Page 175 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Personal Financial Planning

Notes
Lump sum expenses
The possible lump sum expenses of Yashpal, in terms of today’s prices, can be broken
down as follows:

Children’s Education (`) 2,00,000
Children’s Marriage (`) 4,30,000
Others (`) 1,00,000
Total (`) 7,30,000
Therefore, the lump sum expenses adjusted for inflation when Yashpal retires at the age of
60 would be
= ` 7,30,000 x (1 + 5%) 20
= ` 19,36,907

Total expenses
To calculate the total amount needed by Yashpal to finance both his monthly as well as
lump sum expenses, we make the following assumptions:

1. Funds will be required for 20 years after retirement as Yashpal’s expected life is 80
years
2. The return on post-retirement funds to be at 9 per cent p.a. with Yashpal striking a
balance of safe and aggressive investments (earning 4 per cent above the inflation
rate of 5 per cent p.a.)
After calculation, the amount needed on retirement by Yashpal will be:

Retirement Funds Required (Age: 60 years)
Amount for lump sum expenses (`) 19,36,907
Amount for monthly expenses for expected life (`) 1,24,65,352
Total amount required (`) 1,44,02,259
Investing in a property

We saw that Yashpal needs a total amount of ` 1.44 crore on retirement (60 years). This
amount is to be generated by a property investment. This means, a house Yashpal will buy
today should be worth ` 1.44 crore at the time of its sale (at Yashpal’s retirement age).

1. Time for investment 20 years
2. Property appreciation 5 per cent p.a. (at inflation rate)
3. Funds needed for retirement ` 1.44 crore

We assume that Yashpal invests in a property worth ` 50 lakh today. Now, let us analyse
the kind of investment it would mean for him given the following facts:
1. Yashpal takes a home loan to buy ` 50-lakh house, after making a down payment of
` 10 lakh (approx.)
2. Loan duration – 20 years; rate of interest – 9 per cent p.a.
3. Maintenance charges for the house – ` 2,500 per month

4. Yashpal rents the house till retirement at ` 25,000 per month
5. Increase in rental – 5 per cent p.a. (at inflation rate)
Contd...

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