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How Can a 43-Year-Old Hyderabad Resident With 18 Years of Experience Save Up Quickly for Retirement and a Second Home?
Ramalingam Kalirajan |7290 Answers |Ask -Follow
Mutual Funds, Financial Planning Expert - Answered on Sep 17, 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
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 - Sep 15, 2024Hindi
Im 43 years old resident from Hyderabad, working in a mnc with over 18years exp. I have so far not planned well for my retirement / future savings and wish to do now. I have purchased a house for myself in my home town ( home load fully paid just now ) and planning to take another one soon. I earn roughly over 1.15L per month and with no loans or credit cards. I've a wife ( house wife ) and 10 year old daughter . my monthly expenses are over 45k including my parents health insurance and save around 50k as of now . I get 15k rental income from my property . I wish to quickly save 15L to purchase a new home and parallelly plan my retirals money . Looking for your advice on how I can do that. Please advice... Thank you very much in advance
Ans: Sir, at 43 years old, you are in a good position to build a solid financial plan for retirement and future savings. You've already cleared your home loan and are saving Rs 50,000 per month. This is a positive foundation for your goals. Your family consists of your wife, who is a homemaker, and a 10-year-old daughter. Your monthly expenses, including health insurance for your parents, are Rs 45,000. Additionally, you are receiving a rental income of Rs 15,000 per month from your property. Now, you want to save Rs 15 lakhs for a new house while planning your retirement fund. Let’s break down how you can approach these goals.
Setting Financial Priorities
Before diving into specifics, let’s outline your two main goals:
Save Rs 15 lakhs for a new home – You are looking to accumulate this amount in a relatively short time.
Build a retirement corpus – Retirement planning should begin right away since time is still on your side.
Balancing these two goals while keeping your family’s security in mind is key. This means ensuring that you save for your retirement without stretching yourself too thin while saving for the new home.
Saving for a New House
Since you wish to save Rs 15 lakhs for a new home, this can be approached with a focused saving and investment strategy.
Use your monthly savings: You are already saving Rs 50,000 per month, which is commendable. Consider allocating a portion of this towards your new home fund. Since you want to accumulate Rs 15 lakhs quickly, you may have to direct a significant portion of your savings toward this goal, at least temporarily.
High-return, short-term investment options: While it's important to prioritise safety, you can consider short-term debt funds or balanced funds. These funds generally offer higher returns compared to traditional savings accounts or fixed deposits, making them a suitable option for your home purchase fund. Avoid stock market-related products here as they are more volatile, and you don’t want to take on unnecessary risk for a short-term goal.
Time horizon for the house: Depending on how quickly you want to buy the home, you can adjust your savings. If you need the Rs 15 lakhs within 2-3 years, aim to save around Rs 40,000 per month toward this. The rest of your savings can be directed toward retirement.
Retirement Planning – The Core Focus
Now, retirement planning is more critical as this will secure your and your family’s future. You have around 17 years to build a sufficient retirement corpus. Here's how you can approach it:
Start with a clear retirement goal: Estimate how much you would need per month post-retirement. Your current expenses are Rs 45,000 per month. Assuming an inflation rate of around 6-7%, you would need a significantly higher amount at the time of retirement. Let’s assume you will need Rs 1 lakh per month when you retire. Based on this, you can plan how much you need to save every month.
Use actively managed mutual funds: Since you have a long investment horizon for retirement, you can take advantage of the power of equity. Actively managed equity mutual funds (not index funds) tend to outperform over the long run. A mix of large-cap, mid-cap, and flexi-cap funds would provide growth with some level of safety.
Regular SIPs: Systematic Investment Plans (SIPs) in actively managed funds are a smart way to invest for your retirement. Given that you can allocate a good portion of your Rs 50,000 monthly savings towards retirement, you could start SIPs in these funds. Aim for Rs 25,000 to Rs 30,000 per month towards SIPs for your retirement corpus. This disciplined approach will build a strong foundation for your retirement.
Avoid direct funds: You may be tempted to go for direct funds to save on expenses. However, investing through a Certified Financial Planner (CFP) who can guide you will often result in better management and advice tailored to your financial needs. Regular funds, managed by a professional MFD (Mutual Fund Distributor), can yield higher returns by helping you with fund selection, portfolio rebalancing, and tax-efficient strategies.
