I have written many articles on term insurance, health insurance, and retirement planning. A few of my readers have previously asked me – Can you create a sample financial plan for a family with a simple example of financial planning for salaried employees in India? So, here we go!
About the author: Ajay Pruthi is a fee-only SEBI registered investment advisor. He can be contacted via his website plnr.in.
Financial Planning for Salaried Employees
Let`s create a sample financial plan for an individual in India with the Simple Example of a salaried person.
Ajay is 35 years old, married, and has a 7-year-old son. He works in a corporate and earns a decent salary. His wife is 3 years younger than him. Ajay’s income and Provident Fund details are as follows:
Salary & PF Details
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- Accumulated Amount in PF – 8 Lakhs
- Monthly Basic Salary – Rs. 60,000
- Monthly PF Contribution –
- Employee PF Contribution -Rs. 7200
- Employer PF Contribution – (Rs. 7200 – Rs. 1250) = Rs. 5950
- Total PF Contribution – Rs. 13,150
- Annual Expected hike in basic pay – 5%
- Eligible for Gratuity – Yes
Since Ajay has been working for the last 8-9 years, he has accumulated a few assets. The details of which are as follows:
- PPF Account- the Accumulated amount of 7 Lakhs with an annual contribution of 1.5 Lakhs.
- Mutual fund investments of 3 Lakhs with a monthly SIP of 20,000 in direct plans.
- 6 Lakhs in Savings Bank/FD/Liquid Funds account for an emergency.
At this particular time, these are the only assets Ajay has in his possession.
Since Ajay is living with his parents, he will get the ownership of the house as an inheritance. For this reason, he is not interested in buying a house. Nonetheless, he is planning to purchase a commercial property for investments.
Monthly Expenses
Here is the list of Ajay’s monthly expenses.
- Household expenses – 40,000
- Personal Care Expenses – 10,000
- Other Expenses – 10,000
Surplus Available for Fresh Investments
The Monthly Surplus available for fresh investments is – 40000. This is in addition to the ongoing SIPs of 20,000 and PPF of 12,500 per month.
Goals
Here is the list of Ajay’s goals
- Child`s Higher Education after 10 years – 20 lakhs
- Child`s Marriage after 20 years – 10 Lakhs
- Retirement Expenses – 50,000 per month
- Commercial Property after 10 years – 30 Lakhs
- Vacation every year – 50,000
- Vehicle – 5 Years – 6 Lakhs
Here are some of the possible assumptions regarding life expectancy, inflation, and returns during the accumulation and withdrawal phase.
| Assumptions | |
| Retirement Age (Years) | 60 |
| Longevity Age (Years) | 85 |
| Retirement Expenses per month | Rs. 50,000 |
| Higher Education (In Lakhs) | 20 |
| Marriage (in Lakhs) | 10 |
| Education Inflation | 8% |
| General Inflation | 6% |
| Return from Equity | 12% |
| Return from Debt & Real Estate (Long Term) | 6% |
| Return from Retirement Kitty | 1% above inflation |
Financial Planning for Family – Sample Plan
Insurance Requirements
Before calculating the total needed amount for various goals, let us cover the basics. This is because, in case of unfortunate events of death, medical emergencies, or disability, these goals are not impacted.
Life Insurance Amount
With monthly expenses of 50,000/- the insurance requirement would be 250 Lakhs. Considering the child’s higher education and marriage goals of 30 Lakhs, the total requirement would be 280 Lakhs. Presently, Ajay owns assets worth 24 Lakhs (PF+PPF+Mutual funds+Emergency Fund). As such, the net requirement in this case would be 256 Lakhs.
On this account, Ajay can go for a term insurance cover of 2.50 Crores.
Health Insurance Amount
Ajay can opt for a family floater health insurance cover of 50 Lakhs. This amount can be divided into a base policy cover of 10 Lakhs and a super top-up cover of 40 Lakhs. (With 10 Lakhs as deductibles.)
Though Ajay has a cover of 5 Lakhs through his employer, this 50 Lakhs is to ensure decent health cover for the post-retirement days or coverage during job change etc.
Ideally, both the covers should be bought from the same insurer as it helps in easy and convenient claim settlement.
Personal Accidental Policy.
Ajay can opt for a cover of 1 Crore with 20 lakhs total temporary disability cover. It should only be bought from a general insurance company and not as a rider in term insurance products.
Riders in life insurance companies usually do not cover Total Temporary Disability and Permanent Partial Disability.
Critical Illness Policy
Since Ajay does not have a family history of any critical illness, there’s no need for any critical illness policy. Instead, Ajay can increase his health insurance coverage in the future with a super top-up policy.
