FIRE considerations – parents and children

What are the most important considerations for you when you are planning to FIRE? For sure, your lifestyle and expected longevity are two most important considerations but there are a few others which are paramount. These relate to your parents and children. Let us address both of these in the current post.

If you are thinking of FIRE today or in the next 2-3 years, you are probably 50 plus now. It is quite possible that your parents are around still and that is a great thing. Fortunately my parents are both living but I know many of my friends who have lost either one or both parents. Given what our parents mean to us, we would all want them to live as long as possible. In several cases, they will be living on their own. Now the issue is this – when they retired 20-30 years back, the corpus they had would have been sufficient to generate enough income but it is woefully inadequate today. My father retired in 1990 and at that time he only had about 10 lacs as a corpus. It seems impossible today, but it was true then. Now those were the days of 12 % interest rates, so 10 lacs would give you an amount of 10000 per month. In 1990 it was still possible to live reasonably well with that amount if you had your own house. However, it was soon to become difficult.

Fortunately, I passed out of IIMC in 1988 and started working so I could contribute to the family finances. Over a period of time, the inflation increased the expenses considerably and the interest rates generally went down. If you look at the situation today, the costs are at a level of 4 lacs annually, even though they live in a fairly simple fashion. Their original 10 lacs is only fetching 75000 Rs today. Thankfully my sister, who is a Doctor in UK and I are able bridge the gap. How did it affect my FIRE considerations?

Well, for my parents the situation was simple. I know that I need to contribute some amount regularly over a long period of time. I therefore just add this amount to my own monthly expenses and look at the total amount. So, If I am contributing 2 lacs and my own expenses are 10 lacs in a year, then I need to plan for 12 lacs.

As far as children go the issues are a little different. If you are doing FIRE at 50, it is possible that your children are still in college. I am saying this as most people will marry around 30 years and have their first child around 32 years or so. Therefore when you FIRE at 50, your child will probably be just starting college. In my case when I FIREd in 2015 start, my daughter was in her third year of Engineering and my son was only in his first year of his 5 year dual degree course. The overall expenses annually for them were in the range of 6 lacs and it was increasing at the rate of 15 %.

I had the following strategies to deal with the situation:-

  • I needed to fund the Graduation expenses of my children and had told them that if they wanted to do an MBA then it would have to be through an Education loan.
  • For the immediate next year, I put some money in FD in their accounts so that they would mature in time for their semester fees.
  • I also started my Consultancy services which resulted in some active income. To the extent possible, I used the money to create new FD’s with the same strategy as before. This meant, I always had enough money kept away for paying the fees for the next 2 semesters.
  • In 2016 when Rinki passed out of BITS and joined XLRI, we decided to take a loan of 12 lacs whereas the 2 year fees were in the range of 23 lacs.
  • Over the next 2 years we actually used only 6 lacs of that loan as I was able to fund the rest of the money through my Active income.
  • Now she has completed XLRI and will be joining her job in June.
  • My son has now completed 4 years and I will have to pay 2 more semesters, each to the tune of 2 lacs or so. As before, this money is arranged for.

So what is the bottom line? When we talk of FIRE, it has to take into account the situation of your parents and children. In all likelihood, you will have to contribute financially to your parents, assuming they are not staying with you. Build this into your monthly expense estimates and deploy your corpus in a manner so that you are getting this amount in a regular manner. For your children, their regular expenses can be catered through your monthly expenses. However, Education expenses in college are a different story altogether and you need to handle it differently.

Take care of both of these and you are ready to FIRE.

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A TOI article on FIRE

As most of the readers will know, the acronym FIRE is for Financial Independence Retire Early. This is a very commonplace jargon in the US and is becoming popular here too. I was recently approached by a journalist from TOI who wanted to discuss my journey in this as she was writing an article on this.

For those who have not read it, click on this link to read the article. I found the article to be interesting though the writer has not addressed some important issues. In fact the How to part of the article is directly taken from our conversation.

