If you ask this question to those having children, they will surely put Child’s Marriage as their priority. Yes, in our country, we spend a lot of money for Child’s Marriage and Child’s Education. But which is of top priority?
Let us take the example of a middle-class family spending around Rs. 20,000 per month on household expenses. The family includes the following persons:
Husband – aged 38, Wife – aged 35, Son – aged 10 and Daughter – aged 8.
Let us try to visualise the future financial goals for this family. All costs are in today’s value.
- Higher Education expenses of Rs. 10 Lakhs at age 18 for the son
- Higher Education expenses of Rs. 10 Lakhs at age 18 for the daughter
- Marriage expenses of Rs. 5 Lakhs for son at age 26
- Marriage expenses of Rs. 10 Lakhs for daughter at age 25
- Retirement at age 58, with a monthly provision of Rs. 20,000 in today’s value
In the next 8-10 years, the family should plan for higher education of children. They should also plan for their marriage in the next 16-17 years. After 20 years, the retirement planning is also required.
Let us do the Retirement Planning first and see how much amount is required after 20 years.
The future value of Rs. 20,000 monthly expenses even at a modest inflation rate of 6% will be Rs. 64,000 after 20 years.
To ensure the inflation adjusted cash flow of this Rs. 64,000 for the next 25 years (till the wife is aged 80), the amount required will be around Rs. 1.7 Crore. Investment return after retirement is assumed at 1% above inflation.
Assuming a retiral benefit of Rs. 50 Lakhs at age 58, he should plan for the balance Rs. 1.2 Crore after 20 years.
How he can plan the retirement?
He can invest Rs. 1 lakh per year in PPF. This can contribute around Rs. 40 Lakhs assuming a return of 7% throughout the 20 years. He can create the balance Rs. 80 Lakhs by investing Rs. 9,000 per month in good performing Mutual Funds. With PPF and SIP, his monthly savings target will be Rs. 17,333.
Children’s Higher Education
He wants to provide Rs. 10 Lakhs in today’s cost for the higher education of both the children. The value of this with 10% inflation will be Rs. 21 Lakhs and Rs. 26 Lakhs after 8 years and 10 years respectively. He should invest Rs. 13,500 and Rs. 12,000 per month assuming an annual return of 12%.
With 8% inflation, the value of the requirement for marriage will be Rs. 17 Lakhs after 16 years for son and Rs. 37 Lakhs after 17 years for daughter. He should invest Rs. 3,000 per month for son and Rs. 6,000 for daughter.
How much is his cash flow?
His savings target for retirement is Rs. 17,333 and that for children’s higher education is Rs. 25,500 and that for their marriage is Rs. 9,000. This comes to Rs. 51,833.
With a Home Loan EMI still running and very low annual increments in the past 5 years, he finds it difficult to manage Rs. 51,833 per month towards these important goals. At best, he can now save around Rs. 20,000 per month.
What is the next option?
The best option for him will be to assign priority for each goal and then plan for it. Among the 3 main goals, he can plan for an Education Loan for higher education. He or his children can plan for a Personal Loan for their marriage. But can he think of any Retirement Loan for his retirement? No bank will ever think of such a loan!
Retirement Planning or Child’s Marriage – Which is your priority?
Hope you are clear now, why you should take retirement planning seriously. High rate of inflation is making the life of retired people miserable. A low return on fixed income products is another concern for them. With improvement in healthcare facilities, the cost of healthcare is sky rocketing. Social spending, travel etc is adding to their worries.
Retirement Planning should be your top priority, all other goals can wait. When you can start planning for the retirement? The earlier, the better. If possible in the first year of your job itself!