ET Wealth : Family Finances : Oct31-Nov6 2011

The ET Wealth Online personal finance weekly magazine has a Family Finances section that features one family every week for personal finance advice.  This week they featured a family with a monthly income of Rs 54000 (approx USD $1100)  The article is titled Low income likely to pose a big hurdle.  The first thing that struck me is the financial planner characterizing Rs54K per month as low income.  For an emerging economy like India wherein the average monthly income is in the Rs3000-5000 per month (~USD $100), it is a little strange to consider RS54K per month to be low income.  Probably the planner was taking into the account the financial goals of the family while pronouncing their income as low.

The cash flow situation did not look very healthy given the 54% expenditure (Rs11K + Rs18K) on rent + home loan EMI.  Going in for a ready to move in flat, would probably have been the better choice here, even if the cost of the flat would have been a little higher, to avoid having to pay both the rent and the home loan EMI concurrently.  Typically banks do not sanction home loans if the EMI is more than 45% of the net take home monthly income.  In this case, I characterize rent + home loan EMI as the total outgo towards house acquiring expenses and thus they violate the 45% rule (54% > 45%)

Finally they list 4 goals viz (1) Daughter's education (2) Daughter's marriage (3) Retirement (4) World Tour.  The planner is right in striking off the World Tour goal as unachievable giving the current cash flow and savings/investment situation.  Surprisingly he lists the retirement objective as the partially achievable goal with a lowered retirement corpus requirement ("Rs2 crore should be sufficient to see them through their post retirement years") based on some computations that he does not share.

I would have ordered the goals as follows (1) Retirement (2) Daughter's education (3) Daughter's marriage (4) World Tour.  In an income constrained environment, retirement should be the number one objective for any couple.  Their daughter can avail of an education loan when the time is right, and a personal loan if necessary to fund marriage expenses.  However, there is no concept of a "retirement loan" that anyone can avail of, when this critical need arises. 

In my opinion, a good financial planner/advisor should not only focus on crunching the numbers based on inputs from the client, but also help the client prioritize their goals based on a logical understanding of the way finances work, and not just based out of an emotional need to take on well-meaning but extravagant financial goals.  Though the usual advise regarding asset allocation, life insurance, health insurance, inflation based number crunching etc is all covered, I find the critical goal guidance missing. 

Of course this is just my novice opinion!  Let me know what you think.

Household Savings Rate : How do we measure up?

It is the last day of the month, and our only sources of monthly income, i.e. our paychecks hit our salary accounts today.  I had talked earlier about shooting for a 85% savings rate, and the need to be able to track this religiously, if we want to have any chance of hitting this super aggressive goal.  We have always struggled to come up with a system to track our expenses.  Either we get too ambitious and try to record every single penny we spend, and end up failing miserably in the attempt, or we become too lazy and forget to track any spending at all.  So we figured the first step was to come up with a simple way to monitor our overall monthly expenses and then refine the method if we see the need for it.  So instead of messing with tracking spreadsheets, notebooks, etc, my wife and I came up with this pretty simple method, that was staring us in the face.  Today, I simply added up my wife's and my monthly October paycheck, and I withdrew 10% of the amount in cash from our nearby ATM. 

We now have the entire month of November to eke out, using just the cash we have in hand.  We purposely chose to limit the cash withdrawal to 10%, so that we have a 5% buffer in case we needed the extra expenditure to finish up the month.  We intend to cover all our monthly expenses by drawing down from this kitty and paying in cash for all our spending.  There are a few expenses that are paid in auto-pilot mode through online websites such as utilities and phone-bills.  We will simply draw out an equivalent amount of cash from our 10% stock and keep it aside to ensure that we stay true to our target spending allocation. 

To summarize, we will only spend the "real world" money that I withdrew from the ATM in hard cash (which is 10% of our joint monthly income) and will leave all of the remaining online wealth (in bank accounts, SIPs, home loan EMIs, insurance payments, etc) to remain as investments. 

I suggest this method to you as well, as it should be pretty simple, and reduces the burden of thinking about it.  The one thing that will not be covered by this method, is tracking where our expenses are actually going into (for example how much are we spending on food, utilities, entertainment, health care, school fees etc) However, for starters if we can stick to the 15% spending target, I don't think there will be much need to figure out where we spent it.  It is only if we are consistently over-spending beyond the 15% target, will we need to spending distribution, so we can figure out where to cut back.  But then, we will cross that bridge when we come to it.  For now, on towards a frugal November!

