This article shows how a very typical salaried couple with one child can invest for future goals using the Arthgyaan goal-based investing tool.
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Introducing the investors
Personal details
Karthik and Gayathri, husband and wife, age 47 and 40, respectively residing in a major metropolitan city in India
First child Adarsh, age 10, boy
Second child Saanvi, age 6, girl
Income: 2L/month, post-tax in-hand from salary including EPF
This is a single income family since Gayathri is on a career break
Monthly expense: ₹84k/month including annual payments like insurance
Karthik and Gayathri are joint homeowners. They stay in their own house
No home, education or personal loans
Credit card dues: none
Existing assets and investments
EPF: ₹14L in EPF
PPF: ₹12L in PPF
Banks / post office: ₹25L in different schemes, ₹10L in FD
MF: ₹65L in equity MF
Land: ₹25L is the current value of a plot owned by the family
Investment property: ₹60L rented apartment in the same city getting ~2%/year rent
The total market value of these assets:
equity assets: ₹65L
debt assets: ₹73L (investment apartment and plot are included here)
cash assets: ₹13L
total asset value is ₹151 lakhs (the market value of their primary residence is excluded from this total)
Pre-requisites before you start investing
To build a house, you need to first build a strong foundation
Goal-based investing requires completing some steps to ensure that the investment plan is seamlessly executed without breaks due to unforeseen circumstances. We will follow the steps described here: I have heard of goal-based investing. What now?
Risk profiling
Risk profiling is a mandatory step that should be completed before investing in goals. A portfolio created for a goal has one purpose: to meet the goal. Therefore, we need to balance risky assets that generally appreciate fast (like equity) and slow-growing assets that provide stability (like debt). The tool that is used to determine this mix of investments is risk profiling. Risk profiling, if not done, leads to a high chance of missing the goal. Being invested in the wrong asset class in the wrong proportion (either equity or debt) can lead to either high risk or poor returns or worse both.
A minimum of 6 times total monthly expenses and EMI, which is ₹84k x 6 = five lakhs. They should keep ideally this amount in a joint bank account with sweep FD. Both spouses should have debit cards and net banking access to this bank account to get immediate access in terms of need.
However, in this case, they have ₹10 lakhs in FD. This amount together with high-value credit cards will easily cover standard emergencies.
As expenses increase or the emergency fund is used up, the current month’s investments should be diverted until the fund is rebuilt.
Term insurance
Karthik has a personal term insurance policy of ₹1.5 crores.
As we will see below, this coverage amount is not enough considering their goals. Given the value of their goals today, they need at least ₹2.7-3 crores of insurance (the model shows ₹2.6cr) between them. Karthik should take another ₹1.5 crore term life policy costing around ₹35,000/year. It will be a good idea to cover Gayathri with a ₹1 crore term policy as well in case she decides to resume working.
Any existing medical conditions must be declared at the time of taking the policies and there must be a physical medical test.
There should generally be the following policies that a family should have at a minimum:
corporate group insurance for salaried employees covering all family members »> They have a ₹5L plan
personal family floater of ₹20 lakhs covering self, spouse and child along with a super top-up plan » they have a ₹10L family floater policy with a ₹20L super-top up from the same insurer
The family needs to increase their base coverage to ₹20L and take an additional ₹80L-1 crore super-top-up health insurance policy
The purpose of the personal accident (PA) insurance policy is to provide a replacement for your income if you have an accident and cannot work after that. Unlike term insurance, where claims are paid on death, a PA cover is applicable when one of the following is the result of an accident:
accidental death
temporary or permanent partial disability
temporary or permanent total disability
The family should therefore take a ₹1 crore personal accident insurance cover for Karthik for around ₹30,000/year
Pay off high-interest loans
Fortunately, the family has no high-interest loans like credit cards or personal loans.
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To know how much you can invest for goals (the investible surplus), you need to classify and figure out approximately the major monthly expense heads under the three main buckets below:
mandatory: rent/EMI, food, school fees, electricity/mobile bills etc.
save-to-spend: these are used for the sinking fund that is used to pay for hefty annual expenses like insurance premiums, festival gifts and travel by saving for them every month
Setting financial goals
Having clear financial goals is the first and vital step before investing. We will use the SMART framework to write down goals:
Specific: Why do you need the money?
Measurable: How much money do you need?
Achievable: Can you do it? Do you need help?
Realistic: Can you reach this target based on where you are?
Time-bound: When do you need the money? Is the timing flexible?
We will assume that the family can increase its investments by 7% every year via upskilling and improving their human capital: Your human capital, not investment returns, is your biggest wealth creator. Given the importance of human capital, the family should allocate an upskilling line item in the monthly budget. The family can use this for courses, books and other related purposes.
