I have many queries related to my future financial goals

In Advisorkhoj we do not give any specific investment advice. However, we will share some general guidance with respect to your query, so that you can make the right investment decision in consultation with your financial advisor, if you have one. You have made the right start by defining your goals in very specific terms. This will be very helpful for you to plan your investment. To get a sense of your future needs, you will have to apply inflation to each one of your goals. The current inflation rate is about 5.6%, but it is expected to moderate in the future. Over the horizon of your financial goals, we can certainly expect average inflation to be lower than the current levels, because with our economy growing and maturing over time we can expect inflation to come down in the future. For example, the inflation rate in the US is at 0.5%. While our economy may not become as big and mature as the US economy over the next 20 years, it is unlikely that inflation will continue to be at 5 – 6%. On the other hand, you should also remember that inflation has been fairly stubborn in India. Over the last 10 years, inflation in India has been above 5% in 9 out of last 10 years. So you need to consider both the factors as far as long term inflation is concerned. It is extremely difficult to predict, what inflation will be over the next 20 to 30 years and so you need to make an assumption. Let us assume inflation moderates somewhat but also does not go down close to zero; let us say inflation will be at 4%. If it is lower than that, it is good for you. Let us now apply inflation to your long term goals.

1. Your first child’s education: In terms of today’s cost, you are forecasting it to be Rs 20 lakhs. The future cost in 15 years, applying a 4% inflation rate, will be Rs 36 lakhs


2. Your second child’s education: In terms of today’s cost, you are forecasting it to be Rs 20 lakhs. The future cost in 18 years, applying a 4% inflation rate, will be Rs 41 lakhs


3. Your first child’s marriage: In terms of today’s cost, you are forecasting it to be Rs 25 lakhs. The future cost in 22 years, applying a 4% inflation rate, will be Rs 47 lakhs


4. Your second child’s marriage: In terms of today’s cost, you are forecasting it to be Rs 25 lakhs. The future cost in 25 years, applying a 4% inflation rate, will be Rs 53 lakhs


5. Your retirement: In terms of today’s cost, your monthly expenses are Rs 30,000. Therefore, your annual expenses are Rs 360,000. The future cost in 33 years, applying a 4% inflation rate will be Rs 13 lakhs per year. Therefore, your retirement corpus should be large enough, so that return you get on investment post retirement is sufficient to meet your annual expenditure of Rs 13 lakhs. It is always very difficult, if not impossible, to forecast what investment return will be after 30 years. So again we need to make some assumptions. But for the assumptions to be helpful, we need to have some basis, in terms of historical data. Firstly, let us assume that after retirement, you will shift your asset allocation entirely to debt to reduce risk. While we are making this assumption for the purpose of calculation, you should note that, it is always recommended that you should not cut down your exposure to equities to zero after retirement because equity as an asset class will help you beat inflation after retirement. But for the time being, let us assume that post your retirement, you are invested entirely in debt or fixed income. Current differential between fixed income yield (interest rate) on a pre-tax basis and inflation is about 2.5%. But if you are in the highest tax bracket, in which you eventually will be, then there is really no difference between inflation and fixed income yield. If we assume, inflation to be at 3 – 4% at the time of your retirement, therefore, you need to have a corpus of at least Rs 3 to 4 crores. Remember, this is without factoring any lifestyle change. As your income grows your lifestyle will improve. Therefore at retirement, your monthly expense at today’s cost will be higher than Rs 30,000. But more about that later.

So the question is how you need to save and invest? It will depend on how much returns you get on your investment. Over the past 20 years, good diversified equity funds gave over 20% compounded annual returns. Over the next 20 years, can they give 20% compounded annual returns? Again, it is very difficult to forecast how much returns you will get over the next 20 to 30 years. But purely going by logic, as our economy matures, our returns expectations should also moderate. Let us assume you will get 15% compounded annual returns from equities over the next 20 to 30 years. If you get better returns, good for you. Let us now go, goal by goal.

1. Your first child’s education: Assuming 15% long term returns, your monthly investment should Rs 5,385 from now onwards.


2. Your second child’s education: Assuming 15% long term returns, your monthly investment should Rs 3,750 from now onwards.


3. Your first child’s marriage: Assuming 15% long term returns, your monthly investment should Rs 2,298 from now onwards.


4. Your second child’s marriage: Assuming 15% long term returns, your monthly investment should Rs 1,364 from now onwards.


5. Your retirement: Assuming 15% long term returns, your monthly investment should Rs 2,800 to 3,700 from now onwards.

You may try our calculators to plan your financial goals https://www.advisorkhoj.com/tools-and-calculators/

Adding it all up, you need to save and invest Rs 16,000 per month. Your monthly SIP amount currently, as per the information provided by you, is Rs 12,000. This is a great start and since you plan to increase your monthly SIP by another Rs 4,000 you should be right on track based on the above calculations.

Now, let us revisit the question of lifestyle improvement, as you progress in your career. It is bound to happen and therefore you should be prepared for it. Lifestyle improvement is invariably linked to the increase in your salary. Therefore, you should plan to increase your SIPs, whenever you get a salary increment. For example, if you get a salary increment of 10% next year, you should plan to increase your monthly SIPs by 10%. You can avail of the SIP top up facility offered by all the mutual funds (for some Asset Management Companies, you may have to stop your SIP and restart again with the top up facility. You should consult with your financial advisor or speak with the concerned company), whereby you can increase your SIPs every year. This should take care of the lifestyle changes. Also, whenever you receive one time cash flows like annual bonus payment, maturity of your fixed deposits etc, you can use this to invest in lump sum in the various mutual fund schemes that you have invested in. This will provide you a comfortable cushion, as far as your long term goals are concerned.

However, you should note that, life insurance is a critical financial need to take care of the financial interest of your family in the event of an unfortunate death. Since you have a child, you should ensure that you have enough term life insurance immediately. There is not much benefit in having life insurance after retirement, when you do not have income from your profession. Remember that there is a cost associated with life insurance. What is the point of paying life insurance premiums after retirement, when you do not have any income? There are differing viewpoints on this topic, but our viewpoint is that, life insurance is meant to protect your family from the loss of income. If there is no loss of income, even after an unfortunate death, there is no need of life insurance. On the other hand, since you have a young family, an unfortunate death and the loss of income thereof, can have a devastating effect on your family. So you should give this your due consideration. If you want, you can go a term plan with lower cover or sum assured at this point of time, and then buy additional term life insurance when your second child is born. You should not ignore life insurance, even if it requires you to go a little slow on investments. As far as investments are concerned, even if you are forced to go slow, you can catch up later, by saving and investing extra when your income increases, but life insurance is very important.

As far as health insurance is concerned, you should evaluate if your employer’s health insurance plan is adequate for the needs of your family, including maternity cover, since you are planning a second child in the next 2 years.