Jul 16

My latest article in The Hindu Business Line



I am 36 and work at a private sector company. My wife is also 36. We have a 6-year-old son.

I withdrew Rs 8 lakh from my EPF balance to buy my first property. I expect to live till 70. My family’s health history has been good, but my father passed away at an early age. For your calculations, assume that my salary will increase by 8 per cent annually.

 — Hitesh Sood

 The common mistake people of your age commit is that they don’t give importance to financial assets. In the past 20 years, the average age for buying a house has come down from 45 to 35. This phenomenon means that due importance is not given to build financial assets.

At 36, you spend close to 60 per cent of your income towards serving a long-term loan. So building a corpus for other goals would be extremely challenging. Although your salary is expected to grow by 8 per cent, net saving will go down due to tax and improvement in your standard of living. The house you stay will not be a part of wealth creation process.

Your current monthly surplus is Rs 29,000 inclusive of your annual bonus. But to meet priority goals you need Rs 27,600.This would be the situation when you receive a rental income of Rs 25,000. Since you have not mentioned anything about the flat in Noida, we presume you may let it out at later date.

Assuming a rental yield of 3 per cent, you may receive Rs 1.2 lakh per annum. Your post tax inflow will be Rs 90,000. It means that after a few years, you will find it difficult to save for anything beyond the three stated goals.

For your son’s education, you need to save a sum of Rs 21,750 every month for the next 10 years and the portfolio should earn 12 per cent returns. For his marriage, you need to save monthly a sum of Rs 5,050 for the next 20 years to reach the target of Rs 50 lakh.

Though your monthly surplus is pretty low, the only silver lining in your retirement savings is your monthly contribution towards EPF. If the current EPF balance and future accumulation of both employer and employee continues to earn an interest of 8.5 per cent and the yearly contribution increases by 5 per cent, then at retirement you will have a corpus of Rs 4.4 crore.

If the interest rate declared by EPF organisation is lower than expected, you need to compensate it by increasing your monthly savings. Although you have stated your life expectancy to be 70 years we have assumed it to be 80 years.

In your insurance portfolio, you have bought term policies in both online and offline modes.

We suggest you take only the online cover of Rs 1 crore and skip the offline policy during renewal.

Going by your monthly expenses, it appears you have more variable costs. Try to prune these so as to increase your surplus. Utilise the same for meeting a part of the contribution towards building an emergency fund.

source : http://www.thehindubusinessline.com/money-wise/financial-planning/article4912317.ece

1 comment

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