38-Year-Old Aiming for Early Retirement at 55 with INR 4 Crore: Can He Achieve His Financial Goals?

Ramalingam Kalirajan |7290 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Oct 09, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more

Asked by Anonymous - Oct 08, 2024Hindi

Hello Sir, I am 38 now and Planning to retire at 55 with corpus of 4 Cr. I have took home loan of 32 lakh in 2021 which has current interest rate of 9.35% Also have Car loan of Rs 9 lakh took 2 yrs before with interest rate of 10% for 7 year. My take home salary is 1 lakh and rental income of Rs. 12k. Investments current value :- Parag Parikh Flexi cap 4.43 lakh(SIP10K) ICICI prudential Nifty next 50 2.94 lakh(SIP 5K) Kotak Equity opportunities 1.5 lakh Franklin ELSS 70k HDFC Mid cap opportunities 38k(SIP5k) Nippon India Small cap - 5k(SIP 5K) Value of shares in share market is around 9 lakh. Sukanya Samruddhi Yojana 4 lakh PPF 1.5 lakh EPF around 2 lakh I have daughter of 9 year oldand Son of 4 year old Need corpus for Education,Marriage and Retirement Also let me know MF selected are ok or I need to switch??

Ans: You are 38 years old and aim to retire at 55 with a corpus of Rs. 4 crore. Your current salary is Rs. 1 lakh per month, and you have an additional rental income of Rs. 12,000. You have ongoing loans – a home loan of Rs. 32 lakh with an interest rate of 9.35% and a car loan of Rs. 9 lakh with a 10% interest rate.

Your investments include mutual funds, equities, Sukanya Samriddhi Yojana (SSY), PPF, and EPF, and you also have two children (a 9-year-old daughter and a 4-year-old son). You are planning for their education, marriage, and your retirement. Let's evaluate your financial situation step-by-step and provide a detailed strategy to meet your goals.

Evaluating Your Current Loans
Home Loan: You took a Rs. 32 lakh home loan at an interest rate of 9.35%. The current interest rate environment makes your EMI relatively high. Home loans can be long-term commitments, and high interest could be draining a significant portion of your income.

Car Loan: You also have a Rs. 9 lakh car loan with a 10% interest rate. Auto loans are generally high-interest liabilities that depreciate as the vehicle loses value. This is a costly loan that can burden your monthly cash flow.

Recommendation:

Consider prepaying the car loan as early as possible since it comes with a high-interest rate and doesn't offer tax benefits. This will free up cash for other investments.

Look into refinancing your home loan. Check if you can reduce the interest rate by transferring the balance to another lender offering a lower rate. Even a slight reduction can save you a lot over time.

Analyzing Your Current Investments
You have built a good mix of investments in mutual funds, equities, and savings schemes. Let’s evaluate them:

Parag Parikh Flexi Cap (SIP of Rs. 10K): Flexi-cap funds offer the flexibility to invest across market capitalizations. This is a good long-term bet as it gives fund managers the freedom to choose based on market conditions.

ICICI Prudential Nifty Next 50 (SIP of Rs. 5K): You are investing in an index fund, but index funds, especially in the Next 50 category, tend to be more volatile. These funds may not provide as much flexibility as actively managed funds in the long term. Actively managed funds usually perform better during uncertain market conditions.

Kotak Equity Opportunities: Equity opportunities funds can be suitable for investors looking for long-term growth. Ensure this fund is regularly monitored, and stay in touch with your Certified Financial Planner (CFP) to review performance periodically.

Franklin ELSS: This is a tax-saving option. Equity Linked Saving Schemes (ELSS) also provide decent returns over the long term, with a lock-in period of three years. This fund category should remain part of your portfolio for tax saving and wealth creation.

HDFC Mid Cap Opportunities (SIP of Rs. 5K): Mid-cap funds have the potential to offer high returns but come with higher volatility. With 17 years to retirement, mid-caps can give you a good risk-reward balance if you have a long-term horizon.

