Case 002Goal and retirement planningCore

A family needs Rs 50 lakh for a daughter's wedding in eight years and already holds gold jewellery and a fixed deposit. How much must they invest each month, and should the jewellery count towards the goal?

The situation

Sanjay and Pallavi Deshmane expect their daughter's wedding in eight years and estimate it will cost Rs 50 lakh at that time; they have already allowed for price rises. They hold Rs 10 lakh in a fixed deposit earning an illustrative 7% after tax, and gold jewellery worth about Rs 20 lakh, most of it family pieces handed down from Pallavi's mother.

They want one number: how much to invest each month from now. Assume the new money goes into a balanced mix expected, for illustration, to earn 10% a year, and that gold prices rise an illustrative 6% a year.

Your task

Work out the monthly investment with and without the jewellery, and decide which plan you would put in front of them.

Quick check

Should the Rs 20 lakh of jewellery count towards the wedding goal?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

Plan on about Rs 22,900 a month and leave the jewellery out. The deposit grows to about Rs 17.2 lakh, leaving Rs 32.8 lakh for monthly investments to build at 10%. Counting the jewellery cuts the SIP to about Rs 660, but only works if the family sells heirlooms in year 8, which families almost never do.

Step 1What does each asset they already hold grow to?

Start from what is already there, carried forward to the wedding date. The deposit compounds at 7% for eight years: Rs 10 lakh times 1.07 to the power 8 is Rs 17.18 lakh. The jewellery at an illustrative 6% would be worth Rs 31.88 lakh. On paper, the two together cover almost the whole goal, which is exactly why the question is a trap. The number that matters is not what the assets are worth, but what will be turned into cash on the day the caterer, the venue and the tailor send their bills.

Step 2How do you turn the gap into a monthly number?

Whatever the existing assets do not cover, monthly investments must build. At 10% a year, the monthly rate is about 0.797%, and Rs 1 invested at the end of every month for 96 months grows to about Rs 143.4. So the monthly amount is the gap divided by 143.4. A gap of Rs 32.82 lakh needs Rs 22,884 a month; a gap of Rs 0.94 lakh needs Rs 656.

The relationship
SIP=Goal−Deposit×1.078(1+i)96−1i,i=1.101/12−1\text{SIP} = \frac{\text{Goal} - \text{Deposit}\times 1.07^{8}}{\dfrac{(1+i)^{96} - 1}{i}}, \qquad i = 1.10^{1/12} - 1
GoalRs 50 lakh needed in year 8
Deposit x 1.07^8what the Rs 10 lakh deposit grows to, 17.18 lakh
imonthly return equal to 10% a year, 0.797%
96months until the wedding
What it says in wordsCarry every existing asset you will actually use forward to the goal date, and divide what is left by the future value of one rupee a month.
Same goal, same family: the jewellery decides the monthly numberCounting the jewelleryGoal: Rs 50 lakhDeposit grows to 17.2Jewellery counted: 31.9SIP must build 0.9Monthly SIP at 10%Rs 656 a monthOnly works if the jewelleryis sold for cash in year 8Rs lakh, year 8Excluding the jewelleryGoal: Rs 50 lakhDeposit grows to 17.2Jewellery: not countedSIP must build 32.8Monthly SIP at 10%Rs 22,884 a monthWorks whether or not thejewellery is ever soldRs lakh, year 8
Counting the jewellery at Rs 31.9 lakh leaves a SIP of only Rs 656 a month, while excluding it needs Rs 22,884 a month; the lower number holds only if the family sells the jewellery for cash in year 8.
Step 3Why does the jewellery not count?

Ask a direct question: in year 8, will you melt or sell these pieces to pay the wedding bills? In most families the honest answer is no. The heirlooms will be worn, and many will be given to the daughter. An asset funds a goal only if you are willing to sell it for that goal; everything else is wealth, not funding. Count the jewellery and the plan looks cheap for eight years, then leaves the family about Rs 32 lakh short in the final months, when the only fixes are a loan or a smaller wedding.

There is a useful middle path, and it changes the goal rather than the funding. If the family plans to give the daughter jewellery anyway and would otherwise buy new pieces as part of the Rs 50 lakh budget, the heirlooms reduce what must be bought. Jewellery that replaces a purchase lowers the goal; jewellery that is kept changes nothing. Asking which pieces fall in which group is the conversation that earns trust.

Step 4What else would you put in the plan?

Two things. First, a glide down in risk: with three years to go, start moving the accumulated money into short-term debt, so a market fall in year 7 cannot take a fifth off a fixed-date goal. Second, a review each year, because both the wedding estimate and the 10% return are assumptions. Say that limitation to the family plainly. If returns come in at 8% rather than 10%, the monthly number rises, and it is better to learn that in year 2 than in year 7.

Where candidates lose it

Candidates add up everything the family owns, see that Rs 10 lakh of deposit and Rs 20 lakh of gold compound to nearly Rs 50 lakh, and announce that almost no saving is needed. That is net worth arithmetic applied to a cash goal.

The other miss is forgetting to grow the existing deposit to the goal date. Subtracting Rs 10 lakh today from Rs 50 lakh in eight years mixes rupees from two different years and overstates the monthly figure.

What the interviewer asks next

  • The Rs 50 lakh is in today's prices and wedding costs rise 7% a year. What is the new monthly figure?
  • The family wants to add a lump sum from a bonus in year 3. How do you fold it in?
  • Would you use sovereign gold bonds for any part of this goal? Why or why not?

Company names and figures are illustrative.