The right way to retire early

I am aged 43, and require your advice on changes that I should make in my portfolio, so that I can retire in approximately six months and just enjoy life. My dependents are my wife, daughter aged eight years, and a son, who is four. My monthly outflows are: home loan EMI of Rs 1.1 lakh, car loan EMI of Rs 13,000 and household expenses of Rs 35,000.

Investments: I have four apartments — two in Mumbai, and one each in Pune and Chennai. Their current value is around Rs 2.20 crore. I have a home loan liability for Rs 1 crore. My total rental income is is Rs 50,000. I have invested in 12 mutual fund schemes worth Rs 90 lakh, and have direct equity exposure for Rs 15 lakh, mostly in banking and infrastructure stocks. Are these investments enough to meet my children's educational expenses of Rs 8-10 lakh each, and marriage expenses of Rs 10 lakh for my daughter? Should I sell any of my apartments to clear my home loan liability? As of now, I have my company's life insurance and family health insurance cover for Rs 5 lakh.

— Uddhav Nikam

In this column we often highlight the need to take a call on retirement long before planning to quit. If the span of working life is shorter than the retired life, leading a comfortable life becomes extremely challenging.

You have a liability of Rs 1.1 crore, and your monthly needs are close to Rs 1.6 lakh. If you wish to have such a monthly income, you should have a corpus of Rs 2.5 crore, and it should earn tax adjusted return of 8 per cent. Given your present assets, it appears to be a tall order.

If you wish to retire in the next six months, you ought to settle your liability and rejig your portfolio in favour of debt to receive monthly interest. Of the four apartments, sell the one in Pune, as it was purchased five years ago. It will account for 55 per cent of your liability. By reducing the loan, restructure your EMI to Rs 55,700 per month. If you are not comfortable with that, sell the Chennai property as well, and clear the entire home loan liability. The rental income from one property will help you meet your monthly requirement, along with your debt investments.

Children's education: For your daughter's higher education expenses, Rs 8 lakh, if inflated at 7 per cent for the next 8 years, will be Rs 13.7 lakh. For her marriage, the present value of Rs 10 lakh, inflated for 16 years, will be Rs 29.5 lakh.

For your son, higher education expenses, when he turns 16, will be Rs 18 lakh.

In net, the present discounted value of all goals will be Rs 15.2 lakh, and to meet all these goals, you must earmark your present direct equity exposure, and ensure that it earns a minimum return of 12 per cent till all the targets are reached. Without too much risk, you can achieve this target.

Investments: From your portfolio, it appears that you are an aggressive investor and your portfolio has a lot of duplication. Such a portfolio will be quite risky for your retirement, as it can cause capital erosion. The present annual living expenses of Rs 4.2 lakh, inflated at 7 per cent, will mean that, at 60, you willrequire Rs 17.8 lakh.

Once your children are settled, your requirements are likely to drop to Rs 10 lakh per annum. With the equity market in such a dicey situation, instead of diluting your MF equity investments immediately, wait for a year. If the market regresses by 10-20 per cent, dilute 50 per cent of the portfolio and invest it in debt. For the intervening period, utilise your gratuity settlement to meet your monthly needs.

Consider this: If Rs 60 lakh is invested in debt and if you earn a tax-adjusted return of 7 per cent, your annual income will be Rs 4.2 lakh. For the shortfall, utilise your rental income. The balance Rs 60 lakh, if allowed to grow at 12 per cent for the next 8 years, will be Rs 1.48 crore.

At 52, you may encounter a shortfall. Hence, dilute 80 per cent of your MF portfolio, and shift it to debt. The balance 20 per cent can be completely diluted at 70. You can thus meet the shortfall comfortably and can leave an estate for your children too.

Insurance: To protect all your goals, take term insurance for Rs 1 crore, and protect your family with health insurance of Rs 5 lakh.

Portfolio: It is a common misconception among retail investors that having too many equity schemes in a portfolio means diversification. But in reality, it leads to a loss of focus. Instead of having six mid-cap schemes in the portfolio, consolidate it with HDFC Midcap Opportunities and IDFC Premier Equity. Similarly, in the large-cap space, restrict yourself to HDFC Equity and Franklin India Bluechip. Henceforth, do avoid sector funds, because it leads to higher risk.

It is proved several times in the past that large-cap and high-dividend-yielding stocks reward investors in the longer run. Since you are planning to retire, concentrating only on banking and infrastructure stocks isn't an ideal choice. Since you have said that you are investing for more than 10 years in equity, do concentrate on the stocks from the Nifty basket, based on your risk appetite. This can help you to achieve a portfolio return of 12-15 per cent. Continue your gold fund as part of asset allocation.

All these recommendations are based on the current life-style; if there is any drastic change, do review your portfolio or else please undertake yearly review.

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