The transience of life

When I was in class X at St Xavier’s School, Durgapur we were taught the Shakespearean play Julius Caesar as part of our ICSE curriculum. I consider it the best work of the Bard and it is full of memorable quotes that had made an indelible impression in my formative mind. The part I best liked was the one where Caesar’s wife, Calphurnia, is beseeching Caesar to avoid venturing out that day, citing the several omens that had occurred. Caesar’s response to it is an all time classic :-

Of all the wonders that I yet have heard, 

It seems to me most strange that men should fear,

Seeing that death, a necessary end,

Will come when it will come.

I do not wish to be morbid but it is a given that all of us will die, some earlier than others and some later. Given that this is an essential truth, it will seem logical that all of us should try to add value to our own lives and that of others while we do live. However, it is really not so for most people. Many of us are obsessed with some facets of life and hold ourselves back from enjoying life fully. Once common fallacy is that we need to be focused on financial responsibility and therefore cannot indulge in some of the things that will greatly add value to our lives. The sad part is that life, as you know it, may well be over tomorrow morning. Let me give you some examples, which brought home this truth to me powerfully over the last one year :-

  • In a get together of our school friends, I was shocked to learn that many of their parents, who I knew very well while in school, have passed away. I felt rather fortunate that my parents are still there and in reasonably good health.
  • When I shifted from Delhi to Chennai a Recruitment consultant had helped me find the job in Sify. Got to know last November that he had passed away, he was only 55.
  • In our school we were a batch of 70 and this has already seen 4 deaths.
  • Look around yourself and you will see examples of people passing away suddenly and unexpectedly.

Death and taxes, it is said, are the only certainties in life and in the Indian context the former is the unique certainty. Therefore, it makes a lot of sense to do worthwhile things in life in an early part, give yourself time and money in the end and finally find time for things you genuinely enjoy. I have tried to do this to a large extent in my own life, though I do not claim to have all the answers. A suggested blue print could be this :-

  • Focus on building your knowledge and skills through education in the early part of your life. However, if you enjoy sports or any other hobbies and are reasonably good at it then you must take it up. Find time for it, can always be done.
  • While making a living is important, do not get into believing that work is your life as that will be a very sad way to view it. Strike a balance – you work to earn money so that you are able to do things you genuinely enjoy doing. It could be reading books, watching plays, acting in group theater or traveling.
  • Children do need to focus on education but do not make them one track people, there is a lot more to life than school marks and college grades. Spend time with them to understand  their potential and try to develop the same. As parents our responsibilities should be to enjoy our time with the children when they are young, they do grow up very fast and will go away long before you want them to.
  • Unless you have a venture of your own or are really passionate about a profession, try to organize your finances in such a manner that you are financially independent by 45 or 50. This will give you enough time to do the things you love and enjoy while you are still physically fit. If you do a job till you are 60 then you will have very little energy to do other things in the rest of your life.
  • While it is impossible to get a general blueprint for everyone, for most in modern India who want to get professional qualifications and work thereafter, follow this :-
    • Focus on Education, sports and hobbies till you are 22 or 24 depending on what qualifications you go for. This is the time to build skills and value to yourself.
    • Focus on your career for at least 4-6 years before you think of marriage.
    • Between 28 and 48-52 focus on your career and your family life simultaneously, making sure you have a rich life as a professional and as a person.
    • If you do things right then by this time your children will be in college and you will be financially independent. Once this happens, you can figure out how you want to spend your next few years.
    • At this time arrange your finances in such a manner that you can live comfortably without having to depend on any active income.

Living life well is important as it is the only one we have. Making it useful for others will make it worthwhile, but we first need to take care of ourselves and our families before we can think of others. As such the earlier we can get to financial independence the more chances we will have of being of use to others.

You may want to read several other posts in this blog to understand how you can achieve the above.

 

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Financial Independence at 41 – A reader query

India is truly a land of great contrasts. On one hand we keep hearing about difficulty in getting jobs and job losses in a variety of sectors. On the other hand we see people just coming out of colleges getting salaries that their parents did not get even when they retired. The vast majority are forced to work till very late in their lives, yet we have some who plan to retire at a relatively early age. In this post I wanted to share about a reader who wanted to check with me as to whether he could retire at 41.

This person, let us call him Ravi, is atypical in many ways. He is currently employed and is 27 years old. Even at this young age he is clear that he would like to pursue his passion seriously when he is 41. So much so, that he is unwilling to get married and start a family, which he feels will hinder him from achieving his goals. His parents are also self sufficient and have even contributed to his NPS till he got started in his job. The objective of giving this background is simple – I want readers to understand that not all of us can look at this plan, most of us have families and will need a whole lot more to run our lives as well as to retire.

