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Continue Servicing Your Home Loan If There’s No Strong Non-Financial Reason To Prepay It

Investing in equity mutual funds via Systematic Investment Plans (SIPs) will enable you to seize the compounding power of the market and help achieve your long-term financial goals.

May 11, 2024
May 11, 2024
Maintain home loan payments In The Absence of Financial Crisis

Maintain home loan payments In The Absence of Financial Crisis

I am 30 and my wife is 28 years old. We have a two-year-old daughter. Our monthly household income is approximately Rs 3 lakh. We are looking to build a retirement fund of Rs 10 crore over the next 20 years. Additionally, we aim to accumulate Rs 2 crore for our daughter’s higher education expenses and wedding. Please suggest how much I should invest annually/monthly to meet our financial goals.

Ans. Assuming a conservative return of 10 per cent, you will need to invest about Rs 1.5 lakh each month to accumulate a corpus of Rs 10 crore over the next 20 years. Assuming your daughter starts college at 18, you will need to invest about Rs 50,000 per month. Thus, the total monthly savings need to be Rs 2 lakh, and since both the retirement and the education goal are long-term, you can comfortably use equity mutual funds to start systematic investment plans (SIPs). If you want to reduce equity risk in your portfolio, add the Public Provident Fund (PPF) to your retirement corpus and Sukanya Samriddhi Yojana to your daughter’s education corpus. It is important to verify if the required retirement corpus is indeed Rs 10 crore. Based on preliminary analysis, for an inflation-adjusted retirement income of Rs 1.5 lakh, you may need a retirement corpus of more than Rs 15 crore if you want to retire at age 50.

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Also Read: How Does Taxable Income Be Calculated For Seniors Seeking Exemption From ITR Filing?

I am a retired senior citizen (62) living with my wife (59) and son’s family. Our son is the sole breadwinner. Currently, we are burdened with a home loan of Rs 60 lakh. Our household income is Rs 30 lakh per annum. Given these circumstances, please advise us on an investment plan that not only ensures financial stability but also addresses our long-term goals. We would also want to build a sufficient corpus fund for health emergencies.

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Ans. It is generally a good idea to be debt-free, but a home loan is acceptable, given that it is used to acquire an appreciating asset. Unless there is a strong non-financial reason to prepay the loan, you can continue servicing the loan and take benefit of the tax breaks associated with a home loan. The decision on the home loan also depends on your investment portfolio. The typical home loan interest is 8 per cent, and for a portfolio that consists of equity investments, the return from equity can offset the interest cost of the home loan. Given that both you and your wife are retired, and your son is the only breadwinner, it is important to build financial assets that can fund your retirement and your son’s future financial goals. The annual household income as a percentage of the outstanding loan is 50 per cent, which is a good ratio to have and does not indicate stress. For health emergencies, it is strongly advised that you procure good health coverage for you and your wife. Your son can take a separate cover. On top of the health cover, you can start a monthly recurring deposit of Rs 10,000 to build an emergency cover.

My father, who is 58 years old, has been living with me, my wife, and our 5-year-old son in Dubai for the last 10 years. We don’t have any loans, and we own a house in India that’s worth Rs 2 crore. This house has been rented out. My father has a health insurance policy of Rs 25 lakh for himself in India. I am interested in purchasing a term insurance plan for us from India. I am not sure whether to take a plan of Rs 1 crore or two individual term plans of Rs 50 lakh each – one for me and one for my wife. Additionally, I am unsure about the ideal term period for these plans. Please advise on what would be the ideal coverage in this case.

Ans. To decide on the term insurance amount, you need to analyse income replacement. The term insurance amount one needs will be the sum of the discounted value of the income that the individual’s family will forego if something happens to them. Essentially, the term insurance cover will replace the human economic value of the insured to their dependents. Whether you or your wife should take the full Rs 1 crore cover or split it between both of you depends on who is dependent on whom. Life insurance should be taken by the individual who has dependents. If both of you are dependent on each other, both of you should take life cover. A crude way to estimate the life cover required is to assume that the beneficiary of the cover will put the entire money received in fixed deposits and earn 7 per cent, per annum. interest income. You can adjust the life cover depending on whether this interest income is sufficient for your dependents. Note that this approach does not consider that future interest income for dependents should increase with inflation. Hence, a more detailed analysis is required.

Also Read: 5 ‘Samajik Suraksha’ Pension Schemes To Explore For Retirement


The author is a CFA, a Sebi-registered investment adviser (RIA), and co-founder of www.samasthiti.in, a financial advisory platform.
 

Send your queries to letters@outlookindia.com to get them answered by our expert.

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