Sridhar, 52, is among the many people I have interacted in his age group who are facing difficult money-related decisions. Sridhar’s 16-year-old son would like to pursue higher education abroad. Sridhar has savings of ₹20 lakh for his son’s education, but this would be insufficient to fund education overseas. He is not sure how to build additional corpus or whether he should rely on loans or sell existing assets.
Figuring out how to fund a sudden increase of 2-4 times the amount needed for a financial goal is baffling many individuals and has become one of the most asked questions. The first resort is to withdraw from the employee provident fund (EPF). The logic behind this is that forgoing 8% return is better than paying 9-10% on a loan. This is not right though. Withdrawing EPF means losing out life savings which are meant as a financial security for retirement. And given the fact that the amount withdrawn cannot be put back makes it worse. Some session participants say they do this hoping their children would take care of them in old age. But putting retirement at risk for any other goal is not advisable.
Given the ease of obtaining loans, education loan or loan against gold and/or mortgaging a property are the other options considered to fund the shortfall. With rates of 8-10% per annum, these options are preferred over selling the assets. Of course, this means additional burden on the parents to pay back these loans and pretty much put their aspirations on hold. Frankly, it is impossible to double or triple savings for a goal in a 2-year period and while loans are preferred over withdrawing EPF, Indian parents need to have their children contribute heavily towards the repayment of these loans.
The current generation in their 50s may be agreeable to be dependent on children but the generations younger to them are certainly not. For families with children up to 10 years of age, a course correction is still possible. Firstly, check the trends on higher education in your circles. What sort of courses and universities are being chosen by the kids in your circles. And what is the cost of tuition, hostel and miscellaneous expenses. I hear many children say that given the competition and limited number of seats in any reputed college, it is better to try abroad. Do not assume that your children will think differently from their friends.
Secondly, up the goal value accordingly and rework the amount to be invested. Finally, have high allocation to equity mutual funds if you want to beat inflation on education which is more than 10%. If you find it difficult to evaluate funds, do not fret. A Nifty 50 index fund and Nifty 150 index fund is all you need. Some investors believe they can meet financial goals with direct stock portfolios. It sounds easier than it is. Identifying stocks, making regular buy and sell calls or having the ability to ride the volatile times is not easy for the layman. Individuals are better off focusing on their careers and building their primary wealth in order to be able to invest more.
Retirement is another goal which needs a relook and possible revamp every 10 years. This is because one’s lifestyle and aspirations change significantly as the years pass. As people age, they become more focused on how to make life more meaningful and focus on getting back on track on their pursuits. Due to automation and change in work practices, retirement at 50 may soon be a reality.
Revise the amount to be saved, assuming retirement age as 50. Also, expenses required to keep oneself mentally fit need to be added to essential expenses. Provided one has more than 10 years to retirement, taking higher equity exposures will be better. For example, an investment of ₹10,000 per month for 15 years in an equity fund (assuming interest at 12% p.a. will yield 70% higher than a debt investment (assuming interest at 6% p.a.) of the same amount.
At every stage of life, evaluating the changing needs realistically and adapting the financial plan to the new normal can result in lesser reliance on loans (and children!) and leaving retirement funds to compound for a purpose filled future.