Any investment planning must guard against the unforeseen, particularly when it pertains to your better half. Take stock of the must-do list
JOHN Lennon, one of the founding members of The Beatles, once noted in his album, Double Fantasy, that life is what happens to you while you’re busy making other plans. Perhaps, Lennon wouldn’t have given a second thought to what he said. But, life certainly did. Some years later, he was shot dead by Mark David Chapman, for whom Lennon had autographed a copy of Double Fantasy earlier that same night. Lennon has left a treasure of melodies for his admirers but some of us aren’t that lucky. Any eventuality, may not only affect your family emotionally but financially as well. Specially, for your spouse, who can be in dire straits if you haven’t planned for such a situation. Here’s a low down on what to keep in mind while building a financial reserve for your better half.
TILL THERE WAS YOU
Financial planners hold the view that before you make any plan for investments, you should ensure appropriate risk management, which includes not only life insurance and health insurance but household and accidental disability insurance as well. But when it comes to your spouse, you’ve to start with some broad classifications such as is the spouse working, existing assets portfolio and ownership structure, intelligence quotient (IQ), emotional quotient (EQ) and age and financial literacy. Experts believe that the question you should ask is, can you live without your spouse’s income? Accordingly, you must leave an amount needed for living expenses and critical financial goals such as child education and marriage.
NOT A SECOND TIME
You may have pondered over planning your portfolio, but remember that an ideal allocation for your spouse reserve is decided on factors such as lifestyle, risk appetite and requirement on retirement (if your spouse is working). There cannot be a standard formula for investments as it varies from person to person and it’s better if decided by a qualified financial planner. Take an example of a single earner, aged around 35 years, with a monthly income of Rs 50,000. Now, this sole earner needs immediate cover of Rs 1 crore. Reason: if in case of an early death, the spouse needs around the same amount, setting aside personal expenses. So, Rs 1 crore, if invested in any debt fund giving a yield of 8%, will give around Rs 66,000 per month. While the spouse can spend around Rs 45,000-50,000 per month for personal expenses, the rest could be invested to counter inflation in future. Hence, this person should cover himself and his family with adequate health cover and disability cover for himself.
A quick review of your insurance policy should be done first. Make sure you have adequate insurance coverage to make up for the loss of income. Instead of taking one big policy, it is better to have insurance policies maturing at different points of time.
If you’re young, you can look to lock in the investment in less liquid investment. And as you grow, you can start liquidating them and investing in liquid assets. It is important to note that insurance should be ideally kept separate from investments and the core investment should never be influenced by considerations of tax planning.
WILL IT, WILL YOU
Making a Will is an important task in your life. You should make a Will, which protects the interests of your spouse till she survives and should be well defined. It’s also pertinent that the spouse should be well informed regarding your Will, otherwise litigation and other problems can occur. Ideally you must share all information about the Will with the spouse. However, exceptions can be considered in cases of below average EQ and financial literacy. In such cases, you must exercise utmost foresight to devise mechanisms for efficient execution of the Will without the spouse being shortchanged.
If your spouse is working, the reserves can be common but they should ride on multiple objective driven vehicles similar to an SPV (special purpose vehicle). Experts feel that while you may build a common reserve from your incomes, it should be divided across SPVs that will help you achieve different objectives of your life. Cautions: You may have a common reserve but contribution of both should be identifiable and it should not be used for creating personal assets.
Financial planners feel that the purpose of such a reserve can span across objectives such as retirement/ pension, child’s education, healthcare and travel. It is, however, recommended that you should form a separate fund for each of these objectives.
The financial plan must be reviewed periodically to have the correct evaluation for timely adjustments in portfolio diversification and asset allocation. For instance, as you retire, your regular expenses should reduce by around 20% but other expenses increase such as travelling and hobbies. Financial planners say that you should not take major financial decisions in the wake of a loss. Put the lump sum amount aside for a while, preferably in a liquid fund or savings or fixed deposit account for three months. Don’t feel obligated to do something with it right away. After all, it takes time to fill that emotional gap.