Nippon India Small Cap (SIP of Rs. 5K): Small-cap funds have a higher risk but also potential for high returns. Keep this as a part of your long-term investment portfolio but ensure that the exposure to small-cap funds doesn't exceed 10-15% of your overall portfolio.

Shares: You have Rs. 9 lakh in direct equity investments. Equities are excellent for long-term growth, but you must monitor them regularly and stay updated on company performances. Direct equities can be riskier than mutual funds, so ensure diversification.

Sukanya Samriddhi Yojana (SSY): This is a great option for your daughter’s education and marriage, offering guaranteed returns and tax benefits under Section 80C. SSY should remain a core part of your financial planning for her future.

PPF (Rs. 1.5 lakh): PPF is a safe, tax-saving option that also provides good long-term returns. Continue investing in PPF for guaranteed, risk-free returns.

EPF (Rs. 2 lakh): EPF is another safe, long-term retirement saving option. It provides a steady, assured return and should continue to be a part of your retirement corpus.

Recommendation:

Actively managed funds may be a better option compared to index funds. They give fund managers flexibility to make strategic choices, potentially offering better returns, especially in volatile markets.

Continue your investments in mid-cap and small-cap funds but limit their proportion in your portfolio to avoid excessive risk.

Direct equity investment should be carefully monitored or handled through a CFP to avoid risk concentration.

Planning for Children's Education and Marriage
You have a 9-year-old daughter and a 4-year-old son. Education and marriage are significant future expenses that need careful planning.

Education: With education costs rising, start building a dedicated education fund for each child. You may need to allocate a specific portion of your SIPs or open a separate mutual fund portfolio for this goal. Plan for both higher education and school-related expenses.

Marriage: Marriage costs can be unpredictable. You could create a separate investment for marriage-related expenses in a balanced fund or a combination of fixed-income instruments and equities to ensure safety with some growth potential.

Recommendation:

Start allocating a portion of your income towards a dedicated education fund. This could include child-specific schemes like SSY or child-focused mutual funds.

Consider keeping marriage funds in low-risk, medium-return instruments to ensure they grow steadily without much risk exposure.

Assessing Your Retirement Plan
You aim to retire at 55 with a corpus of Rs. 4 crore. This is achievable with disciplined investing and strategic planning.

Current Investment Strategy: You are already investing in mutual funds, equities, and long-term savings plans like PPF and EPF. However, you need to ensure that your asset allocation is aligned with your retirement goals.

Debt Management: Your current loans should be repaid before retirement to avoid carrying financial liabilities post-retirement. Prepaying your car loan and refinancing your home loan could help you save significant amounts, which can then be redirected to investments.

Recommendation:

Focus on building a balanced portfolio of equity and debt to ensure your portfolio grows while also offering stability. Equity should dominate your portfolio in the early stages, while debt instruments can gradually take over as you approach retirement.

Increase your SIP contributions whenever your income increases. Aim to invest 25-30% of your monthly income towards retirement planning.

Evaluating Your Financial Goals and Future Course
You need to address three major goals: retirement, children's education, and marriage. Each goal requires a dedicated plan to ensure adequate corpus growth.

Recommendation:

For retirement, ensure that at least 60-70% of your portfolio is in growth-oriented instruments like equity mutual funds for now. As you approach retirement, gradually shift to debt funds for stability.

For your children's education, use a mix of equity mutual funds and child-specific investment schemes to ensure the corpus grows in line with education inflation.

For marriage expenses, opt for lower-risk instruments that offer predictable growth, such as balanced funds or a combination of equity and debt.

Final Insights
Loan Repayment: Focus on prepaying your high-interest car loan as soon as possible. This will free up cash flow for investments. Consider refinancing your home loan to reduce the interest burden.

Mutual Fund Strategy: You have a well-diversified portfolio. However, avoid index funds, as actively managed funds can provide better returns over the long term. Continue SIPs in flexi-cap, mid-cap, and small-cap funds but limit small-cap exposure.

Children's Future: Start separate SIPs for your children's education and marriage. SSY is a great option for your daughter’s future, but you may also need equity mutual funds for higher growth.