With that proviso, let us look at Ravi’s current situation :-

  • His current NPS balance is 9 lacs. We will assume he keeps it at this and lets it grow at a rate of 10 % every year. He will have 34 lacs in 14 years time.
  • His monthly surplus is 60000 Rs today. We will assume it stays at this level for 6 years and then goes up to 90000 for the rest of the period.
  • We will assume that his Equity to Debt allocation is 60:40. So for first 6 years he will invest 40000 per month. This will lead to 1.7 crores in 14 years at 12 % return annually.
  • For next 8 years he will invest 58000 in equity every month. The extra 18000 for 8 years will add up to 29 lacs at 12 % rate of return.
  • For the debt allocation, these figures will be 62 lacs and 16 lacs at 8 % annual return.
  • Ravi’s total corpus when he is 41 years will therefore be 3.12 crores.

Let us now look at how much Ravi will be needing :-

  • As he lives in a smaller town his current expenses are only 25000 Rs per month or 3 lacs annually.
  • At 41 we can assume this to be in the region of 7 lacs annually.
  • Let us assume Ravi will live for another 45 years from 41. At a conservative level his corpus should be 45 x 7 lacs or 3.15 crores.
  • How should he deploy his money so as to get a passive income of 7 lacs annually? In this case as he has enough money, so keeping it in any instrument which matches inflation will suffice. However, as a good financial practice he should deploy his money as suggested in some of my blog posts earlier.

So, Ravi can retire at 41 which is great for him. What works for him is lesser responsibilities and ability to invest a lot at an early age. His parents have also contributed to his NPS which adds up. People with wife and children will find it really hard to retire at 41. However, something like 50 is still quite possible.

I will be happy to receive and answer any queries that the blog readers may have.

 

A trip to Bali – Beaches and bonding

The regular readers of my blog will understand that travel is one thing which keeps me going. Fortunately, my family members are also keen on it and this has enabled us to visit several destinations, both mainstream and offbeat, where we have spent some great family vacations. This year we already had one in Goa and were not planning for another one so soon.

The genesis of our trip to Bali was the realisation that it will become tough to get a travel window for our whole family once the children start their professional careers. Lipi was particularly keen that we go somewhere outside India this time, since our last such trip was to Thailand way back in 2008. What with the issues of getting visas, Bali seemed to be the best option. Given the paucity of time again, it seemed a good idea to go for a packaged trip rather than plan one on our own. We were able to get Yatra.com to customise a trip for us. They were covering the airfare, accommodation and 2 full day tours in Bali along with the airport transfers for 42000 Rs per person which looked fine. We made the payments through our credit cards, got the required voucher printouts and were ready to take off.

The Air Asia flights have only hand luggage as per the ticket rules and the weight cannot exceed 7 Kgs. This meant each one of us had a single piece of luggage and had to make choices on what to carry – the good part was all of us were travelling light. The journey to Bali was a good one and we used the layover in KL to have breakfast at McDonald’s. KL airport has good WiFi and, as is the wont with every family nowadays, all four of us were busy with our phones for the rest of the waiting. The airport in Bali has a runway adjoining the sea and the descent of the aircraft was quite a nice view. Immigration was a breeze as they just stamp your passport and we were soon on our way to the hotel. In the short distance we had to travel, I was quite impressed with the sculptures on the road crossings – they were from Hindu mythology and mostly from the epics Ramayana and Mahabharata. Bali is having a majority Hindu population and they have evidently preserved their heritage and culture rather well. We need to take lessons from them.

Our hotel was in Kuta area which is a bustling place having markets and other commercial establishments. The hotel itself was pretty good with nice rooms, a well appointed Gym, 3 nice restaurants, a nice Spa and most importantly a great location with Supermarkets, fast food joints like KFC and Domino’s as well as good local restaurants. We went to the Kuta beach in the evening and it turned out to be quite a happening place. You walk through a busy market to reach the beach and there are several restaurants as well as some shacks proffering Beer and cold drinks. The beach itself was crowded but quite clean and the sunset was out of the world. I have seen several sunsets all over the world and the first one in Indian ocean  was somewhat special. A restaurant served us a drink named Kuta Sunset, which was quite apt. We also had a Seafood Pizza and some Fried chicken while we watched the sunset. After coming back to the hotel we turned in early as the next 2 days would be busy ones.

We started the second day with a hearty breakfast that had everything from Cornflakes to Muffins/Croissants and Nasi Goreng too. By 10 AM we were off to our whole day tour. The first part was covering several villages where artisans made jewellery and clothing. In the afternoon we went to the Kintamani viewpoint from where you can see Mount Batur which has a Volcano crater at the summit. The whole mountain area and the lake was great viewing and there are many restaurants where you can sit on the terrace and have your lunch with observing the views. The fish that we ordered was not cooked properly but the day was otherwise so good that we took it in our stride. Next we went to a Coffee plantation where we saw how Luwak coffee was made and saw the Civets that play a key role in it. We also got to sample many different kinds of Coffee which was truly an unique experience. The journey back to the hotel was a long one and we had dinner at KFC before calling it a day.

