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Young couple Sandeep and Kamini approached us for financial planning. They are in their early 30s.
They did not have clarity about their financial goals. A simple savings and investment plan without worrying too much about an increase in future income with reasonable returns was their expectations. They were not sure if a financial planner can work that way. They both agreed to invest ₹10 lakh per year for the next 25 years out of which 50 per cent will be committed for the long term and the balance for the short to medium term.
They both are from affluent family backgrounds. Their interests vary — from travel to building legacy to support social causes. Kamini is a very enterprising person and runs a family business. Sandeep is working with a consulting firm, in a mid-management role. Sandeep is concerned about job security in his mid-40s. They have a daughter aged 3. They both have adequate life and health insurance for themselves and their parents and all are leading a healthy lifestyle. They spend ₹12 lakh per year on living expenses.
Review and recommendations
Based on the discussion, they would like to have two years of expenses in safe avenues at any point of time. This will provide the flexibility to opt for a change in career or handle job loss for Sandeep. Kamini wants to build an equivalent amount to support her business or for its expansionafter five-seven years. It was also suggested to focus on the daughter’s education expenses and their own retirement.. This will also provide them with guidance on selecting the investments.
1. Their requirements were divided into five baskets:
a. Protection
b. Stability
c. Responsibility
d. Retirement
e. Legacy
2. It was suggested to look at the investment period as five blocks of five years, equally dividing the 25-year time horizon. For the first five years, they will be investing 50 per cent of the investible surplus towards protection need. This will help them build approximately two years of living expenses in the first five years. This investment basket will be in safe avenues with high liquidity. The balance of 50 per cent will be directed towards daughter’s education in the Responsibility Basket at an expected return of 12 per cent CAGR.
3. In the next block of five years, 50 per cent of the investible surplus will be directed towards building the Stability basket for a sum of ₹25 lakh at current cost. The stability basket may have exposure to moderately higher risk than Protection Basket based on their risk position in that block of years. The balance of 50 per cent will be directed towards their retirement with an expected return of 12 per cent CAGR.
4. By the end of the 10th year, they will have ₹25 lakh in Protection basket adjusted for interest and taxes and ₹25 lakh adjusted for moderate growth in the Stability Basket with mostly fixed income investments. The first five years of investment in Responsible basket at an expected return of 12 per cent will be at ₹56 lakh and Retirement Basket may have ₹31.76 lakh.
5. In the third block of five years, they will be spending from Responsibility basket towards daughter’s education, and they will also be redirecting 50 per cent of investible surplus towards this requirement. Hence, in total, they will be having ₹56 lakh plus the additional allocation of ₹25 lakh in that block of five years towards their daughter’s college education. This is equivalent to ₹29 lakh of the current cost of college education at 10 per cent expected inflation for the next 10 years.
This is a reasonable accumulation under the given constraints. In this block of five years, they will be investing the balance 50 per cent in their retirement basket. Assuming Protection and Stability Baskets were not withdrawn, these baskets may have the interest and growth added to the respective baskets.
6. In the 4th block of five years, the entire 100 per cent of the investible surplus will be invested towards retirement. This will help them reach a target value of ₹2.18 crore at the end of 20 years.
7. In the last block of five years, they will be spending or investing in the legacy fund. Without further contribution, their Retirement Basket will grow to ₹3.84 crore by the end of 25 years approximately. They can expect ₹16.9 lakh per year retirement income at then cost for the next 30 years, adjusted for inflation of 5 per cent per year and an expected return of 7 per cent per year. It has to be noted that the retirement income would be equivalent to ₹5 lakh today at 5 per cent inflation per annum.
The family was earlier approached by one of their friends to invest ₹10 lakh per year for 25 years. Kamini and Sandeep realised at that point about their saving potential and wanted to understand the alternatives and their search ended with the financial planner. The holistic approach of financial planning covering their requirements amidst the anticipated constraints provided more clarity to them. There could be alternate strategies if not for those constraints and their personal preferences to reach their milestones.
The author is a SEBI Registered Individual Investment Adviser; Can be reached at www.financialplanners.co.in
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