If you go through the comments you will see that many of them are overly negative. That is really unwarranted as it is possible to achieve FIRE without compromising on things such as your old parents and well being of your children.

I will address this in the next post.

Financial independence is central to living life in your terms

Over the course of the past 3 years or so when I have been writing my blog, several people have asked me as to why I focus so much on financial independence ( FI ) as a goal when most people automatically keep working till they cannot do so. In some posts I have explained as to why FI is an imperative, even if you want to continue in your present job or profession and retire normally. However, the most important idea of being in an FI state is that it gives you the ability and confidence to live life in your terms.

What do I mean by living life in your terms? It simply means that you are able to do the things you want to do without having to worry about the financial impact of them on your future well being. There are only two conditions where this is possible. Firstly, you can inherit a lot of money and secondly, you work towards and attain an FI state on your own steam. Remember, in your life the terms are set by you, so it is not necessary that they will align with other people. For one person it may be the ability to stay in a huge mansion with all amenities, for another it can be the flexibility to travel as and when he wants and for a third it may be playing the stock market with some capital without the fear of losing it. Let me give you some more examples of what you may be able to do in the FI state – these are real life happenings with people who I know.

  • A couple in their 40’s take 2 vacations outside India every year because there is just too much to see and they have the cushion of FI.
  • A man who is a car enthusiast has bought a luxury car recently surprising many of his friends and family. He said that he wanted to buy it for about 2 decades but was able to do it when he understood that he was in an FI state.
  • A batch mate of mine who is a Banker, left his job and started to do workshops on personal finance as it has been his passion for a very long time.
  • A lady who has been a lawyer for 3 decades was able to switch to taking cases free for the poor when she realised she was well over the FI line.

I can go on with more examples but I think the point is made. Whatever your terms are, you need to be in an FI state to live life with those. Most of us work because we need to earn certain amount of money, for now and for the future. While we are doing that, we are unable to live life in terms of what we want – it can be a money issue or a time issue or both. Once you are in the FI state you will be able to reorganise your life in a way so as to do these things in a manner that fulfils your aspirations. To me, that is the essence of living – yes, there are times when you live for responsibilities and need to compromise on your personal aspirations but that is surely not a desirable state.

Coming to my personal example, what does being in the FI state mean for me? Also, to respond to the curiosity of many people, what do I do now and what do I plan to do in the future? Let me try and address it here :-

  • I do some Consultancy work if it is of interest to me. As I do not depend on the money from it to fund my lifestyle, the flexibility of choice is great.
  • As many of you know, I write this blog and am advising several people who seek me out. I have also made Holistic life and Financial plans for a few people who have reached out to me. Note that this is not my profession in any manner.
  • I have been involved very closely with the education of my children and that is coming to an end now. Interaction with many IIM and B school aspirants through public sites is something I am passionate about. I am also part of the admission panel for IIM Calcutta.
  • Conducting high end Consulting workshops for corporate organisations is something I love to do and will expand it significantly this year.
  • Travel has been a passion for me since long and I am able to do it much more now. In the last year and quarter we have been to Kumarokom, Araku valley, Italy, Goa ( twice ), Konkan beaches, Durgapur, Ayodhya hills, Khajuraho and are now planning a short trip to Bali.
  • Sports is another passion I have and I am really happy to be able to watch almost anything I want to nowadays. Looking forward to the FIFA world cup.
  • I am toying with the idea of writing a book. Something may or may not come out of it but I will make a fairly serious attempt this year.
  • I am also keen to explore the idea of forming a venture. The ideas for it are crystallised now and I will be looking for some founder partners soon.

When I measure all of the above against what I could have done as a CEO in a regular corporate job, I must say that I find this infinitely more preferable. The bottom line however is that I am able to do this only because of my FI state.

What is your ideal existence in life? If you are already having it in your current job or profession, great !! If it is very different from what you are currently doing then you need to think seriously about being in the FI state so that you can live in your terms.

After all you have only one life to live !!

