Aditya (38) is a marketing professional. His take-home monthly income is Rs 1.10 lakh. His wife is a homemaker. The couple has a seven-year-old son. They live in their own house and have a monthly expenditure of around Rs 70,000. In addition to creating a sufficient corpus for his son's higher education and marriage, Aditya wishes to retire at the age of 50. So far, he has accumulated a corpus of Rs 15.3 lakh in equity mutual funds and holds some balance in the Public Provident Fund (PPF). He wants us to make a financial plan for him.
Aditya has a fixed deposit of Rs 6 lakh for emergencies. Although this amount is on the higher side, he can continue with it if it makes him feel secure. The general rule is to maintain an emergency corpus equivalent to one's six-month expenses.
The emergency corpus can be kept in a combination of a liquid fund and a sweep-in deposit. It will help him earn higher returns without compromising on liquidity.
Action: Use a combination of a liquid fund and a sweep-in deposit for your emergency corpus
Aditya has a term-insurance plan of Rs 1.5 crore. This amount should be sufficient for the family's living expenses in his absence. He also has a health cover of Rs 7 lakh for the entire family.
Although the health cover seems adequate for now, it should be revisited every two-three years to make provision for inflation and rising medical costs. He may also consider buying a critical-illness health-insurance policy of Rs 10 lakh for his wife and himself. Such a policy helps you meet expenses for a serious disease should you contact one. Given today's lifestyles, a critical-illness cover provides extra financial safety.
A critical-illness policy would cost each of them around Rs 8,000 per annum. These policies pay a lump sum on the diagnosis of the specified illnesses, irrespective of the treatment costs.
Though most health insurance policies cover Covid, Aditya may also consider buying a Covid-specific health insurance plan for his entire family to get extra financial protection from the dreadful virus.
Action: Revisit your health insurance cover every two to three years. Consider buying a critical-illness health cover.
Son's higher education and marriage
Aditya plans to spend Rs 15 lakh and Rs 10 lakh, respectively, on his son's higher education and marriage. Assuming an inflation of 6 per cent, these amounts would become Rs 26.9 lakh and Rs 16.3 lakh, respectively, by the time they are required.
Although the marriage of his son is 20 years away, he has only 12 years of active work life to contribute to this goal, assuming he retires at the age of 50. An SIP of Rs 11,300 at a modest return of 12 per cent per annum should be sufficient for the targeted amount. However, the SIP amount should be increased yearly by 10 per cent.
Action: Systematically invest Rs 11,300 in pure equity funds
Going by the current expenditure level and a conservative annual withdrawal rate of 5 per cent, Aditya would need around Rs 3.4 crore to retire at the age of 50. His current accumulations in equity funds and PPF are likely to fetch him Rs 62.4 lakh, assuming an annual return of 12 per cent on equity funds. His mandatory EPF contribution amounts to Rs 7,800 per month. A similar share is contributed by his employer. This, along with his current EPF balance of Rs 19.4 lakh, would fetch him another Rs 1.1 crore if he retires at the age of 50. We have assumed a 10 per cent increase in his EPF contribution, along with annual appraisals.
For the deficit in the required retirement corpus, he needs to invest Rs 37,200 every month in equity funds. Again, the contributions should be increased yearly by 10 per cent. This looks challenging as Aditya is left with a monthly surplus of only Rs 28,700 after provisioning for his son's higher education and marriage.
He should consider postponing his retirement goal by a few years. Working for another four-five years would not only help him accumulate the required corpus but also provide him sufficient cushion should some financial emergency unexpectedly arise around his retirement. He would still be able to retire by 55, earlier than many.
Two to three years prior to his retirement, Aditya should systematically start moving to a liquid fund the money needed for the next three years of expenses. During his retirement, he should ensure that at any time, the money needed for the next three years of expenses should be in a liquid debt fund.
Contrary to what many people think, equity has an important role to play in retirement. It helps you beat inflation. Relying only on debt makes you vulnerable to running out of money at a later stage. Since Aditya already has equity exposure and understands market volatility, during his retirement, he should have about 50 per cent equity allocation.
As a rule of thumb, don't withdraw more than 4-6 per cent of retirement corpus in a year. This will ensure that the equity portion of your corpus is able to meet the shortfall created due to a rise in inflation.
Action: Consider postponing your retirement by a few years.
Aditya's current mutual fund portfolio comprises nine equity funds, which are a mix of large, mid caps and tax-saver funds. He should try to consolidate his portfolio to four-five funds. Otherwise, it may lead to dilution of returns over the long term.Besides, if you have many funds, monitoring the portfolio also becomes difficult.
Aditya should also consider moving his money from large-cap to multi-cap funds. These funds invest in companies of all sizes and across sectors, thereby enabling the investor to earn higher returns. He may continue to invest a small portion, say 20-30 per cent of his portfolio, in mid- and small-cap funds for aggressive returns.
Action: Reduce the number of funds in your portfolio. Consider moving to multi-cap funds.
Keep in mind
Reassess your health-insurance cover every two-three years.
Don't shun equity in retirement. It helps you get inflation-adjusted returns.
Muti-cap funds are the best type of equity funds, given their go-anywhere mandate.
Four-five funds are enough for a portfolio. More funds don't result in better diversification but managing them can be a hassle.