I am 53 and my wife is 45. We have two sons who are still studying. At retirement, I may need ?50,000 per month to meet expenses. I am eligible for employer-sponsored pension from an insurance company, but it will not be sufficient. My outstanding home loan is ?60-lakh. For my son’s wedding, I will need about ?20-lakh in five years. I am thinking of withdrawing a part of my EPF (Employee Provident Fund) to either repay the housing loan or to invest in mutual funds and bonds. Our family health cover is ?8-lakh. Please suggest ways to plan my investments.
You have a good EPF balance and are still contributing 20 per cent toward the same. At your age, it is one of the best debt investments since EPF declares an average interest rate of 8.5 per cent each year and is also tax-free. Withdrawing to invest in MF or bonds or to repay home loans is not recommended.
For a five-year period, not many bonds or other fixed-income instruments offer a post-tax return of 8.5 per cent with sovereign guarantee, such as the EPF. With your plot and existing house, you are already overweight on real estate. Buying an apartment at the end of your career is not normally recommended.
However, having you bought the flat and you are letting it out it make sense to pay EMI for next five years rather than closing it.
Since its being let –out entire interest paid will be exempted from your income and it will help you to bring down your borrowing cost. In the first year your interest outgo will be Rs 2.92 lakh and this will bring down your borrowing cost to 7.62 per cent. Whereas your interest on EPF is paid on compounding it makes sense not to withdraw money from EPF to close the home loan.
Although the interest rates are higher for a five –year period no bond will offer you post- tax return of 8.5 per cent with sovereign guarantee. Hence it’s not prudent to withdraw from EPF to invest in bonds.
Retirement: Ignoring the pension from your insurer, at retirement assume you need annually Rs 6 lakh (appears to be on higher side) to meet your monthly needs, at 58 you should have a corpus of Rs 1.18 crore and it should earn a return one per cent over and above inflation.
Assume your EPF current balance of Rs 35 lakh continues to earn a return of 8.5 per cent at retirement it will be Rs 52.6 lakh.The current contribution along with employer continues earn similar return at retirement it will be Rs 48.4 lakh.
Your EPF kitty itself will be Rs 1.01 crore and the short fall will be Rs 17 lakh.
Since you have not disclosed your term of insurance product we could not evaluate bonus for the product.Considering 15 years product your maturity proceeds will be Rs 10 lakh.
With other retirement benefits you can simply meet your needs till your life expectancy. Since your wife is younger to you by 8 years and women outlive men by 3 years you need bigger retirement corpus to sustain till your life expectancy. Build your direct equity and mutual fund to meet your son’s marriage needs and to create a buffer for your wife needs.
The rental incomes will be a cushion in the latter years if your investments are not earning desired return.
(The writer is an Investment Advisor and Founder Myassetsconsolidation.com)