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Retirement
The SMART framework is applied like this:
Specific: To retire from active service for both spouses. In retirement, the lifestyle required is expected to cost ₹6.75L in today’s money. We assume 7% inflation both in the pre and post-retirement phase. At this inflation level, expenses double in 10 years
Measurable: The target corpus is ₹6.5 crores which is what should be accumulated by the point retirement starts
Realistic: The SIP amount per month for retirement is something the family can invest, given their income and expense levels
Time-bound: The plan is to retire in 15 years when Karthik is 62 years old and targets a total of 40 years in retirement. Given that Gayathri is 40 years old today, this plan provides for her up to age 95
Child goals: education and marriage
Children’s goals are very precious for a family. However, given the much shorter horizon for purposes like a UG degree, the monthly investment amount can be surprisingly higher.
Specific: Adarsh and Saanvi’s UG and PG degrees, and marriage
Measurable: In today’s money, these goals add up to ₹30 lakhs per child
Realistic: The model’s output for this goal shows that both the children’s goals are already funded
Time-bound: The goals are spaced out over multiple horizons over the next 20 years
Other goals
Gold purchase: Gayathri plans to accumulate gold for Saanvi’s marriage. This amount can come from monthly income as we will see below.
Derivation of investment amounts
(click to open in a new tab)
The table shows the SIP amounts split amongst different goals and the portion of the current corpus allocated to each goal. Investors have two approaches to investing:
We use the Arthgyaan Goal-based investing calculator to formulate the investment model with all the above assumptions and goals. There is a link to download a pre-filled copy of the Google sheet via the button below.
Important: You must be logged into your Google Account on a laptop/desktop (and not on a phone) to access the sheet.
Once you get your sheet, you can access video tutorials in the howto tab.
Here are some case studies using the tool (click the image below)
SIP amounts and split between goals
(click to open in a new tab)
Where to invest?
For most investors, this is the most critical question. It is a variation of finding the ‘best’ of everything: the best mutual fund, PMS service, insurance policy, etc. However, if you have followed the process until now, you will realise that coming to this stage is the very end of the goal-based investing strategy.
We will keep this simple with some typical investments that the family can follow and should be sufficient for their purpose.
Debt asset class: Apart from the NPS and provident fund investments already in place, the family can explore debt mutual funds: How to choose a debt mutual fund?
Cash asset class: For goals within three years and the emergency fund, a savings bank with sweep FD or a regular FD/RD is sufficient. For purposes beyond three years, please use the same debt funds as per the debt allocation above.
Additional investment in Provident fund: Apart from the mandatory investments via EPF, the family should refrain from additional investment in VPF. Given the long time horizon of the goals, a high allocation to equity is critical.
Insurance mixed with investment: ULIP, endowment, and related mixed products should be avoided due to high commissions, opaque structure, low returns, and lock-ins.
Current prices of goals change, or new goals are added/old goals removed
These factors will require a portfolio review exercise every 6-12 months. Then, the process goes through the above steps: goal setting, capturing current asset values, and feeding them into the model to recalculate the numbers. The concept is explained here: Are your investments on track for your goals?
Rebalancing plan
(click to open in a new tab)
This section shows the current and target asset allocations for equity, debt and cash. The action on the investor will be to immediately implement the rebalancing plan as shown in the image.
Practical considerations
Moving to cash
The plan requires that a good amount of the cash holding be moved to equity today using the Arthgyaan Have-vs-Need framework (image above) whose output we have seen in the rebalancing plan section.
Many investors have a lot of doubts as to the best way of moving a sum from cash to equity. In the bigger scheme of things, any sort of tactical market timing has no impact on future returns solely because once the full amount is invested, it is now exposed fully to market movements: SIP vs. lump sum: what should I choose?. In this case, the Karthik can divert his entire investible surplus into equity until the equity gap is filled.
SIP amount required is in line with the investible surplus
The family has an in-hand income of ₹2L/month (excluding the rent from the second home) and spends ₹84,000/month (including the sinking fund). These expenses leave them with an investible surplus of ₹1.28L/month which is more than sufficient as per the model output.
In this case, the family is doing well in creating and following a goal-based investment process and they should continue it.
Investing for the child’s first home
We are a big advocate of both
not having investments in real estate beyond the primary residence
investing for the goal of funding the down payment of the first house purchase of the child
This position is due to our opinion that real-estate investments, after buying the primary residence, should be attempted only after primary goals (retirement / FIRE, children-related etc.) are fully funded vs. market-linked assets like stocks and bonds. We are also seeing a rapid increase in real estate in major metro cities. We have made our case on this topic in detail here: Why parents should invest for the downpayment of their child’s first home?.
Dealing with extra investible surplus
This family is currently in a position where their goals are well funded and on track with an extra investible surplus. The family should consider investing the surplus:
assuming that children’s college education goals will be more expensive
both the children will require additional support once they start earning and require homes as we mentioned above
Gayathri has an opportunity to either get back to the workforce or start a home business once the children become bigger. This plan de-risks the cash flow from the income of Karthik and some home businesses can be started even today
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This post titled Case study: how can this middle-aged investor with two children plan for retirement and children's goals? first appeared on 11 Jun 2023 at https://arthgyaan.com
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