JOHN Lennon, one of the founding members of The Beatles, once noted in his album, Double Fantasy, that life is what happens to you while you’re busy making other plans. Perhaps, Lennon wouldn’t have given a second thought to what he said. But, life certainly did. Some years later, he was shot dead by Mark David Chapman, for whom Lennon had autographed a copy of Double Fantasy earlier that same night. Lennon has left a treasure of melodies for his admirers but some of us aren’t that lucky. Any eventuality, may not only affect your family emotionally but financially as well. Specially, for your spouse, who can be in dire straits if you haven’t planned for such a situation. Here’s a low down on what to keep in mind while building a financial reserve for your better half.
TILL THERE WAS YOU
Financial planners hold the view that before you make any plan for investments, you should ensure appropriate risk management, which includes not only life insurance and health insurance but household and accidental disability insurance as well. But when it comes to your spouse, you’ve to start with some broad classifications such as is the spouse working, existing assets portfolio and ownership structure, intelligence quotient (IQ), emotional quotient (EQ) and age and financial literacy. Experts believe that the question you should ask is, can you live without your spouse’s income? Accordingly, you must leave an amount needed for living expenses and critical financial goals such as child education and marriage.
NOT A SECOND TIME
You may have pondered over planning your portfolio, but remember that an ideal allocation for your spouse reserve is decided on factors such as lifestyle, risk appetite and requirement on retirement (if your spouse is working). There cannot be a standard formula for investments as it varies from person to person and it’s better if decided by a qualified financial planner. Take an example of a single earner, aged around 35 years, with a monthly income of Rs 50,000. Now, this sole earner needs immediate cover of Rs 1 crore. Reason: if in case of an early death, the spouse needs around the same amount, setting aside personal expenses. So, Rs 1 crore, if invested in any debt fund giving a yield of 8%, will give around Rs 66,000 per month. While the spouse can spend around Rs 45,000-50,000 per month for personal expenses, the rest could be invested to counter inflation in future. Hence, this person should cover himself and his family with adequate health cover and disability cover for himself.
A quick review of your insurance policy should be done first. Make sure you have adequate insurance coverage to make up for the loss of income. Instead of taking one big policy, it is better to have insurance policies maturing at different points of time.
If you’re young, you can look to lock in the investment in less liquid investment. And as you grow, you can start liquidating them and investing in liquid assets. It is important to note that insurance should be ideally kept separate from investments and the core investment should never be influenced by considerations of tax planning.
WILL IT, WILL YOU
Making a Will is an important task in your life. You should make a Will, which protects the interests of your spouse till she survives and should be well defined. It’s also pertinent that the spouse should be well informed regarding your Will, otherwise litigation and other problems can occur. Ideally you must share all information about the Will with the spouse. However, exceptions can be considered in cases of below average EQ and financial literacy. In such cases, you must exercise utmost foresight to devise mechanisms for efficient execution of the Will without the spouse being shortchanged.
If your spouse is working, the reserves can be common but they should ride on multiple objective driven vehicles similar to an SPV (special purpose vehicle). Experts feel that while you may build a common reserve from your incomes, it should be divided across SPVs that will help you achieve different objectives of your life. Cautions: You may have a common reserve but contribution of both should be identifiable and it should not be used for creating personal assets.
Financial planners feel that the purpose of such a reserve can span across objectives such as retirement/ pension, child’s education, healthcare and travel. It is, however, recommended that you should form a separate fund for each of these objectives.
The financial plan must be reviewed periodically to have the correct evaluation for timely adjustments in portfolio diversification and asset allocation. For instance, as you retire, your regular expenses should reduce by around 20% but other expenses increase such as travelling and hobbies. Financial planners say that you should not take major financial decisions in the wake of a loss. Put the lump sum amount aside for a while, preferably in a liquid fund or savings or fixed deposit account for three months. Don’t feel obligated to do something with it right away. After all, it takes time to fill that emotional gap.
