Luckily for the family, Arun recognises the value of prudent financial planning. He was greatly affected by the situation of his uncle Ajit, who inspired him to become a pilot in the first place. Ajit, who flew with United Airlines in the US, was among roughly 122,000 United Airlines workers and retirees who were badly hurt by the airline’s bankruptcy and subsequent takeover of its pension by the Pension Benefit Guarantee Corporation in that country. While United has been the longest airline bankruptcy case in history, it’s not the only company that’s run aground, or seen its stock plummet to historic lows. Companies from various industries have plunged into financial despair, often taking employees and retirees with them, including Enron, Worldcom, Delta, Northwest and Bear Stearns.
Arun, like most pilots, faced the a number of challenges. First, the loss of his flying license could have a significant impact on his income and career prospects. Second, lifestyle expenses being on the higher side sometimes resulted in lower overall savings. Third, he had no critical illness or disability benefits. Fourth, pension benefits were minimal, which created a sizeable shortfall in funding retirement needs. And lastly, Arun has little time to make prudent financial decisions.
When he came to meet me, his main concern was to have a sufficient corpus on retirement to maintain the family’s lifestyle, and to provide for medical contingencies. The Raj’s goals were simple. They wanted a post-tax retirement income of Rs 2 lakh per month in today’s rupees. They wanted to set aside Rs 1 crore for their son Jai’s education. Thirdly, they wanted to buy a vacation home for Rs 1 crore. And lastly, they wanted to pay off their loan of Rs 25 lakh in next five years.
Assessment
An analysis of Arun’s goals, cash flow, net worth, insurance policies, investments and tax returns revealed a number of things. Firstly, it was clear the Rajs’ savings were substantial, despite high expenses. They saved a tidy sum every year. Their debt situation was quite comfortable, but the interest rate on their loan had zoomed upto 13.5%. We decided to negotiate with the bank, or look out for better alternatives, as there was no prepayment penalty on the loan. We shopped around and got a loan for Rs 20 lakh at around 9.75%, so we decided to switch loans.
Secondly, we noticed that most of Arun’s and Ananya’s investments were in equity, through ULIPs, mutual funds and stocks. Their debt exposure was paltry, and apparently limited to PPF and 20 LIC endowment policies. These policies generated around 4-5% per annum. Arun had been advised that PPF was not a good investment, so he was contributing only Rs 5,000 a year—a fraction of what he was entitled to put in.
Thirdly, the Rajs’ equity portfolio consisted of five ULIPs, 35 mutual fund schemes, and 40 stocks. But it was skewed heavily in favour of Jet and Deccan. He had bought several shares in the company that employed him, and appeared to think of it as sacrosanct retirement money. Airline stocks accounted for almost 70% of his portfolio, besides the exposure through mutual funds and ULIPs. One of the reasons for this was also the ESOPs that he had received from his employer. The ULIPs, which Arun had bought several years ago, and which cost him around 30% for the first two years—some had even cost around 15-40% in the first—were looking reasonable during the heady bull run. However, two of his policies had lapsed, and he was extremely agitated about this. He fumed, “I was told that I need to pay the premiums for three years, only so why did my policy lapse?” There was a number of schemes in their portfolio to which the Rajs had only a small exposure. Most were NFOs launched in the last two years.
Fourthly, we noted that the family had good medical insurance cover, but Arun’s life insurance cover was far too low for comfort.
We then created a comprehensive investment strategy for him parts of which are reproduced below.
Strategy
The first step was to ensure that the Rajs had several months’ worth of expenses in the form of fixed deposits, and overdrafts against fixed deposits and investments. This would ensure they had access to funds at short notice, in case of an emergency.
Next, we pared down his insurance premium from Rs 5 lakh to around Rs 1.5 lakh. This was done after assessing the surrender values of insurance policies, premiums to be paid, performance to date, and the cost of a term plan. We first opted for a term plan to ensure that he could still get one at a reasonable price. After the policy was issued did we surrender most policies for which premiums had to be paid for the next 15 -25 years. 3. We advised him to invest Rs. 70000 every year in his PPF instead of the small amounts he contributed. We also advised him to make Voluntary Contributions to his Provident Fund besides the mandatory contributions he was making.
4. We then reduced his exposure to airline stocks to around 5 % of his portfolio from 70 %. Though this was a difficult decision but was something that paid off handsomely as we were able to sell the stocks near its 12 month high. We then pruned his stock holding to around 18 and sold 12 open ended schemes. A part of the proceeds (Rs.5 Lakhs)was used to pay off a portion of home loan. The rest was invested in Cash Management Funds, Gold, Income Funds and Fixed Maturity Plans.
5. We also decided to sell his Pune property for which he was getting a very good price, The strategy was that the Pune property market seemed overheated and considering the sky high prices, and interest rates, it was time to sell. We decided to look for opportunities in the real estate space elsewhere, wait till an appropriate correction takes place, and explore other options. Prices now have already started to dip in Pune.
6. We then started off with Monthly & Quarterly Systematic Investments in mutual funds and stocks that we identified and decided to add to our existing positions on every 5-7 % fall in the market.
7. We then decided that Arun would meet with his cousin who is a renowned lawyer an talk about getting his Will done. We also ensured that all his bank accounts and investments were done on a Either or Survivor mode.
All pilots will enter the cockpits only after knowing whether they would be flying too. When it comes to their profession, they are very clear about the origin, destination, altitude,and different nuances required to succeed in the profession. However when it comes to making financial decisions, most are at a loss of words when it comes to talking about
what their destination could be. It’s understandable that the very nature of the profession leaves little time for making prudent financial decisions but at the end of the day is something pilots must certainly take up on a priority basis.
While you can get a lot of false promises & lemons in the name of advice or wealth management, a sound written financial strategy that will address every aspect of personal finance right from cashflow & debt management, loans, insurance, investments, retirement and estate planning to managing your emotions or you is important.
Flying is a very exhaustive & tiring job and airline pilots fly crazy hours (though they might not officially disclose it) which leaves them with little time but peculiar financial needs. Arun today surely appreciates financial security – the ability to meet financial needs and demands as they arise because he has planned well.
MEET THE FAMILY
Arun Raj is a pilot in his late thirties. He and his wife Ananya, a homemaker, dote on their eight-year-old son Jai. The family’s income is substantial. After taxes, expenses, and insurance premiums, they have a surplus of Rs 9 lakh, besides the savings they have accumulated. Ironically, although Arun makes a lot of money for his family, he has little time to plan his family’s finances Amar Pandit is Certified Financial Planner and Director, My Financial Advisor
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