This week we’re going to explore the circumstances of Mr. Gokul, aged 42 years, working in an IT company and is living in Chennai with his wife Veena, homemaker aged 41, and two school going sons Mithul and Krishna aged 10 and 7.
As the sole bread-winner of the family,
Gokul is a well disciplined saver and prefers to have a well defined plan be it planning his monthly budget together with his wife, planning a
vacation and even his working style at work, but felt at a loss when it came to big financial goals.
Recently hearing about the concept of comprehensive financial plan, he was curious about how this could help him find clarity and
confidence in matters of his own finances. So, today let’s see how comprehensive financial planning can help empower this nuclear family.
Before we deep dive into his comprehensive financial plan, let us understand his current cash flows. His monthly salary is Rs. 180,000/-. His expenses are as follows:
| Expenses | Cost |
| Houshold Expenses | Rs. 50,000 |
| Lifestyle Expenses | Rs. 20,000 |
| Children’s School Fees | Rs. 35,000 |
| Miscellaneous Expenses | Rs. 5,000 |
He is currently staying in a 1 BHK apartment which he received in inheritance after his parents passed away. Hence, he has no rental
expenses.
We know Gokul is a regular saver, and he has a monthly savings going on for Rs. 15,000/- towards gold chit scheme and bank RD. He
spends another Rs. 36,000/- towards several insurance saving schemes. In total there is monthly cash out flow of Rs. 161,000/- leaving a
surplus of Rs. 19,000.
Life aspirations he’d like to fulfill through in his lifetime are listed below:
1. Funding for Mithul and Krishna’s graduation and post graduation – for which he assumes would cost him Rs. 20,00,000/- and Rs.12,00,000/- respectively for each as of today’s value.
2. As the kids are growing up, he understands the need for a bigger house and plans to purchase a new house in the next year 5 years,
with suitable upgrades. In today’s value it would cost him Rs 75,00,000/-. Gokul plans to retain his current house and let it out for rent to
earn rental income (with which he plans to serve the new home loan EMI.)
3. By the time his kids would come to marriage age he would have retired (as he wishes to retire at his age 55) and thus wants to have the funds in place before their wedding age. As of today’s value he would require about Rs. 5,00,000/- for each of them to plan the wedding as per his choice.
4. As per Veena’s lifetime dream for going on a international vacation, Gokul wants to fulfill her dream by celebrating their 25th Wedding anniversary in Paris in the 2031.
5. Above all Gokul and Veena wish to live a financially independent life during their retirement.
6. Along with his goals, Gokul also wanted to ensure and analyze on the current life cover he has.
Over the years, he has build his networth by holding the following assets. In the past he had chosen investment products based on the guarantee returns, while he is aware that the returns he get from these products are less and open to choose suitable products, that matches to fulfill his goals.
Current Assets
| Assets | Value |
| SBI SB A/c | Rs. 15,00,000 |
| Axis Bank SB A/c | Rs. 4,00,000 |
| Fixed Deposit | Rs. 25,00,000 |
| LIC – New Jeevan Anand (Plan 815) | Rs. 8,00,000 |
| LIC – Jeevan Ankur (Plan 807) | Rs. 4,50,000 |
| LIC Plan – Jeevan Anand (Plan 419 | Rs. 36,000 |
| LIC Plan Jeevan Labh (Plan 836) | Rs. 5,00,000 |
| LIC Plan Jeevan Anand (Plan 815) | Rs. 7,50,000 |
| EPF | Rs. 20,00,000 |
| Land Plot (Urban) | Rs. 22,00,000 |
| Gold Jewellery | Rs. 10,00,000 |
| Total | Rs. 1,21,36,000 |
Our approach to his financial goal planning:
Given that he wants to retire early, has few other major goals, and has larger proportion of assets fetching lower returns – let’s see how this
can be addressed and planned, which can help him gain confidence in achieving his financial goals.
As usual we need to assess his contingency fund situation. Being the sole bread-winner of the family, considering his nature of work and the monthly expenses he has, contingency fund amounting to six months of monthly expenses would be required. This would amount to about Rs. 9,60,000/-. This amount should be readily available to him in case the need arises in the event of a job loss, sudden illness or any other sudden major life event. We see that he has about Rs 19,00,000/- in savings account (the proceeds he received from his father’s insurance policy), Instead of letting this amount sit idle in the savings account, we can make a separate FD for the amount of emergency fund. Thus, emergency funds are taken case of.
Now lets see how his goals were addressed. These goals addressed are in no particular order of priority.
Goal 1 – Have an adequate life cover
Here we take the need-based approach to estimate the ideal life cover for Gokul. In this approach we estimate the present value of all the
future expenses/money needs. This is done to take into account inflation and time value of money. Items included in the need based
calculations are:
1. Household expenses that Veena would require until the living age of 85 (This is to ensure that Veena able to live a financially independent life in the event of his untimely passing.)
2. Expenses that Mithul and Krishna would require until they become financial independent (which is expected till they complete their postgraduation).
3. Gokul is very particular that his untimely passing away should not put an end or compromise on the quality of planned education to his kids and hence, amount he expects to incur for their education is also included.
