Financial independence #5 – my strategies

Several people have wanted to know about my investments and how I managed these to get to a state of Financial independence at my desired time. The important thing to understand is this – you will need a few good strategies first in order to ensure you are on the right track. Getting to FI is a destination but what is very important is the journey. You do not only want to arrive at a state of FI, you also want to get there in good time and in good shape.

Let me explain a little what I mean by this. Your utilization of money will broadly be in 3 areas – your regular expenditure whether mandatory or discretionary, your expenditure in creating assets and finally your investments. Now even with increasing incomes, you will not be able to invest greatly in the third component if the first is increasing rapidly and the second is at a high level. Once the first peaks off and the second goes away you are in much better shape.

For my part I had looked at my life situation in the following manner before deciding on the strategies:-

  • I had decided anytime between 48 and 50 to be the cutoff age for reaching FI. The main consideration here was my children completing school and one or both of them being in college.
  • At 50 I would have 10 years of fairly active life to pursue my professional interests, prior to the conventional age of retirement at 60.
  • Ideally, I would like to maintain the same lifestyle for the 10 years, from reaching FI till the age of 60.

Based on the above the following strategies were quite easy to arrive at :-

  1. It was important to close out any loans or other liabilities well before the desired year for FI. This was easy for me as the only loan I had was for buying my Chennai apartment in 2003, which had been closed by 2005 itself.
  2. As I have an unified portfolio and not different ones for different goals, I would need to earmark some funds for the years my children would be in college. For my daughter, this was simple as she is completing her graduation in 2016 and there are FD s for her fees till then. For my son, his graduation will be till 2019 and I have earmarked the proceeds from my 2 insurance policies for his expenses in college.
  3. Though I will get some Active income from my consultancy, I did not want to depend on the same. For real FI your passive income has to suffice adequately. I needed to arrive at a level of PI by considering these:-
    1. Rent from Chennai apartment to take care of our rent in the city of stay, probably Hyderabad or Kolkata.
    2. Regular expenses, both mandatory and discretionary would reduce when the children went off to college. For the lifestyle we want to lead we need about 8 lacs a year. This has some built in inflation for the 10 year period.
    3. There are no incremental investments in my FI state, but see the next point for details.
  4. I would still continue to invest in the following, but not from a perspective of incremental investments. The amounts needed would be funded through redemption of existing financial assets, which may be unsuitable:-
    1. PPF investment would be from redemption of debt funds over the next few years. My PPF is 20 years now and I want to continue it at least for another 5 years. My  wife’s PPF current PPF is only 3 years old and we will run it till 15 years.
    2. I have a good portfolio of MF SIP now and would like to continue the same. However, this will be done through redemption of existing Mutual funds that have inferior performance now. If I do this over the next 5 years then my MF portfolio will only have the 7 desired funds.
    3. Normal churning of my stock portfolio which I will manage actively now.
  5. Any Active income is therefore available for investing in stocks, spending on causes that are important to me and any indulgences that my passive income will not cater to.

The task therefore boiled down to my portfolio generating a Passive income of 8 lacs from the year of my FI. This has to continue for 10 years or so, when my actual retirement strategies will kick in. In the next post, I will write about how I am generating this passive income.

Look forward to your comments and observations on this and my other posts in the blog.

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