Financial Planning for Salaried Employee – Sample Plan for Family

Till now, I have written a lot of articles on retirement planning. People usually ask me why I take examples of 1 Crore accumulation in PF or 2 crores in mutual funds. Can you create a sample financial plan for a family with a simple example of financial planning for salaried employee in India?

Also Read: Fire Retirement in India with Calculator

So, here we go!

Financial Planning for Salaried Employee

Let`s create a sample financial plan for an individual in India with the Simple Example of a salaried person.

Ajay is a 35-year old, married and having 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

1. Accumulated Amount in PF – 8 Lakhs
2. Monthly Basic Salary – Rs. 60,000
3. Monthly PF Contribution –
   1. Employee PF Contribution -Rs. 7200
   2. Employer PF Contribution – (Rs. 7200 – Rs. 1250) = Rs. 5950
   3. Total PF Contribution – Rs. 13,150
4. Annual Expected hike in basic pay – 5%
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 funds 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.

Also Read: PPF Withdrawal Rules

At this particular point of time, these are the only assets that Ajay has in his possession.

Since Ajay is living along 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 commercial property for investments.

Monthly Expenses

Here is the list of Ajay’s monthly expenses.

• Household expenses – 40000
• Personal Care Expenses – 10000
• Other Expenses – 10000

Surplus Available For Fresh Investments

The Monthly Surplus available for fresh investments is – 30000. 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 (All figures are in accordance with today`s cost trends.)

• Child Higher Education after 10 years – 20 lakhs
• Child 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

Also Read: Best Plan for Child Education and Marriage

Here are some of the possible assumptions regarding life expectancy, inflation, returns during accumulation and withdrawal phase.

Financial Planning for Family – Sample Plan

Insurance Requirements

Before calculating the total needed amount for various goals, let us cover up the basics. This is so because in case of unfortunate event 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 a child’s higher education and marriage goals of 30 Lakhs, the total requirement would be 280 Lakhs. Presently, He owns assets worth 24 Lakhs (PF+PPF+Mutual funds+Emergency Fund). So, here the net requirement would be 256 Lakhs.

On this account, Ajay can go for a term insurance cover of 2.5 Crores.

Also Read : Term Insurance FAQs 

Health Insurance Amount

Ajay can opt for a family floater health insurance cover of 30 Lakhs. This amount can be divided into base policy cover of 5 Lakhs and a super top-up cover of 25 Lakhs. (With 5 Lakhs deductibles.)

Though Ajay has a cover of 5 Lakhs through his employer, this 30 Lakhs is to ensure decent health cover for the post retirement days or any job change etc.

Ideally, both the covers should be bought from the same insurer as it helps in easy and convenient claim settlement.

Also Read : Best Super Top Up Plans in India

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 cover in the coming future with a super top-up policy.

Now let’s take a look at the calculations related to the various goals of Ajay.

Child Education

Child Marriage after 20 years – 10 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 in 100% 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 advise able to go for 100% equity. Ajay can invest 50% in equity and the remaining 50% in debt instruments. Assuming a total 9% returns 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 Marriage

Child Marriage after 20 years – 10 lakhs

Value of 10 Lakhs after 20 years at 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 in 100% equity mutual funds, the amount required would be 5,000 per month assuming 10% returns.

Since the duration of his goal is 20 years, it would be more profitable to invest 100% in equity.

You can also ask as to 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 Funds investments are good for 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:

1. Ajay will get around 185 Lakhs from his PF accumulation. This is based on the assumption of 5% increment in PF account every year and 6% interest rate for 25 years.
2. 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.)
3. 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 the amount of 24,000?

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%. Please take a look at the table.

It’s true that re-balancing would be required when the goal approaches nearer. But at this point in time, we can increase the equity part.

Now, the total investment required for various goals is 61,500, in addition to PF. Ajay has a surplus of 62,500 per month along with current SIPs and PPF.

What About The Other Goals?

• Commercial Property after 10 years – 30 Lakhs
• Vacation every year – 50,000
• Vehicle – 5 Years – 6 Lakhs

After investing for child 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.

For vehicle and vacation – Invest the surplus in debt funds/RD/FD.

Whereas the commercial property- investment can be done in a mix of equity and debt funds.

For the above-mentioned investment:

Ajay can use a mix of the index fund, multi-cap fund and mid-cap fund for equity mutual funds. Besides, 1 or 2 debt funds can be set aside solely for debt mutual funds.

Also Read : Best Large Cap Mutual Funds in India

Also Read: Best Mid Cap Mutual Funds in India

Having gone through this financial planning for a salaried employee, what is your view? Please feel free to share your opinions with us.