Retirement Corpus: With consistent investment and discipline, a Rs. 4 crore corpus is achievable. Aim to increase your SIP contributions periodically, keep monitoring your mutual fund performance, and consult with a CFP regularly to review your progress.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

https://www.youtube.com/@HolisticInvestment

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.

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Ans: You are 44 years old with a stable income of Rs. 1.9 lakh per month. Your portfolio consists of:

Mutual Funds: Rs. 5 lakh, with a SIP of Rs. 15,000 per month.

Equity: Rs. 3 lakh in direct equity.

Provident Fund: Rs. 12 lakh, offering steady, risk-free growth.

Fixed Deposit: Rs. 6 lakh, providing secure, low-risk returns.

NPS/PPF: Rs. 2 lakh in these long-term retirement-focused instruments.

Sukanya Samriddhi Yojana: Rs. 2 lakh, a good plan for your daughter’s future.

Old Insurance Policies & ULIPs: Around Rs. 5 lakh, combining insurance and investment.

Medical Insurance: Adequate coverage for your family.

Home Loan: Rs. 38 lakh pending, with an EMI of Rs. 53,000 per month.

You aim to retire by age 55, with a target retirement corpus of Rs. 4 crore. This is an ambitious yet achievable goal with disciplined planning.

Evaluating Your Current Portfolio
Your portfolio is diversified across various asset classes. Here’s a brief assessment:

Mutual Funds: You have Rs. 5 lakh invested, with a SIP of Rs. 15,000 per month. This is a solid start, but you’ll need to increase your SIP over time to reach your goal.

Equity: Rs. 3 lakh in direct equity offers growth potential. However, direct equity requires active management and carries higher risk. Consider whether you have the time and expertise to manage this actively.

Provident Fund (PF): Rs. 12 lakh in PF provides a safe and steady return. It’s a good foundation for your retirement planning, but it alone won’t suffice to reach your Rs. 4 crore target.

Fixed Deposit (FD): Rs. 6 lakh in FD is low-risk but offers limited growth. This is useful for emergencies or short-term needs, but it won’t help much in wealth accumulation.

NPS/PPF: Rs. 2 lakh here is beneficial for long-term tax-efficient growth. Continue contributing to these, as they will form part of your retirement corpus.

Sukanya Samriddhi Yojana: Rs. 2 lakh is a smart investment for your daughter’s education and marriage expenses. This is a long-term, tax-free investment, which is beneficial.

Old Insurance Policies & ULIPs: Rs. 5 lakh here may not be optimally allocated. ULIPs often have high costs and suboptimal returns compared to mutual funds. These should be reviewed and possibly restructured.

Medical Insurance: You’ve ensured coverage for your family, which is essential. This helps safeguard your financial planning from unexpected medical expenses.

Home Loan: Rs. 38 lakh pending with an EMI of Rs. 53,000 per month is a significant commitment. This is manageable given your income but impacts your monthly cash flow. Paying this off before retirement would ease financial pressure.

Steps to Reach Your Rs. 4 Crore Retirement Corpus
To achieve a retirement corpus of Rs. 4 crore by age 55, a structured approach is necessary. Let’s break it down:

1. Increase Your SIP Contributions
Current Situation: You invest Rs. 15,000 per month in SIPs. While this is good, it’s not enough to reach your Rs. 4 crore goal.

Recommended Action: Gradually increase your SIP contributions. Aim to increase by at least 10-15% every year. As your income grows, channel a portion of the increments into your SIPs. This helps in capitalizing on the power of compounding.

Focus on Actively Managed Funds: Actively managed funds are preferable over index funds due to their potential for higher returns. Work with an MFD with CFP credentials to choose the best funds.

2. Review and Restructure Old Insurance Policies & ULIPs
Current Situation: You have Rs. 5 lakh in old insurance policies and ULIPs. These may not be the most efficient investments for wealth creation.

Recommended Action: Review these policies with your Certified Financial Planner. If they are underperforming or carrying high costs, consider surrendering them and reallocating the funds to mutual funds. This will give you better returns in the long run.

