Over the past few days I have read some interesting posts and associated comments in the Facebook groups, related to how much corpus does one need to be classified as financially independent? The figures suggested ranged from a few crores to 100 crores and more. Much of the discussions were hilarious – someone suggesting that a person in government job can do regular SIP and create a corpus of 100 crores etc – well he will probably have to live and work a few more years than is allowed right now !!
Let us come back to the main point though – I do not know clearly what will be the expenses of the person who started the post. I would imagine, most people in the first 5-7 years of their career will not have an earning of more than 10 lacs and an expense of 5 lacs or so. Of course, you can well have a person working in Google earning 1 crore but we are not talking of such people for the purpose of this post. Since any figure that I put out can be contested by others, I think it will be safe to illustrate the financial independence issue with my own example.
When I looked at 2014 December to see where I stood, this is what I saw:-
- My expenditure for the year was totally about 20 lacs. This was the maximum that we had ever spent in a year.
- However children’s education, rent and a vacation to Australia was accounting for 13 lacs of the above.
- I looked at some more travel needs and decided that if I stayed in my own apartment and arranged for the children’s education through other sources of funds, then my annual needs will be about 8 lacs.
- This amount of 8 lacs will let me maintain the same lifestyle that I maintain today and let me travel a bit more within India.
- If I wanted to travel outside India or wanted to replace my car then these needs would have to be funded through other sources.
So how much money would I need for a feeling of comfort in not having to earn any more? Two factors are important – the rate of return your money will earn you and the number of years that you needed to plan for. Now, given the changes that will take place in our economy in the near future, it will be best to assume that your returns will only match inflation. You may be able to get your money work a little harder than this but there is no harm in being conservative. As far as the number of years are concerned, I will take 30 years as the remaining time we ( my wife and I ) have to live.
Based on the above how much did I need if I had to feel comfortable about having enough amount at only zero real rate of return? I did a calculation that looked somewhat like what follows here :-
- Retirement corpus = 30 years x 8 lacs/year = 240 lacs
- Graduation expenses for daughter = 5 lacs
- Graduation expenses for son = 15 lacs
- Replacement of car = 12 lacs
- Vacations outside India = 4 vacations x 5 lacs/vacation = 20 lacs
- Replacement of other durable goods = 5 lacs
So, if I had about 3 crores in December 2014, I could feel quite comfortable about my state of financial independence. It did not mean that I would not earn any more, it just meant that even if I did not have any more active income, I would still be able to do all things important to me. Now as my asset base was considerably more than 3 crores, I could very easily think of myself as being financially independent. Note that I have not taken expenses for the PG education of my children as I think they should ideally be responsible for it. Similarly, I have not outlined their expenses for marriage here, though I do have a separate fund for it.
What is the safety net that I have in this plan? Well, I am still having an active income from my consultancy practice, so much of my 2015 expenses have been funded from there. Also, the way my assets are structured and deployed I can hope to make more than zero real rate of return. However, the key point is that, even with a fairly high level of expenditure and plans the overall corpus required to be financially independent is not prohibitive and is definitely possible to achieve.
How will this really work for someone who wants to be in the state of FI after say 10 years? I will illustrate with an example in the next post.