Case 028Goal and retirement planningWarm up

A 32-year-old earning Rs 12 lakh a year has Rs 3 lakh in savings, no life cover and a dependent mother. What are her first four priorities, in order?

The situation

Aditi Parulekar is 32, single, and works for a logistics company in Pune on Rs 12 lakh a year. After tax and provident fund she takes home an illustrative Rs 85,000 a month. The household spends Rs 50,000 a month, including her widowed mother's living and medical costs. She has Rs 3 lakh in a savings account and no investments.

She has no life cover. Her employer gives group health cover that ends when she leaves the job. She wants to start investing because friends are talking about mutual funds.

Your task

Set her first four priorities in order, size each one, and say how much she can invest each month once they are in place.

Quick check

What comes first for Aditi?

Worked solution

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

30-second answerThe answer to give first

Reserve, term cover, health cover, then investing. Top the reserve up from Rs 3.0 lakh to about Rs 4.5 lakh, nine months of spending. Buy term cover of about Rs 75 lakh, because her mother depends on her income. Buy personal health cover for both, since the employer's lapses with the job. Then invest the surplus, about Rs 32,000 a month, which the reserve top-up borrows for its first five months.

Step 1Why does protection come before growth?

A family that buys a car before fixing a leaking roof ends up selling the car when the monsoon arrives. Investments made without a reserve and cover become the reserve and the cover, and they get sold at whatever price the market offers on the day of the shock. For Aditi, the shocks that matter are a job gap, a hospital bill and, worst, her own death, which would leave her mother with no income. Each gets a named defence before the first SIP.

Protection first, then growth: four questions in order1. Does the reserve cover 9 months of spending?No: Rs 3.0 lakh held, Rs 4.5 lakh neededTop up Rs 1.5 lakh first2. Would anyone lose income if she died?Yes: her mother depends on herTerm cover, about Rs 75 lakh3. Would a hospital bill empty the reserve?Yes, if cover ends with the jobPersonal health cover, both4. Is every protection box ticked?YesInvest about Rs 32,000 a month
Aditi's order runs reserve, term cover, health cover, then investing: the reserve needs Rs 1.5 lakh more to reach nine months of spending, her mother's dependence calls for term cover, and employer health cover ending with the job calls for personal cover.
Step 2How big should each protection be?

Reserve: nine months rather than six, because she is the only earner and her mother cannot absorb a gap. Nine months of Rs 50,000 is Rs 4.5 lakh, so she needs Rs 1.5 lakh more. Term cover: size it to what her mother would lose, not to a multiple of salary. If her mother needs about Rs 25,000 a month for 25 years, and the payout earns 2% a year above inflation, the present value is Rs 3.0 lakh a year times 19.5, about Rs 58.6 lakh. Rounding up to Rs 75 lakh leaves room for medical costs, which rise with age.

The relationship
Cover≈3.0×1−1.02−250.02=3.0×19.52≈58.6 lakh\text{Cover} \approx 3.0 \times \frac{1 - 1.02^{-25}}{0.02} = 3.0 \times 19.52 \approx 58.6\text{ lakh}
3.0her mother's yearly need, Rs lakh
0.02the assumed return above inflation on the payout
25years of support to fund
What it says in wordsThe cover is the lump sum that, invested, would pay her mother's yearly need for 25 years.
Step 3What does the monthly plan look like once the order is set?

Premiums come first because they are small and the cover matters from day one. At illustrative premiums of Rs 9,000 a year for term cover and Rs 30,000 for a family health policy, confirmed with real quotes, protection costs about Rs 3,250 a month. That leaves about Rs 31,750 a month: it tops up the reserve in about 5 months, and then the same amount becomes her SIP. The investing starts later than her friends', and it starts on ground that will hold.

MonthProtection premiumsTo reserveTo SIP
1 to 53,25031,7500
6 onwards3,250031,750
Rupees a month from a surplus of Rs 35,000. The reserve reaches about Rs 4.5 lakh by month five, after which the whole surplus after premiums goes to investing.

Where candidates lose it

Candidates jump to the investment mix, equity funds and SIP amounts, because that is the part that sounds like wealth management. The interviewer wanted to hear the word dependant and see cover sized to it.

The second miss is sizing life cover as ten times salary without asking who would need the money. The honest method starts from the mother's yearly need and works back to a lump sum.

What the interviewer asks next

  • Aditi's employer offers group term cover of three times salary. Does she still need her own policy?
  • Her mother is 62. How does that change the health cover conversation?
  • Should the reserve sit in a savings account, a sweep deposit or a liquid fund?

Company names and figures are illustrative.