Deepak is planning for an early retirement from his corporate job and want to lead a retired life in his native place. Keeping this in mind, he has constructed a house near to his brother’s house.
He is aged 38 and is working with a MNC bank in Mumbai as Associate Vice President. He was with a PSU bank for almost 10 years and joined private sector in 2006. All his savings has gone to construct the house, where he wants to stay after retirement. He is planning to retire at age 50 and give free tuition to poor children in his village. A noble profession of teaching the poor!
Let us see whether his financial position will permit his ambition. Early retirement is a dream for many now. But with high inflation, huge health care costs, education expenses etc. it is a nightmare for many. Unless you anticipate all these and plan early, you cannot think of early retirement.
Let us see, if Deepak can manage his early retirement.
He is married to Anitha aged 35 a home maker and they have 2 daughters aged 7 and 5. His major financial goals are
- Provide 10 lakhs each (in current cost) for the higher education of both daughters.
- Provide 10 lakhs each (in current cost) for the marriage expenses of both daughters.
- Provide for a monthly payment of Rs. 20,000/- in current cost from his retirement till his wife is alive. It should provide for an inflation adjusted withdrawal.
If he wants to retire at age 50, he is having only 12 years to plan for it. This requires a very high savings rate in the remaining 12 years. Also he has to plan for necessary Life Insurance and health Insurance to protect his family from any possible uncertainties.
He has investment of 6 Lakhs in PPF and another 6 lakhs in mutual funds in addition to 2 lakhs in bank deposit.
He want to provide for an inflation adjusted monthly payment of 20,000 till age 80 of his wife, in case of his early death. This requires a corpus of 71 Lakhs. To provide for children education and marriage, there should be a provision of 34 lakhs, in case of his early death. All this demands an insurance cover of 1 Crore for him. He can go for an online term plan for 20 years. He can buy this at an annual premium of around 12,000.
Though his entire family is covered through the medical insurance offered by his employer, he should go for an additional health cover in his personal capacity. He should go for a 10 Lakhs family floater policy which will cover all 4 members of his family. He should opt for a policy which offers life time renewal. Policies with no sublimits and no claim based loading will be the better option.
Children Higher Education
He wants to provide 10 lakhs each in current cost for both the daughter’s higher education. Assuming 8% inflation, he should accumulate 21 Lakhs and 25 Lakhs when the daughters are aged 17. Assuming an investment return of 12%, he should invest 17,500/- per month for reaching this goal. He can select good diversified mutual funds and review the performance periodically to review the progress. Also, he has to reduce the equity component as he approaches the goals.
He is planning to provide 10 lakhs each in current cost for each of them when they are aged 25. Assuming 6% inflation, the target will be 28 lakhs and 32 lakhs at their age 25. Since, he has to save this amount in the next 12 years, this requires a monthly investment of 11,500 for the next 12 years.
He wants to provide an inflation adjusted withdrawal of 20,000 till his wife is aged 80, ie. for 33 years. The value of 20,000 after 12 years at 6% inflation will be around 40,000. To ensure this monthly payout adjusted for inflation, he should have an accumulation of around 1.2 Crores.
He will get around 60 lakhs from his PF and another 10 lakhs from gratuity at his age 50. The current investment of 6 lakhs in mutual fund will grow to around 23 lakhs. He can continue to invest 1 lakh in his PPF account for the next 12 years to accumulate 34 lakhs at his age 50.
The above will take care of his retirement needs.
Once, the suggested Life insurance and health insurance are in place, Deepak can manage his early retirement with an investment of 29,000 per month for his daughter’s needs. He should start SIPs in good performing equity funds and change the asset allocation, as he approaches the goals. He should continue to invest 1 lakh in his PPF account also.
With a decent salary of the MNC bank and with early financial planning, Deepak is all set to retire at 50 for his second innings in his native village – his passion for teaching poor children.
Let us wish him all the best.