Road to financial freedom for a fresh MBA

April is a month when the B school fever is at a peak, both for new admissions as well as for people who have just passed out and are about to embark on their first job. This year I got to meet quite a few of both varieties, courtesy my daughter’s convocation at XLRI and my being a panel member for the IIMC admissions. In one such interaction, I was asked a question – “how long will it take me to be financially independent, if my starting salary is 22 lacs a year and a good life today costs about 1 lac per month for a family?”.

I could not give a straight answer on the spot so I promised to get back to this person. If you look at it logically, we will need to make some assumptions in order to reach a conclusion on this. Let us go by the following :-

  • Rajat is 24 now and has an Educational loan of 20 lacs. He wants to pay it off in 10 years.
  • He is in a growth sector company and can at least expect a salary hike of 10 % each year. 
  • His initial costs per month will be 50000 Rs including 10000 Rs he sends to his parents.

Let us also assume that Rajat will live till 85 and will be financially free at age X. Based on what we had covered in the earlier posts, Rajat will need an income for (85-X) years. If he is assuming a cost per month of 1 lac in today’s prices, then it is reasonable to assume that at 6 % inflation, these costs will double in 12 years and triple in 20 years. Based on this Rajat will need 36(85-X) Rs as his corpus for zero real rate of return.

Putting some numbers in place now, let us see if Rajat can retire at 45 years:-

  • He will need to have 14.4 crores to fund himself till 85 years.
  • If he is investing in equity with SIP for 20 years, he will need to invest 1.45 lacs per month at a 12 % IRR. This is clearly not possible.
  • Viewing from another angle, how much can he invest today? Well, if he pays EMI of 25000 and has expenses of 50000 then he may be able to do SIP of 50000 at most.
  • In 20 years this will grow to nearly 5 crores @ 12 % returns.
  • With his increase in salary, Rajat will be able to do more SIP at a later date. Let us assume he will be able to do at least another SIP of 50000 Rs per month every 5 years. The new SIP’s will therefore be of 15,10 and 5 years respectively.
  • The new SIP’s will contribute the following to the corpus :-
    • 50000 for 15 years will grow to 2.5 crores @ 12 % returns
    • 100000 for 10 years will grow to 2.3 crores @ 12 % returns
    • 150000 for 5 years will grow to 1.22 crores @ 12 % returns
  • So from the MF route, Rajat will have about 11 crores.

Now apart from these he will also have substantial PF and some other Debt investments. Bottom line is he will easily be financially independent in 21 years time, if he is able to invest in a disciplined manner. As you have seen in the earlier posts, even with a corpus of about 12 crores or so, it will be quite easy to get this done.

I think the above will become the norm for the future very soon. We will have people working in regular corporate career for time periods of 20 to 25 years and then doing things which they are fond of. Of course, some may get off the train earlier so that they can follow something they are passionate about. 

Think of it – 45 and no worries financially any more that you have to earn money !! That is the stuff I always dreamed of but it took me another 5 years to get there.

Financial independence or retirement – A template

I have been asked by many readers as to how they should be organizing their money in retirement so as to get a regular income that stands the test of inflation over a long period. In recent times I am also asked the same question by people who want to be financially independent at an earlier age and are keen to set up a passive income stream that will last their lifetime. The interesting aspect to be noted here is that the solutions are pretty much the same, though the amount of corpus will necessarily differ.

Let me explain this a little. The whole idea of retirement, early or at 55/60 years, is to get some cash inflow from the money you have invested in different financial instruments or in other assets such as a house etc. This cash inflow should be able to take care of the cash outflows that your aspired lifestyle requires. Assuming that most people retire at 60 and can expect to live till 85 in today’s context, their corpus needs to last them 25 years. Now if you decided to take an early retirement at 45 then your corpus will need to last you 40 years. The key to this is also whether you are earning any active income in early retirement. For example, many of us earn some income through consultancy or other means and this will help. However, for the purpose of this post, let us assume that a person takes an early retirement at 45 and expects to live till 85.

