I am a 34-year-old Government employee. My wife is 33. I have a 4-year-old son who is in kindergarten. I will retire in 2037 and will be covered under the NPS scheme.
We are planning for a second child. We wish to provide similar quality education to both our children in the future. I also need to factor in costs that may arise due to any medical emergency related to my parents. Is my cash flow sufficient to meet my financial goals? Do suggest changes in the investments, if required.
- Bhaskar
For the middle income earners it is always a challenge to save for all goals. With inflation consistently at higher levels, monthly surpluses tend to shrink. Although your goals are long-term, with limited surplus it may be challenging to achieve your goals without borrowing. If you save for your son’s education, for example, that will completely wipe out all your surplus.
Currently for a two-year course overseas, the cost is Rs 25 lakh. Assuming currency risk and inflation to be 7 per cent, the cost of education will be Rs 84.5 lakh in 2031.
If you earmark your SBI ULIP for this goal and if the investment delivers 10 per cent return after 18 years, you will have Rs 10 lakh. To meet the shortfall you ought to save monthly, a sum of Rs 9,820 for the next 18 years. Since you don’t have the necessary surplus, you can reach this goal by taking an education loan.
If you want to buy a plot for Rs 6 lakh, you should have at least 20-30 per cent in cash for the initial margin. For this you can dilute your savings in mutual funds and PPF. For the balance, if you take a loan of Rs 4.2 lakh for a 10-year tenure at 11.5 per cent interest, your EMI will be Rs 5,900. Once this is repaid you can start take a construction loan.
To build a 1,000 sq ft house, currently it costs anywhere between Rs 1,800 and Rs 2000 per sq ft. Considering inflation to be at 7 per cent (same considered for all calculations) in 2023, the cost will be Rs 39.3 lakh.
If you take a loan for construction at 10.5 per cent till your retirement, your EMI will be Rs 37,950.
If your salary grows at 7 per cent per annum including increases in your DA, after 10 years your salary will be Rs 70,800. Hence taking a loan will not be difficult. To support this goal earmark your HDFC ULIP.
The only silver lining is your savings towards retirement. The current annual expense of Rs 2.4 lakh will be Rs 12.18 lakh at retirement. To receive such an income at retirement, you should have a corpus of Rs 2.68 crore and it should earn a return of one per cent over and above the inflation to sustain till you turn 85.
If you continue to invest in SBI Unit Plus and if the fund delivers 10 per cent return, then at retirement it will amount to Rs 81.3 lakh. If your current accumulation in NPS and your future contribution increases at five per cent, your corpus will be Rs 86.5 lakh if NPS delivers a return of nine per cent.
To meet the shortfall you need to save monthly a sum of Rs 4,630 and it should earn 12 per cent returns. This you can start once your salary increases.
For your son’s graduation use the money back policy proceeds to meet the needs.
(The author is CEO,myassetsconsolidation.com)
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