BackAsk Mint Money | Term insurance helps cover loans as well as financial plan
Ask Mint Money | Term insurance helps cover loans as well as financial plan
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I am 38 years old with a monthly income of Rs1.30 lakh. So far, my only investment is a house, the equated monthly instalment (EMI) for which is Rs50,000. I can save Rs50,000 per month. I need to start investing for retirement; I expect Rs1 lakh per month. I want to secure my two-year-old child’s future, save tax and invest for short-term needs.
—Devinder
The retirement need you have mentioned does not clarify whether the Rs1 lakh per month is at present or at future value. We have considered retirement after you turn 58 years and have provided for Rs40,000 per month as the present value need for retirement which translates to Rs19.87 lakh in the first year post retirement or at the age of 59 years. Your child’s higher education expense has been considered when he turns 18 for Rs30 lakh (present value) which will be equivalent of Rs88.56 inflated value. We have also provided for a corpus of Rs15 lakh (present value) when your child turns 25. This corpus can be used for his marriage/settling expenses.
We have made a few assumptions that are critical for the plan. We have assumed your savings will grow 5% year-on-year. Inflation has been taken at 7% as an average over longer period and interest rate (earnings rate) at 10%. It has been assumed you will continue to work till you are 58 years.
As there was no information provided, we have not considered any existing savings. Further, it is assumed your EMIs for the house will end in another 12 years when you turn 50 years and this will lead to an increase in savings. Your net worth when you turn 58 years is targeted at Rs4.95 crore. This will help you sustain the corpus till you are 87 years.
You reach the break-even point at 79 years, when your interest earnings are higher than your expenses. Subsequently, your expenses become higher than earnings, hence you start dipping into your corpus.
Investment strategy: As all your needs are long-term, you should park most of your money in equities. Start a monthly systematic investment plan. Pick four funds from the equity category—diversified, large cap, mid cap and hybrid—and invest Rs10,000 in each.
Look at opening a Public Provident Fund account for yourself or in your son’s name. You can contribute a maximum of Rs70,000 per annum in this.
Take adequate cover in the form of term insurance that protects you first for your housing loan and then protects your financial plan. In addition, take a health policy for yourself and for your family.
Things to watch: Check the interest rate on your home loan regularly. In case you find your rate is higher than what the market offers, approach your lender for readjustment of the rate. You may find this beneficial in the long run.
Queries and views at mintmoney@livemint.com
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