4. Also included is amount towards the children’s wedding at their respective marriageable ages.
All these totals up to an amount of Rs. 4.7 Crore. This amount takes into consideration the factors like cost of escalation of theses expenses
aside from inflation factors. Relevant economic assumption are taken to arrive these numbers. The idea is that if the amount of Rs. 4.7 Crore is deposited in a risk free investment option (like a FD etc), with the returns this fund will generate, Veena would be able to address for goals that have been planned for in his absence.
From the 5 policies held in LIC, he has an existing life cover of Rs. 52,90,000/-with a term of 10-12 years. and from assets he owns today, and can be liquidated in case of an eventuality, he has a provision for about Rs. 1 Crore. This when adjusted against the required cover he has a shortfall of Rs. 3.5 Crore, Hence an additional life cover of Rs 3.5 Crore. with critical illness rider (amount equal to twice his annual income is generally recommended as a thumb rule), The critical illness rider is added to mitigate the risk of dealing with illness treatment, change in lifestyle and loss of income if he happens to get diagnosed with any of the critical illness. As this rider will give him the lumpsum amount in the event of a diagnosis.
Goal 2 – Move to a bigger home in the next 5 years
Gokul initially planned to purchase a new home utilizing the sale proceeds from the plot. But later it was recommended to him to consider selling his current self owned apartment also, along with the plot of land to fund for the new home. This is because with the lesser number of years to his retirement, his monthly EMI would exceed the EMI-to-income ratio, pushing him to stressful cash flow situation. Rental income that he might receive would still not be sufficient to handle the cashflow stress.
Goal 3 – Fund for Children’s graduation and post graduation expenses
All the LIC plans previously taken were to serve and address the future education goals. The rate at which the education cost is accelerating, current policies will address only about 20% of Mithul’s graduation cost and 70% of Krishna’s graduation (assigned according to their maturity dates).
Combining both the kids graduation and post graduation expenses long term savings plan has been recommended with a 20% step up strategy, that is to keep increasing the saving amount by 20% every year until Gokul’s retirement year, 2035. It is ideal to consider saving in an equity and balanced mutual funds to get the benefit of higher returns compared to traditional saving plan.
This savings plan should be reviewed periodically to ensure that it fetches about 10.5% returns throughout the term. To avoid the market risk, portion of the respective year withdrawal can be planned to move to a risk free return product. It is suggested to stop the savings in chit and RD and utilize it to invest in mutual funds and increase it every year as per step up strategy. As there is reasonable expectation of salary increments every year, this can be managed well.
Goal 4 – Fund for each kid’s wedding when they turn 27, respectively
From the surplus of Rs. 19,000/- available we will use about 20% of it towards this goal, again by considering a equity mutual fund, with the longer time horizon towards this goal an aggressive approach can be used here along with utilizing the gold jewelry either by en-cashing it or exchanging it for new jewelry at the time of wedding.
Goal 5 – International vacation for celebrating Gokul and Veena’s 25th Wedding anniversary
As no currently owned assets are assigned towards this goal, we can use about another 20% of surplus of Rs. 19,000/- to be placed in a balanced mutual fund considering a medium time horizon.
Goal 6 – Early retirement at Gokul’s age 55 having sufficient corpus to serve until Veena’s age 85
With early retirement comes two financial draw backs, first, fewer years of income generating years and second, longer number of survival years without work/employment. This can again be well addressed with the availability of funds in EPF account (without withdrawals till retirement).
Gokul has been keeping this amount without withdrawing, and suggest him to continue doing the same until retirement. Along with it, fresh savings in an investment fetching 11% returns, is recommended. Starting with about 50% of surplus amount of Rs. 19,000/- and increasing the savings contribution by 25% annually. Idle amount left in savings account and FD has also been utilized to address this goal.
Our cash flow analysis & projections shows a surplus of INR 1,500 monthly even after allocating funds for all the goals. The cumulative surplus in the later years can be used as a buffer, in case of minor short falls at any point in time. Every individual’s needs and wants and situation is unique and hence seeking the professional guidance enhances your utilization of funds towards future goals.
Conclusion
A comprehensive financial planning has the power to empower individuals and families like Mr. Gokul and his nuclear family. By carefully assessing their current financial situation, analyzing their goals, and formulating a personalized plan, they can gain clarity and confidence in their financial journey.
With a well-defined roadmap, they can navigate through major milestones such as funding their children’s education, purchasing a new home, planning for their children’s weddings, and even achieving early retirement.
By addressing their specific needs and aligning their investments and savings with their goals, Mr. Gokul and his family can work towards building a financially secure future. Through proper risk management, adequate life cover, strategic asset allocation, and maximizing the potential of their existing assets, they can ensure a robust financial foundation.
Moreover, ongoing monitoring and periodic reviews will help them adapt their plan to changing circumstances and stay on track towards achieving their aspirations. Overall, comprehensive financial planning not only provides individuals and families with a sense of direction and purpose but also enables them to make informed financial decisions, optimize their resources, and ultimately live a fulfilling and financially independent life.
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