Diversify into balanced funds: To add stability to your portfolio, consider balanced or hybrid funds that allocate part of the investments to debt instruments. These funds reduce risk and offer more predictable returns, complementing your equity investments. As you near retirement, shifting a larger portion into these funds will help protect your capital while still offering growth.
Emergency Fund and Insurance
Maintain an emergency fund: With a wife and daughter depending on you, having a robust emergency fund is crucial. Ideally, this should cover 6-12 months of your living expenses, including health insurance premiums. You should aim to have around Rs 5-6 lakhs easily accessible in a liquid fund or savings account.
Health and life insurance: You mentioned that your parents' health insurance is part of your expenses, but ensure you have adequate health insurance for yourself, your wife, and your daughter. Since you are the sole breadwinner, having sufficient life insurance (term plan) is also essential. If you hold any LIC or ULIP policies, you can consider surrendering them if they are not performing well and reinvest the proceeds into mutual funds for better growth.
Rental Income – An Additional Asset
Your rental income of Rs 15,000 per month adds a nice cushion to your finances. You can consider reinvesting this amount in your retirement fund. This way, the rental income can grow over time and contribute to your future corpus.
Avoid Buying Another House for Investment
While buying another house for personal use is fine, purchasing it as an investment may not always be the best decision. Real estate is illiquid and can come with maintenance and tenant-related issues. Instead, directing that Rs 15 lakhs into mutual funds or balanced funds could offer better growth and flexibility for your financial goals.
Tax Planning
Tax-efficient investments: Since you are earning Rs 1.15 lakh per month, you fall in a higher tax bracket. You can save taxes while investing for your goals. Contributions to PPF, NPS, and ELSS funds help in this regard. However, be cautious of the lock-in periods, especially for PPF and NPS, which have long-term commitments. ELSS funds offer tax benefits and can be part of your retirement planning as they have a 3-year lock-in and offer the potential for good equity growth.
Utilise Section 80C: Ensure that you fully utilise the Rs 1.5 lakh deduction under Section 80C each year. This includes investments like PPF, life insurance premiums, and ELSS funds. You can also explore the National Pension Scheme (NPS), which offers additional tax benefits under Section 80CCD(1B) for contributions up to Rs 50,000.
Final Insights
Prioritise retirement planning: Focus on building your retirement fund before committing too much toward the purchase of another property. A well-structured retirement plan will give you peace of mind and financial security in your later years.
Balanced approach for both goals: Split your current savings between the new house and retirement in such a way that both goals are met. However, ensure that retirement takes precedence as you can always take more time to save for a second home if necessary.
Systematic investments are key: Start SIPs for your retirement and short-term investments for the house fund. This approach brings discipline to your savings and helps grow your wealth systematically.
Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
Setting Financial Priorities
Before diving into specifics, let’s outline your two main goals:
Save Rs 15 lakhs for a new home – You are looking to accumulate this amount in a relatively short time.
Build a retirement corpus – Retirement planning should begin right away since time is still on your side.
Balancing these two goals while keeping your family’s security in mind is key. This means ensuring that you save for your retirement without stretching yourself too thin while saving for the new home.
Saving for a New House
Since you wish to save Rs 15 lakhs for a new home, this can be approached with a focused saving and investment strategy.
Use your monthly savings: You are already saving Rs 50,000 per month, which is commendable. Consider allocating a portion of this towards your new home fund. Since you want to accumulate Rs 15 lakhs quickly, you may have to direct a significant portion of your savings toward this goal, at least temporarily.
High-return, short-term investment options: While it's important to prioritise safety, you can consider short-term debt funds or balanced funds. These funds generally offer higher returns compared to traditional savings accounts or fixed deposits, making them a suitable option for your home purchase fund. Avoid stock market-related products here as they are more volatile, and you don’t want to take on unnecessary risk for a short-term goal.
Time horizon for the house: Depending on how quickly you want to buy the home, you can adjust your savings. If you need the Rs 15 lakhs within 2-3 years, aim to save around Rs 40,000 per month toward this. The rest of your savings can be directed toward retirement.
