses. How much should I save if my wife and I want to live comfortably till the age of 80 years?Madhu

Solutions

With controlled monthly expenses and a substantial jump expected in your income, reaching all your goals will not be a challenge. What you need to concentrate on is asset allocation.

With good monthly cash flows, your investments are not reflecting your stated risk appetite. But note that for an entrepreneur, cash flows may fluctuate . With your current surplus you have to create a contingency fund and such funds should have liquidity.

Steady cash flows are essential to achieve financial goals. We have constructed this plan based on your current disposable income and if there is any drastic change in the income, you need to revisit your investments. Review your portfolio at least once in six months.

Higher Education: Few of us can tell what course a child in primary school will pursue when he or she grows up. But going by the common choices of today, we can plan for their education. In your case you have said that your elder son will only purse CA and you need not make any provision for that. This is not the right strategy.

It is better to assume that he may have a different choice when he grows up. Make a provision for such a change of heart. Your second son's anticipated higher education cost of Rs 6 lakh will be Rs 12.6 lakh if inflated at 7 per cent (for all the calculations, we presumed the same inflation) for 11 years. To reach the target, you need to save Rs 4,670 a month and it should earn a return of 12 per cent (same return presumed for all calculation).

Your daughter's higher education is 14 years away and the present cost of Rs 6 lakh will be Rs 15.5 lakh. To reach the target you need to save monthly Rs 3,600. For her marriage you need to build a corpus of Rs 44 lakh in the next 22 years for which you ought to save Rs 3,500 a month.

Retirement: While building the retirement corpus, it should not be watertight in accommodating expenses. Going by your likely future income, your standard of living is likely to increase, which may leads to higher household expenses.

It may not be ideal to build a retirement corpus based on present annual living expenses. It is better to re-evaluate your requirement if there is any major change in lifestyle.

The present annual living cost of Rs 2.4 lakh will be Rs 10.6 lakh when you turn 60. To have such a pension, it is ideal to have a corpus of Rs 1.74 crore at retirement. To accumulate the corpus you need to save monthly Rs 13,500 for the next 264 months.

Investment and insurance: It's surprising to see that with such good cash flows, you decided to pay premiums only for three years on your ULIPs. This is a long-term product. We often see investors selecting a wrong product and failing to reap the benefits. We suggest that you pay premiums till the maturity of the plan. Whenever you start fresh investments, earmark a goal towards the investment.

A few of your current MF investments are inline with our regular recommendations. Once your tax saving obligations are met, discontinue the SIP in Birla Tax Relief 96 and increase your contribution to HDFC Top 200 and ICICI Pru Dynamic. Restrict your MF portfolio to four to five schemes. Discontinue your postal recurring deposit and start a fresh recurring deposit for 10 years in a bank to take advantage of the prevailing high interest rates.

As you have not disclosed your business liability, we suggest you take a term insurance for Rs 1.5 crore to secure your monthly expenses and all your goals. We suggest an asset allocation of 60:30:10 in equity, debt and gold.

(Send your queries to >fp@thehindu.co.in)

Read the rest of this article by Signing up for Portfolio.It's completely free!

What You'll Get





Related

This article is closed for comments.
Please Email the Editor