At a very basic level you need to understand the following calculation:-

  • Assume an expense of 10 lacs per year at present without accommodation and any children related expenses.
  • For a period of 40 years assume zero real rate of return – this means your corpus invested in various instruments will grow at the same rate as inflation.
  • With the above assumption in place the required corpus is simply a producr of your annual expenses and the number of years. In this particular instance it will be equal to 10 lacs x 40 or 4 crores.
  • So if you are 45 years old and have an amount more than 4 crores and are unlikely to spend more than 10 lacs annually, you can take an early retirement.

What if you do not have this amount but are still interested in retiring earlier than the normal age anyway? Well, there are a few alternatives you can consider in the above example that we are dealing with :-

  • If you work for another 5 years the amount of money needed annually will grow to 13.38 lacs due to 6 % inflation and the amount needed will be 4.68 crores for 35 years. This may sound fantastic but is true – reason is your money is growing for less years and your expenses have increased.
  • Take this futher to 10 years working. Now your expenses annually will be 17.91 lacs and corpus needed for 30 years is 5.37 crores.
  • Before you are worried with these figures let me also give you the good news. Suppose you are 45 and had a current portfolio of 3.2 crores. Now you cannot retire at 45 but decide to work 5 years more. At 10 % growth in 5 years your portfolio value will be 5.15 crores.
  • With a time period of 10 years the portfolio will amount to 8.3 crores.
  • Bottom line is you can retire quite peacefully in either 5 years or 10 years.
  • Apart from working longer there are two more strategies you can look at – one is to believe that your expenses will reduce when you retire. In my experience this is rather tough to achieve and therefore you should ideally not aim for this.
  • The final one is to generate a real rate of return for your portfolio. This will ensure you need a corpus less than 4 crores to begin with. If you deploy your money well, this should be quite possible to achieve.

Let us take the limiting condition where you do have 4 crores and need to deploy it in a fashion so as to last for 40 years. For the sake of simnplicity I will assume that expenses double on an average every decade. In effect you spend 20 lacs per year in decade 2 etc. In such a situation how should you deploy your money? But before we get there let us see the cash outflows and strategy of withdrawal.

  • You need 1 crore in the first decade – this should be largely from interest from PPF/VVY/SCSS  or capital gains from debt funds.
  • Your 2 crores in the second decade should largely be funded by redeeming your Debt investments.
  • Your 4 crores in decade 3 will be mostly through SWP from Mutual funds.
  • Your 8 crores in the final decade will be through redeeming both MF and stocks.

Finally let us talk of the allocation now :-

  • 60 lacs for you and your spouse in VVY and SCSS, 40 lacs in PPF.
  • 1 crore in Debt funds so that you get returns of roughly 8 lacs a year.
  • With the above 2 crores your first decade cash flows are assured.
  • In the second decade you can redeem the debt investments and still have enough surplus to take care of some indulgences.
  • Out of the original 4 crores, put 1.5 crores in equity MF and 50 lacs in Blue chip stocks which are likely to give stable returns.
  • Your MF portfolio will grow to 10 crores in 20 years even at 10 % returns.
  • Spend 4 crores out of this in decade 3 and let the rest be invested.
  • In decade 4 you will have much more than 8 crores in MF itself.
  • Your stocks are really a bonus – leave it as your legacy by donating it to worthy causes.

So when do you want to retire and will you have enough when you do? I think this post has provided a good template for this. Apply it to your own situation and see how it wotks out for you.

Taking stock of my FI state

Many of you who follow the blog will have an idea about my journey in life so far, but let me summarize for new readers. I was born and brought up in Durgapur ( West Bengal ), studied in St Xavier’s school, Jadavpur university and IIM Calcutta, worked till 2014 end in corporate world with 14 years plus at CXO level. Since then I am working in my own Management Consulting practice. I have 2 children who are doing Post graduation ( Rinki is in XLRI and is an Engineer from BITS Hyderabad) and Graduation ( Ronju is doing a dual course in BITS Goa). I have been financially independent since 2014 and thought it would be a good idea to share the stock taking which I did recently.