Retirement Planning – The Core Focus
Now, retirement planning is more critical as this will secure your and your family’s future. You have around 17 years to build a sufficient retirement corpus. Here's how you can approach it:
Start with a clear retirement goal: Estimate how much you would need per month post-retirement. Your current expenses are Rs 45,000 per month. Assuming an inflation rate of around 6-7%, you would need a significantly higher amount at the time of retirement. Let’s assume you will need Rs 1 lakh per month when you retire. Based on this, you can plan how much you need to save every month.
Use actively managed mutual funds: Since you have a long investment horizon for retirement, you can take advantage of the power of equity. Actively managed equity mutual funds (not index funds) tend to outperform over the long run. A mix of large-cap, mid-cap, and flexi-cap funds would provide growth with some level of safety.
Regular SIPs: Systematic Investment Plans (SIPs) in actively managed funds are a smart way to invest for your retirement. Given that you can allocate a good portion of your Rs 50,000 monthly savings towards retirement, you could start SIPs in these funds. Aim for Rs 25,000 to Rs 30,000 per month towards SIPs for your retirement corpus. This disciplined approach will build a strong foundation for your retirement.
Avoid direct funds: You may be tempted to go for direct funds to save on expenses. However, investing through a Certified Financial Planner (CFP) who can guide you will often result in better management and advice tailored to your financial needs. Regular funds, managed by a professional MFD (Mutual Fund Distributor), can yield higher returns by helping you with fund selection, portfolio rebalancing, and tax-efficient strategies.
Diversify into balanced funds: To add stability to your portfolio, consider balanced or hybrid funds that allocate part of the investments to debt instruments. These funds reduce risk and offer more predictable returns, complementing your equity investments. As you near retirement, shifting a larger portion into these funds will help protect your capital while still offering growth.
Emergency Fund and Insurance
Maintain an emergency fund: With a wife and daughter depending on you, having a robust emergency fund is crucial. Ideally, this should cover 6-12 months of your living expenses, including health insurance premiums. You should aim to have around Rs 5-6 lakhs easily accessible in a liquid fund or savings account.
Health and life insurance: You mentioned that your parents' health insurance is part of your expenses, but ensure you have adequate health insurance for yourself, your wife, and your daughter. Since you are the sole breadwinner, having sufficient life insurance (term plan) is also essential. If you hold any LIC or ULIP policies, you can consider surrendering them if they are not performing well and reinvest the proceeds into mutual funds for better growth.
Rental Income – An Additional Asset
Your rental income of Rs 15,000 per month adds a nice cushion to your finances. You can consider reinvesting this amount in your retirement fund. This way, the rental income can grow over time and contribute to your future corpus.
Avoid Buying Another House for Investment
While buying another house for personal use is fine, purchasing it as an investment may not always be the best decision. Real estate is illiquid and can come with maintenance and tenant-related issues. Instead, directing that Rs 15 lakhs into mutual funds or balanced funds could offer better growth and flexibility for your financial goals.
Tax Planning
Tax-efficient investments: Since you are earning Rs 1.15 lakh per month, you fall in a higher tax bracket. You can save taxes while investing for your goals. Contributions to PPF, NPS, and ELSS funds help in this regard. However, be cautious of the lock-in periods, especially for PPF and NPS, which have long-term commitments. ELSS funds offer tax benefits and can be part of your retirement planning as they have a 3-year lock-in and offer the potential for good equity growth.
Utilise Section 80C: Ensure that you fully utilise the Rs 1.5 lakh deduction under Section 80C each year. This includes investments like PPF, life insurance premiums, and ELSS funds. You can also explore the National Pension Scheme (NPS), which offers additional tax benefits under Section 80CCD(1B) for contributions up to Rs 50,000.
Final Insights
Prioritise retirement planning: Focus on building your retirement fund before committing too much toward the purchase of another property. A well-structured retirement plan will give you peace of mind and financial security in your later years.
Balanced approach for both goals: Split your current savings between the new house and retirement in such a way that both goals are met. However, ensure that retirement takes precedence as you can always take more time to save for a second home if necessary.
Systematic investments are key: Start SIPs for your retirement and short-term investments for the house fund. This approach brings discipline to your savings and helps grow your wealth systematically.
Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
Asked on - Sep 17, 2024 | Answered on Sep 17, 2024
Dear Sir,
Sincerely thank you for your point by point illustration. have taken down those actionables and work towards them.
Regards
Anonymous
Ans: You're welcome! If you have any more questions or need further assistance, feel free to ask. Best wishes on your financial journey!
Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
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