Shift Focus to Term Insurance: If you don’t have term insurance, consider getting it. Term insurance offers high coverage at a low cost, ensuring your family’s financial security without mixing insurance and investment.

3. Maximize Contributions to PPF and NPS
Current Situation: You have Rs. 2 lakh in PPF and NPS combined. These are long-term, tax-efficient investment vehicles.

Recommended Action: Maximize your contributions to PPF each year. It’s a risk-free, tax-free option with a decent return. NPS is also beneficial, especially for its tax advantages. Consider increasing your NPS contributions, especially if your employer offers matching contributions.

Diversify Within NPS: Choose an asset allocation within NPS that aligns with your risk tolerance. A mix of equity and debt within NPS can provide balanced growth and safety.

4. Pay Down Your Home Loan Strategically
Current Situation: You have Rs. 38 lakh left on your home loan, with a hefty EMI of Rs. 53,000 per month.

Recommended Action: Paying off your home loan before retirement should be a priority. You don’t want a large liability hanging over your head post-retirement. Consider making additional payments towards the principal whenever possible. This will reduce the loan tenure and the interest paid over time.

Balance Between Investment and Loan Repayment: While it’s important to pay down your loan, don’t compromise on your investments. Find a balance where you can continue to grow your wealth while reducing debt.

5. Emergency Fund and FD Utilization
Current Situation: You have Rs. 6 lakh in FD, which is good for emergencies.

Recommended Action: Keep at least 6-12 months’ worth of expenses in your FD as an emergency fund. If you have excess funds beyond this, consider moving them to higher-yield investments, such as mutual funds or PPF, which offer better growth prospects.

Liquidity Needs: Ensure your emergency fund is easily accessible. Don’t tie up all your savings in long-term investments without having liquid reserves.

6. Direct Equity and Risk Management
Current Situation: You have Rs. 3 lakh in direct equity. This carries higher risk and requires active management.

Recommended Action: Evaluate your equity portfolio with your Certified Financial Planner. Ensure your stock picks align with your risk tolerance and retirement goals. If managing direct equity is overwhelming, consider shifting some of these funds to mutual funds, where professional managers can handle your investments.

Diversification: Avoid over-concentration in any one sector or stock. Diversify your holdings to reduce risk.

7. Consider Additional Retirement Vehicles
Current Situation: Your retirement savings are spread across various instruments.

Recommended Action: Explore additional retirement vehicles such as Voluntary Provident Fund (VPF) or Senior Citizens Savings Scheme (SCSS) when you approach 55. These provide secure, government-backed options for retirement savings.

Don’t Rely Solely on One Source: Ensure your retirement corpus is spread across multiple sources to reduce risk and provide flexibility.

8. Regular Portfolio Review and Rebalancing
Current Situation: Your portfolio needs to be regularly monitored to stay aligned with your goals.

Recommended Action: Schedule regular reviews with your Certified Financial Planner. Adjust your portfolio based on market conditions and your evolving financial situation. As you approach retirement, gradually shift from high-risk to lower-risk investments to preserve your capital.

Stay Disciplined: Avoid making emotional decisions based on short-term market fluctuations. Stick to your long-term plan, and make adjustments only when necessary.

9. Estate Planning and Will Creation
Current Situation: While your focus is on retirement, it’s also essential to think about estate planning.

Recommended Action: Create a will to ensure your assets are distributed according to your wishes. This will prevent legal complications for your family later. Consider discussing with your Certified Financial Planner the need for a trust if your estate is substantial.

Nomination Updates: Ensure all your investments, insurance policies, and retirement accounts have updated nominations. This simplifies the process for your beneficiaries.

Finally
Your goal of a Rs. 4 crore retirement corpus by age 55 is achievable. It requires a disciplined approach, increasing your SIP contributions, optimizing your existing portfolio, and paying down debt. Work closely with your Certified Financial Planner to ensure your investments align with your goals. Regular reviews and adjustments will keep you on track towards a secure and comfortable retirement.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in