The interesting fact is that the last four calendar years 2014 through 2017 have been progressively the most expensive years of my life. This flies in the face of conventional wisdom which will tell you to be conservative on spending when you are no longer doing a regular job etc. When I took the plunge in 2014 end, my thinking was as below:-

  • My total expenses in 2014 was equivalent to 200 units in some scale.
  • If I left out children’s college education, the travel to Australia which we went for in October 2014 and my apartment rent in Hyderabad then the expenses would be equivalent to 100 units.
  • Now, my rent was getting covered by the rent of my Chennai apartment, I had a separate fund for my children’s graduation expenses and we would obviously not go for an Australian vacation every year.
  • Based on this it seemed reasonable that my expenses annually would be in the range of 100 units.
  • As my financial assets would generate more passive income than 100 units, I concluded I had achieved the holy grail of financial independence.

At the end of 2015, I was surprised to see that my overall expenses were in the range of 225 units. A closer examination revealed the following :-

  • Education expenses were higher as I had to pay two semester fees for my son instead of the one in 2014.
  • Expenses otherwise on my children were high, courtesy their being typical college students now. Also, Rinki took up a course for her MBA entrance preparations.
  • However, my other expenses were still below 100 units and this was managed easily through my passive income stream.
  • It thus seemed that my assumptions held true for 2015.

2016 was a completely different story though. My overall expenses shot up to 400 units and change. Analysis of this figure showed up the following:-

  • Educational expenses were very high in the year as Rinki got into XLRI and, after a long deliberation, I decided to fund her first year expenses. We could have taken a loan for the entire expenses but this seemed a better idea for us.
  • Other expenses of children continued to grow. I am fine with their having a good time in college as long as they have the right priorities.
  • Our travel increased a lot in the year – we took more vacations and also traveled a fair bit for Rinki’s admission process.
  • With the declining interest rates the cash flows of my parents got impacted adversely. I chipped in with a greater amount than normal this year.
  • We upgraded our timeshare and there was a one time cost of 1.7 lacs for this.
  • Furniture replacement with a new sofa set, Dining table and balcony chairs were an expense this year.
  • Purchasing a new Android tv, new internet connection, new phone for my wife and a recording set top box also happened during the year.
  • In summary, it was a year with great experiences and they often come at a fairly high cost !!

So what was the conclusion I arrived at from all of this? Well, 2016 was definitely not a typical year and I did not think it will ever repeat in our lives. With Rinki getting the rest of her course done through bank loan, asset purchases not really there except for a Fridge and lesser travel the 2017 expenses will be much lower.

The reality was quite different though. We did not spend 400 units in 2017 but it was still close to 250 units. A closer look revealed the following:-

  • As is their practice, BITS again increased the fees by 12 % and my children’s college expenses continued to rise. I have been rather indulgent on this as I believe one should have a fun college life.
  • As I was earning a pretty decent Active income, I thought it would be good to part pay the Term 4 fees of Rinki. She chipped in with some of her internship earning and this has resulted in the loan amount being only 6.5 lacs.
  • Even though we had not planned for it, Lipi and I went for a vacation to Italy in May for a week. It was a great trip and I was quite happy to pay for it.
  • We also upgraded our Timeshare once again to a one bedroom unit and this too was an unplanned expenditure.
  • Travel within India too was more than we had anticipated. We went to Kumarokom in February, Vizag and Aruku valley in June, Goa in August, Durgapur in September for Pujas and finally Konkan beaches in November. While all these were expensive they created great memories and was totally worth the effort and money.
  • Other than the above, most of our expenses were the regular ones. We did exceed on the Entertainment and dining out part but not alarmingly.

At the same time, the experience of 4 years now set me thinking as to whether I should look at financial independence and retirement cash flows differently. After a lot of reading and deliberation I came up with a better model. You can read about it in this post

I am also working out my likely cash flows in 2018, based on the above model. Should be writing a post on it this week.

A real life financial planning case study

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.