Now let’s take a look at the calculations related to the various goals of Ajay.
Child`s Higher Education
Child`s higher education after 10 years – 20 lakhs
Value of 20 Lakhs after 10 years at 8% inflation rate – 43 Lakhs
How much does Ajay need to invest in order to achieve the target amount of 43 Lakhs after 20 years?
If he invests 100% in equity mutual funds, the amount required would be 21,000 per month assuming 10% returns.
Since the duration of his goal is less than i.e. 10 years, it is not advised to go for 100% equity. Ajay can invest 50% in equity and the remaining 50% in debt instruments. Assuming a total 9% return of combined equity and debt, Ajay would need to invest 23,000 per month. The amount would be invested in equity and debt mutual funds in the ratio of 50:50.
Child`s Marriage
Child`s Marriage after 20 years – 10 lakhs
Value of 10 Lakhs after 20 years at a 6% inflation rate – 32 Lakhs
How much does Ajay need to invest in order to achieve the target amount of 32 Lakhs after 20 years?
If he invests 100% in equity mutual funds, the amount required would be 5,000 per month assuming 10% returns (4,500 per month to be precise)
Since the duration of his goal is 20 years, it would be better to invest 100% in equity.
You can also ask why the 3 Lakhs in mutual funds have not been used here. Yes, the amount of 3 Lakhs can be used in either child education or marriage. Now, we know that the retirement duration is 25 years and Mutual Fund investments are good for the long term. We will use the same in retirement planning.
Retirement Planning
The monthly amount to be provided in current value: 50,000, Retirement Age – 60
Value of 50,000 after 25 years on retirement @ 6% inflation: 2.15 Lakhs per month.
This has to continue till Ajay’s wife turns 85, around 28 years. (Assuming longevity of 85 for this calculation).
Assumed investment return post-retirement period is 1% above inflation.
The Corpus required for this would be somewhere around 6.30 Crores.
Ajay can plan the accumulation of this amount as follows:
- Ajay will get around 185 Lakhs from his PF accumulation. This is based on the assumption of a 5% increment in PF account every year and 6% interest rate for 25 years.
- If he invests 1.5 Lakhs every year in his PPF account, he’d get around 112 Lakhs at age 60. (Assuming that he will invest the amount at the end of the year.)
- As he already has 3 Lakhs in mutual funds, assuming 10% returns on this investment, he’d get around 33 Lakhs.
The above-mentioned investments lead to a total of around 330 Lakhs. Out of which, only 33 Lakhs is in equity i.e. 10% in equity and 90% in debt.
The remaining amount required for Ajay’s retirement is 300 Lakhs.
The monthly investment required to achieve 300 Lakhs in 25 years is 24,000 assuming 10% returns in the long run. (Gratuity would be extra at the time of retirement)
Do we need to invest anything in debt apart from PF and PPF?
Since the time to achieve the goal is 25 years, the answer to this question is no.
Plus, the debt part is close to 50%.
Re-balancing would indeed be required when the goal approaches nearer. But at this point in time, we can increase the equity part.
Ajay can achieve his vacation goal by investing 4,300 per month in RD.
The total investment required for various goals is 68,800, in addition to PF. Ajay has a surplus of 72,500 per month along with current SIPs and PPF.
The insurance premium can be paid from the remaining surplus amount.
What About Other Goals?
- Commercial Property after 10 years – 30 Lakhs
- Vehicle – 5 Years – 6 Lakhs
After investing in child`s education, marriage, and retirement goal, no surplus would be left. The only option left is to invest the annual bonus or any other remaining surplus for these goals. Otherwise, it is better to postpone the goals until enough funds are accumulated.
As the investments are fixed, Ajay will grow in his career, and he may be able to invest for his goals in the future. The other option can be to keep increasing SIP for a child’s education, marriage and retirement goals and start investing for vehicle and commercial property goals.
There can be various solutions to financial planning depending on the priorities of goals.
For vehicle – Invest the surplus in debt funds/RD/FD.
Whereas, for commercial property – Investment can be a mix of equity and debt funds.
Investment for different goals:
Ajay can use a mix of the index fund, flexi cap fund, and mid-cap fund for equity mutual funds. Besides, 1 or 2 debt funds can be set aside solely for debt investments.
I trust that this article has provided you with valuable insights into a financial planner’s approach to financial planning for a salaried employee. Although each planner may bring their unique perspective or individual touch, the overall process of financial planning typically follows this framework.
Please feel free to share your opinions with us.
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