It always surprises me a little to see the reactions of people in Facebook groups when a group member asks a simple query. Some members assume that the questioner needs to get knowledge by reading blog posts of some other members first, others advise him to go to a fee only financial planner and even give him a list, yet others tell him that one should just keep working and not think of retiring.
To come back to the recent query, here are the salient facts shared by the person who wanted advice on whether he will be able to gain Financial independence in 6 years:-
- He has 1.2 crores in FD and another 30 lacs in equity etc
- Can invest 20000 per month for next 6 years
- Has a child in class 7, who should be going to college in 6 years
- Has his own house and loans will be paid for by the time he is 50.
- Current costs are 1 lac per month, 15000 for child and includes loan repayments.
Let me come to the question as to whether he will be able to be financially independent by the time he is 50. For this we will calculate his Financial Independence Number (FIN) in the following manner.
- His base cost at 50 will be lower than 1 lac as child cost will be gone and so will the loan repayment. However, let us take it at 1 lac to take care of inflation etc.
- For retirement of 30 years his cost will be 3.6 crores at zero real rate of return
- For child higher education we can take 20 lacs
- For asset replacement etc we can take 20 lacs
- Total FIN therefore comes to 4 crores.
Fortunately, in real life we do not need to go with financial planner and/or calculators blindly and can use some experience and common sense. It is difficult to tell others what to do as they will have their own goals and ways. However, if I were in his place, I would be doing the following:-
- As his child’s college education is 6 years away, I will put 10 lacs in an Aggressive Balanced fund like HDFC Prudence. This amount will take care of the 20 lacs that will be required for the child’s graduation.
- I will redeploy the 1.1 crore left in FD to different types of Debt funds. Assuming a CAGR of 8 % this will grow to an amount of 1.75 crores.
- His current equity investment will grow to 60 lacs if we take 12 % CAGR over 6 years.
- 20000 SIP @ 12 % returns will grow to about 21 lacs in 6 years.
- So at 50 years he will have 1.75 crores in Debt and 81 lacs in equity
Let us now look at deployment of corpus. In the first 10 years of retirement, his strategy can be the following:-
- Interest from Debt portion will be to the tune of 14 lacs @ 8 % returns. This is definitely possible if he is into good quality Debt instruments.
- As his child is in college and he is still relatively young, I will not reinvest this 2 lacs but spend it in discretionary expenditure such as travel or asset replacement.
- At the end of 10 years, he will be 60 so the activities will reduce and on the balance his medical expenses may grow. I think an annual expense of 18 lacs will be enough. There is no need to calculate this by inflation formula – makes no sense at all to do so.
- Assuming a 12 % return on equity his equity corpus will be 2.51 crores.
In the next decade his deployment can be as follows:-
- Keep using the interest from Debt instruments and take out the remaining required amount from redeeming the principal.
- Even after you finish the decade you will have some amount left in Debt instruments. I suggest you donate it to a charity of your choice.
- Your equity investments would have grown to more than 7 crores by now and will be more than enough to last your life as well as live a legacy.
So to come back to the basic query – will you have enough to retire at 50? You bet you will. Now just shut out all the negative people with negative comments from your mind and go ahead with the plan. Honestly, if you are able to get the selection of instruments done on your own, you do not even need a Financial planner.
Will be happy to receive comments, feedback and criticism on the post.