Helping the Sharmas enjoy the sunset

 

 

 

Neeraj Sharma (38) is a senior executive working for a FMCG company. He lives with his wife Varsha (36) who is a homemaker, son Siddharth (6) and daughter Pooja (2). His mother Aditi (65) also lives with them.

 

Neeraj’s father passed away at an early age and his mother raised him and funded his graduation from a reputed management institute from her salary, working as a teller in a public sector bank. She still gets a pension, which is sufficient to meet her personal needs. Neeraj likes to spend freely and wants to give his children all that he could not get as a child. A large portion of his salary goes towards regular expenses, most of which are lifestyle expenses. His cash flow and asset-liability situation is shown below.

 

He has bought a flat in Mumbai two years back, where he lives, which is currently valued at  around Rs 63 lakhs. He has an outstanding loan on this property of Rs.42 lakhs and is paying an EMI of approximately Rs 35,000 p.m. (or Rs 4.2 lakh per annum) on the same for a period of 20 years. He has another property in Pune, which is his home town, which is valued at Rs 14 lakh and is lying vacant. As can be clearly seen from the table, he has very few financial assets. He has a life insurance cover of Rs 11 lakh for which he pays an annual premium of Rs 45,000 and which will mature after 20 years and is expected to yield him approximately Rs 25 lakh. His employer provides free medical insurance cover for him and his family.

 

Neeraj was quite happy with the way life was going till recently, when he spoke to a senior colleague nearing retirement, who had not saved enough to match his lifestyle during retirement. This got Neeraj thinking.

 

Though he was earning quite well, he was spending most of it. He would retire at 58, 20 years from now. He did not have adequate financial assets and was not saving enough to build upon them. Moreover, he had not started planning for his children’s financial future. He discussed this issue with his wife and they decided to get professional help. They approached an expert to get a clear perspective and a proper financial plan in place to help meet their financial goals.

 

Upon going through his situation with his financial planner, Neeraj saw that he was barely saving Rs 85,000 a year. That too, was not being properly invested and he had no idea where this surplus was going. Neeraj had certain financial goals he felt he must achieve. He wanted an annual inflation-adjusted income of Rs 6 lakh once he retired. He also wanted an inflation-adjusted amount of Rs 25 lakh each for his two children when they turned 21, for both their higher education and marriage. He inquired whether his life insurance cover was adequate for his family in case of his untimely demise and whether he could afford to buy more insurance.

 

Neeraj was advised to make a break-up of his expenses. Upon going through this expenditure statement, it was found that his family was spending Rs 1.5 lakh per annum on clothes. They were also spending around Rs 1.5 lakh per annum on holidays. They readily agreed that they could reduce Rs 50,000 per annum on clothes. It was suggested that for the next few years, instead of paying large amounts of money to stay in luxury hotels during their holidays, they could make use of their holiday time-share membership and go to those locations where it had its resorts, so that they would save substantially on hotel bills. They worked out that they could save Rs 75,000 per annum on holidays and another Rs 25,000 on other expenses. This gave them a saving of Rs 1.5 lakh on their expenses.

 

The next area of discussion was Neeraj’s asset allocation. At present, almost all his investments were in real estate. He had no exposure to equities and very little exposure to fixed income instruments. Such a concentrated asset allocation made his investments highly vulnerable to volatility in real estate prices. He could also consider other asset classes like bullion in order to diversify his portfolio.

 

It was suggested that he sell the property in Pune and use the sale proceeds to partially prepay his housing loan, since it was on a floating rate and the rates had recently gone up substantially. If he got Rs 14 lakh for his property and used the proceeds to prepay his loan, the EMI would reduce by around Rs 1.4 lakh per annum. 

 

It was also discussed whether Varsha could get a job and both she and Neeraj were quite open to the idea, given that both children were big enough to be cared for by Neeraj’s mother. Since Varsha was fairly educated, she felt confident that she could start with earnings of around Rs 2 lakh per annum.

 

Taking into account the annual savings of Rs 3.65 lakh, it was suggested that they start a savings plan for both their children and their retirement immediately. Neeraj was advised to increase his life insurance cover to at least 10-15 times his annual income, through a term insurance policy with accidental death and critical illness riders. The premium on such a policy would be quite affordable, since premium on term insurance is not very high. This sort of policy is best suited for availing high-risk cover at low rates purely from a risk protection point of view.

 

Neeraj was also advised to start investing in select diversified equity mutual funds through the systematic investment plan route, whereby they would invest a fixed amount of money on a certain date every month. Moreover, it was also suggested that they start buying a certain amount of gold every month from their bank. They had an option to purchase as less as 5 gram of gold every month. This would help them diversify their investment portfolio by including bullion, which is another well performing asset class and an ideal hedge against inflation. Moreover, they could use this gold at the time of their children’s wedding, if needed.

 

Although their existing savings would not be enough to meet their financial goals for retirement and children’s future planning, they could start the process of saving for them and could enhance their investments as and when Varsha started earning, which was expected to be very soon and when Neeraj got a raise or bonus. Moreover, they would get some money from the maturity proceeds of Neeraj’s existing life insurances and provident fund, which would add to their retirement funds. They were advised to maintain their bank deposits as a contingency fund for any emergencies. Varsha was also advised to take out term life insurance with the same riders for herself of around 10-15 times her salary, once she got a job.

 

Understandably, the above suggestions, combined with fiscal prudence, would help the Sharmas achieve a safe and secure financial future for themselves and their children, even while maintaining their lifestyle at a standard they felt comfortable with.

 

 

The case study is only a model for illustrative purposes.