Allocate assets based on risk tolerance :: Business Line

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I am 42 and would like to retire in five years. My wife is employed in a bank and she plans to take voluntary retirement in 2018. We have a son, aged 11, and a daughter aged two. Our combined net take home salary is Rs 1.6 lakh. Our monthly household expenses are Rs 40,000 and MF investment is Rs 12,000. The current monthly investable surplus is Rs 1,00,000, for which we need your investment suggestions.

Investments: We invest in three mutual fund schemes on a monthly basis and their current value is Rs 5 lakh.

We have three traditional insurance plans, for sum assured of Rs 3 lakh, with all of them maturing between 2013 and 2018.Our annual premium outgo is Rs 20,000 and combined outstanding in PF is Rs 12 lakh.

We own four plots worth Rs 1.75 crore and will inherit a share of property (land) which is valued at Rs 20 lakh.

We recently booked an apartment in Chennai worth Rs 65 lakh availing a loan of Rs 20 lakh. Once we move in, we have to pay Rs 12,000 as EMI. This is equal to our current monthly rental.

Goals: How much do we need to save for our son's education, and daughter's education and marriage? We might require Rs 10 lakh (in present value) each for her education and marriage.

My employer does not provide pension, but my wife is eligible for a pension of Rs 10,000 per month, after voluntary retirement.

Do advice us on how to plan for retirement — on the kind of investments we should make from now on. Since markets are at low levels, we can invest in direct equities too. Currently, I pay Rs 6,000 and my wife contributes Rs 2000 towards PF.

If we fall short, I can sell a few of my plots in Coimbatore.

My wife's employer provides health insurance for Rs 1 lakh. Is this enough for our family? Gopalakrishnan

Risk perception and risk tolerance are important aspects in investment decisions. Risk perception will fluctuate in the short-term based on the external environment. But risk tolerance is an inherently critical aspect in deciding asset allocation and should not change frequently.

Since you and your wife plan to retire early, you must organise your investments based on your risk tolerance. The advantage with this strategy is that once you know your tolerance, you can hold on to your portfolio without revisiting it all too frequently.

Debt restructuring: It is always prudent to clear liabilities before you retire. We presume that you may repay your loan on receiving the inheritance settlement.

Hence, we have not incorporated any provision for the same in our calculations.

If, by retirement, you do not receive the settlement, you have another way out.

Use your insurance maturity amount, gratuity and a part of the proceeds from the plot sale to repay your loan.

Education: The present higher education cost of Rs 10 lakh will be Rs 15 lakh by the time your son turns 17, if inflated at 7 per cent (the assumption used for all calculations).To build the corpus, you ought to save monthly, a sum of Rs 14,325 and it should earn a return of 12 per cent (the assumption used for all calculations).

Since you have a lesser number of years to save for your daughter's education and marriage, put together a sum before you retire and allow it to grow till you actually need it.

The present value of Rs 10 lakh will be Rs 27.5 lakh. If you save Rs 8,530 per month for the next 84 months (your retirement), it will result in a sum of Rs 11.1 lakh. If you allow it to grow at 12 per cent till she turns 17, you can reach the target.

Marriage: The present value, inflated till she turns 24, will be Rs 44 lakh. To reach the target, you have to save a sum of Rs 6,200 for the next 84 months, which will result in a sum of Rs 8.1 lakh. After the accumulation, if you manage to earn 12 per cent return on the lumpsum and allow it to grow till the target period, you can comfortably reach the goal.

Investment: If you prefer to take direct equity exposure, do it in small doses and build it over a time. If you lack time and expertise, it is better to build the portfolio through mutual funds. Since you have a solid back-up in the form of real assets and, with your goals being long- term, allocate 60 per cent of the future savings in equity, 30 per cent in debt and 10 per cent in gold.

Insurance: Take health insurance for Rs 5 lakh to meet any medical emergencies; to protect all the goals, take a term insurance for Rs 50 lakh.

Retirement: The current expenses incurred for a year at Rs 3.6 lakh (we have ignored the rental outgo since you are moving to the new house next year), if inflated for five years, will mean that at retirement it will be Rs 5.05 lakh.

After offsetting your wife's pension of Rs 1.2 lakh per annum with an annual increment of 2 per cent, you should have a corpus of Rs 1.2 crore to lead a comfortable life till you reach 80 years.

If your current investment in mutual funds is allowed to grow at 12 per cent and your current PF balance continues to grow at 8.5 per cent along with your and employer future contributions, the total accumulation would be Rs 33.5 lakh.

If you deduct your accumulation from the retirement corpus, you need to have a corpus of Rs 84 lakh. You ought to save monthly, a sum of Rs 80,300 for the next 72 months at .All this will mean that you will require Rs 10,000 more every month. . If your wife is able to avail of the home loan benefit, it can bridge the shortfall. Do review your portfolio at least once a year to reach your goals.