Financial Planning- June 12 :: Business Line

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I am 40 years old and my wife is 39. We have two sons aged 11 and five. When I bought the flat in 2009, I took a home loan for Rs 70 lakh. The current outstanding debt is Rs 29 lakh.

My parents are independent and I will get Rs 50 lakh by inheritance soon.

Through a group health insurance policy, my family is covered for Rs 3 lakh.

I am willing to take high risk on my investments.

- Madhavan

Although you have been working for many years, your saving ratio is still not healthy.

With your current surplus it is prudent to construct a portfolio with due weightage given to equity based on the tenure of goals.

ASSET ALLOCATION

For your elder son’s portfolio, we suggest asset allocation in the ratio 50:40:10 in debt, equity and gold, respectively. With such a portfolio you should be able to achieve a return of 10.3 per cent annually. For your retirement and younger son’s education, maintain an asset allocation ratio of 60:30:10 to achieve 12 per cent returns.

Your existing portfolio is overweight on real estate. Do not add to this asset class till you rebalance your portfolio.

EDUCATION

The Rs 10 lakh needed for your elder son’s education will be Rs 15 lakh, if inflation continues to hover around 7 per cent (same rate applied for all goals).The maturity proceeds of the children’s plan will be Rs 5.5 lakh. Earmark the same for this goal. To meet the shortfall you ought to save monthly, a sum of Rs 9,600 for the next 12 years.

For your younger son, the cost of education will be Rs 25 lakh after 14 years. To reach the target you need to save Rs 6,000 for each of the next 168 months.

RETIREMENT

The present annual living expenses of Rs 3.6 lakh will be Rs 13.93 lakh if inflation continues to average at 7 per cent till you turn 60. To receive such an annual income at retirement, you should have a corpus of Rs 3.06 crore and it should earn one per cent return over and above inflation to sustain till you turn 85.

If your current balance and your future contributions, along with that of your employer’s, continue to deliver 8.5 per cent, at retirement you will have a corpus of Rs 1.29 crore. After factoring EPF accumulation, the corpus that needs to be accumulated will be Rs 1.77 crore. To reach the target you need to save a sum of Rs 17,900 for the next 240 months and it should earn a return of 12 per cent.

Once you have your share through inheritance, utilise it for you children’s post graduation.

Since you have a health cover for Rs 3 lakh, we suggest you to take a step-up plan for Rs 5 lakh.

You should have a term insurance policy for Rs 1.3 crore.