The next day we covered two important points of Bali. The Tanah Lot temple is for the Sand and Sea and gives you great views of the Indian ocean along with the rocks on the shore. The sculptures have definite Indian influence and it makes you realise how far Indian civilisation had traversed in the ancient days. You would think that better views of the Indian ocean are probably not possible but that will change once you go to the next point which is the Uluwatu temple complex. This is situated at a height and the cliffs give you a great view of the ocean. The monkeys in the temple complex are a menace and apparently snatch everything from food to eyeglasses to hats. Rinki and I had a nice time exploring the area and taking in the myriad hues of the sea from different viewpoints. The coup DE grace was definitely the Kecak Fire dance depicting scenes from the Ramayana, specifically the burning of Lanka by Hanuman. The dancers were superbly skilled and watching them perform as the sun sets on the Indian ocean is a heady experience. The trip back to the hotel was again a long one but the lingering memories of the dance kept us preoccupied. We wanted to try out some local cuisine that dinner while Ronju was hell bent on a Burger, which is his staple diet whenever possible. A compromise was reached where we let him go to his favourite haunt, namely KFC, while we searched for an Oriental restaurant. We managed one where Kung Pao Chicken and the local delicacy Braised pork went superbly well with the Noodles.

After our exertions of the first 2 days we wanted to take day 3 easy. I was all for going to see the Rice terrace that Bali is famous for but gave in to a more sedate day as Lipi was feeling a bit under the weather. Rinki and I spent some time on the terrace swimming pool in the morning, before we went off to have a pizza lunch at Domino’s. In the afternoon I took the children for a last look at the Kuta beach. Sitting in the shade with them and talking while nursing a cold beer was good fun. We managed to catch a great sunset once more and the children went frolicking in the beach once the sun’s rays had tempered down a bit. Ronju had his customary burger at Wendy’s this time and after we got back we went to another dinner – this time with all 4 of us.

Next day we were on our way back, again with a layover in KL. It was a smooth journey and the trip was a greatly enjoyable one. The best thing about Bali is the ease of getting there and familiarity with many things Indian. We will be back again as the Timeshare we have with Karma, entitles us to a few resorts there.

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.

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.

A real life case study on retirement corpus deployment

Of late, I have been getting several requests from people about how to structure their retirement corpus to get a certain amount of income every month for lifetime. I was however, quite surprised to get a request last week – the person said that he had 3 crores and was willing to deploy it as per my suggestions and wanted to check how much he could spend per year, if he had a lifetime of another 30 years.

So let us see this from a very basic retirement maths perspective first:-

  • We will assume that the corpus is deployed so that the real rate of return is Zero. This essentially means that the returns from the portfolio will match inflation.
  • In this scenario his overall costs over 30 years will be 30X ( assuming he spends @X each year ) and the limiting condition is 30X = 3 crores. This means X=10 lacs
  • Going by this he can definitely spend an inflation adjusted amount of 10 lacs today.
  • Note that he will not have any issues with this strategy as even very conservative investments are likely to match inflation. He can put money in PPF, Debt funds, VVY, SCSS etc and still be able to achieve this.

Let us extend the logic a little further and see if we can do better in some way. We will try to structure the portfolio in a manner suggested below:-

  • Try to earn money in the first decade through debt investment returns. We will aim to earn 12 lacs in the first year to take care of the inflation within the decade. This is how it can be done:
    • 60 lacs in VVY and SCSS (for the couple) will yield 4.8 lacs a year.
    • 60 lacs in Debt funds will yield 4.8 lacs a year. This can be FMP type of funds where you use the capital gains for your expenses.
    • 20 lacs in IndiGrid InvIT which is likely to give 2.4 lacs a year.
    • 10 lacs in a liquid fund to cater for any financial emergency situation.
  • Put 1 crore in an MF portfolio over a period of time. This can be through STP of 1 lac per month for 100 months.
  • Put 50 lacs in stocks over a period of time. This should be based on markets and in the interim period the money can be kept in a Liquid fund.
  • At the end of the first decade, continue with the Debt plan as before. You will now be spending about 25 lacs per year and half of it is generated from Debt portfolio.
  • The MF will grow to about 1.6 crores by this time and stocks to 80 lacs. Set up a SWP from your MF to get 13 lacs every year @ 1 lac plus every month.
  • In the third and final decade, your MF portfolio and Stock portfolio will be enough to take care of your expenses @50 lacs a year.

Finally, what if you want to spend more now and taper off your expenses as time goes by? Many may want to travel around the world in their first decade and reduce it over time. In this case let us assume you need an average expenses of 15 lacs  in decade 1, 20 lacs in decade 2 and 30 lacs in decade 3. How do you cater to these?

  • Put 1 crore in Liquid funds and spend from it for the first 10 years. The amount earned through interest will enable you to do this.
  • Put 50 lacs in Debt funds, 1 crore in MF and 50 lacs in stocks.
  • After 10 years the Debt funds will grow to about 1 crore, MF to about 1.6 crores and Stocks to about 80 lacs. I have assumed staggered investments and conservative returns to make this a very safe plan.
  • In decade 2 spend from the Debt portfolio and do SWP from MF portfolio.
  • In decade 3 use MF and stock portfolio.

So to answer the question of the person, he can even spend 15 lacs per year with a 3 crore corpus as long as it is structured properly. In terms of withdrawal rate this is a 5% but it should work quite well.

I hope this has proved to be useful to most of you and you can structure your portfolios in a similar manner to maximise your spending power.

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 !!