Focus on financial independence, not legacy

By Larissa Fernand |  13-01-20 | 
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About the Author
Larissa Fernand is Website Editor for Morningstar.in. She would like to hear from you and welcomes your feedback.

A friend called me the other day to discuss his financial position. He has been reading the Retirement articles we put up and decided that 2020 is the year to “get his stuff in order”.

Frankly, he seems to be in a good place; a government employee, earning well and living within his means, assured pension, and just two dependents; a wife and child.

He will completely close this outstanding loan in 2 years. The current Equated Monthly Installment (EMI) is around 15% of his salary. His house is currently worth around Rs 1 crore, but that really doesn’t matter as this is his residence, and he plans to live here all the days of his life.

He does not lead an extravagant lifestyle. In fact, his monthly expenditure amounts to Rs around 55,000. This includes all the household expenses, the EMI of his home loan, and insurance premiums. Post expenses, tax and contribution to provident fund, he has Rs 65,000 to save and invest.

Here is what he asked me.

Q 1: How must I save for my daughter’s wedding?

My daughter, who is now 20, should be getting married at the age of 25 or 26. I need Rs 80 lakhs at that time. I foresee the wedding expenses to be Rs 20 lakhs. The balance I want to give her as a gift, a personal security as she leaves home.

Q 2: How must I prepare my retirement corpus?

I shall be retiring in 2025, and by then I should have Rs 1.2 crore in my General Provident Fund, or GPF, and Rs 20 lakhs as gratuity.

Being an ex-government employee, I shall be getting a pension of Rs 80,000 per month.

I have zero investments in equity.

Q 3: Must I increase my insurance when I retire?

My employer gives me an accidental insurance cover of Rs 25 lakhs. But I have a personal medical insurance for my family of Rs 15 lakhs each. So when I retire, should I buy additional insurance coverage?

- Jairam S.

Right now, Jairam is in a sweet spot. His pension exceeds his monthly expenses. But retirement planning is all about looking ahead and taking into account the impact inflation has on one’s pension and corpus. So this begs the question: For how long will this pension suffice? He is retiring at the age of 60. Assuming he lives till the age of 80, Rs 80,000/month will remain constant for two decades post retirement. It is a cause for concern.

For these reasons, I personally feel there is no need for him to give his daughter a huge wedding gift of Rs 60 lakhs. I completely understand that a wedding would demand an expenditure of Rs 20 lakhs, but the balance he can save for his retirement, and eventually Will it all to her.

I reached out to P V SUBRAMANYAM, a chartered accountant and author of the book Retire Rich.

He graciously wrote down his views and emailed them across. I have reproduced them below.

The wedding and gift

Let me start by addressing the really big expense – the wedding of (and the gift for) your daughter.

The wedding expenses can come out of your gratuity.

Today, a girl gets security in the education her parents have given her. Assuming she gets a job where she earns Rs 15 lakhs a year, you are giving her 4 years cost-to-company (CTC). Not a bad amount, but the Rs 60 lakhs that you want to gift her has far more significance for you than it will for her. She is very young and is just starting off on her life. She, along with her spouse, will earn an income.

You can eventually Will her all your wealth and assets. Right now, the focus must be on being financially independent during retirement.

Having said that, it is not my intention to interfere in your personal life. That is your call.

Monthly expenses

If your expenses are Rs 55,000 per month, this is only going to be on the rise when you take inflation into account. Over time, this figure will double.

Once you stop working, your work-related expenses (travel, eating out etc) should dip. By then, your loan would be over and done with, and your daughter would be married. So it would be just you and your wife. Your pension of Rs 80,000 should take care of your household expenses.

Bear in mind that inflation will always be prevalent, and your pension may not have kept pace ENOUGH with inflation.

Retirement corpus

While the optics may appear grand right now, if you take inflation and longevity of your life into account, the Rs 1.2 crore (GPF) may not be sufficient.

I believe that at the time of retirement, you should have approximately Rs 2 crore. Normally I would put it at Rs 3.6 crore (12 lakhs x 30). The reason I reduced it is because you have a pension, no loans, no big expenses, and reside in your own house.

Here are my suggestions on the Rs 1.2 crore corpus:

  • Senior Citizens Savings Scheme – Rs 15 lakhs
  • Regular bank fixed deposit – Rs 5 lakhs, as an emergency fund
  • Liquid fund – Rs 10 lakhs
  • Ultra short bond fund – Rs 60 lakhs
  • Credit risk fund
  • Short term Income fund

The ultra short bond fund should be used to do a Systematic Transfer Plan (STP) into a multi-cap fund with about 30% exposure to American stocks. The STP amount should be Rs 50,000 per month and you should think of a 10-year investing horizon. By the time you are 70, you will have enough money in equity. Assuming that the fund did reasonably well, you will have Rs 1 crore in equity.

Insurance

You should have your medical insurance reviewed for sure. It is always better to buy a basic cover, a top up and a super top up instead of a straight cover of Rs 15 lakhs. So your medical insurance may need a re-jig.

My final word of advice

I have written as an Independent Finance Adviser (IFA) managing your money. All that I have said is very easy for an adviser or investment professional to understand, not necessarily for a man who has never invested in mutual funds or equities.

I have deliberately been generic. Not mentioned the specific names of funds.

You need specific, tailor-made advice. You need to invest the Rs 65,000/month surplus you currently have. Go to a FINANCIAL ADVISER. He will review your status and position periodically. After all, the answer given in January 2020 could be very different from what you need in June 2025.

You can connect with P V Subramanyam on Twitter and Facebook

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