India Early Retirement Safe Withdrawal Rate

In an earlier post, I had touched upon the concept of Safe Withdrawal Rates, and lamented the fact that most Indian financial planners and retirement gurus seem completely oblivious to the whole concept.  Simply put, a safe withdrawal rate is the percentage of your final retirement corpus that you can safely use for annual expenses, without running out of money over the lifetime of your retirement.  It is critical to be able to predict this as accurately as possible to help you with your retirement planning.  For example, if you have accumulated a retirement corpus of Rs50 lakh (about USD $100,000 at today's weakened Rupee to Dollar conversion rate), and want to use it to fund over 20years of retirement expenses for yourself and spouse (assume you are retiring in your 60s, and based on your family history, expect to live into the 80s), you will need to know how much money you can pull out in the first year of retirement to fund your living expenses.  Would you be ok with pulling out Rs2 lakh in the first year, or can you take out as much as Rs5lakh?  How about in the next year? How do you make these plans in a systematic manner?  This is what SWR is all about.

There is a lot of research and literature regarding SWRs in developed economies like the US, where there is tons of historical data regarding asset class performance over long periods of time (basically the historical rate of return from stocks, real estate, bonds, treasuries etc) that can be used along with historical macro-economic data like inflation, GDP growth etc to reasonably predict a useable SWR into the future.  However in an emerging economy like India, a lot of these key inputs are either not reliably available, or changing so fast, that it becomes very difficult to predict SWR in the Indian context. 

I had come across this article titled Safe Withdrawal Rates from Retirement Savings for Residents of Emerging Market Countries written by Dr. Wade Pfau, who is an Economics professor at the National Graduate Institute for Policy Studies (GRIPS) in Tokyo.  So I specifically put forward 2 questions to him.  What was his opinion for a Safe Withdrawal rate that I could use in India? and (2) How should I adjust the SWR if I was planning on an extended retirement period spanning 60 years. 

Wade was kind enough to put together a detailed response on his blog titled Do-it-Yourself Safe Withdrawal Rates to my queries.  The summary is that predicting SWRs in an emerging economy like India is very difficult given the lack of historical data, and the rapidly changing emerging market dynamics.  His feedback is that for new retirees, it is the future asset returns that matter, and the ability to predict these returns is the key to being able to predict how much to withdraw from your retirement corpus per year.  For an extended retirement period he suggests reducing the withdrawal rate by 0.5-1% to increase the probability of success (i.e. your money out-living you)

I appreciate the thought he has put into the matter, and the various links he has provided with additional data and analysis on the subject.  My goal will be to review the material he has provided, and use it to estimate an SWR that I can use for my own retirement planning.

India Early Retirement and Formula F1 Racing

Formula F1 Racing debuts in India for the very first time today, at the 875 acre Buddh International Circuit.  The high octane world of car racing is as alien to me as bob-sledding is to Jamaicans (obscure reference to the movie Cool Runnings)  It takes some patience and extreme passion to enjoy watching several futuristic looking cars, that all look pretty much the same to me, hurtling around an odd shaped track of 5.14Km (about 2.34Miles) over 60 times.  The fastest drivers can complete one circuit in as little as 1.5mins, setting an average speed of over 200Kmph.  Still there is a lot of interest in this fast growing sport in India, and we expect the popularity of car racing to grow exponentially in coming years.

So why are we talking about Formula F1 Racing on a early retirement blog? Well that's because I believe there is an enormous similarity between  F1 racing and Early Retirement, that is just too glaring to ignore.  Stumped? Well you wont be, once you have read through the remainder of this article. 

Even though F1 racing has this reputation of being an exotic sport, which attracts the attention of only a very small percentage of sports fans, there is one critical function that it performs in the world of automobiles.  Formula F1 Racing is relentlessly pushing the envelope on what is possible in the world of automobiles and transportation.  Both technology and human endurance are pushed to the limits in this sport.  But the naive reader may ask, What does that have to do with me? The answer is simple, and it has everything to do with you as long as you own a car, or use any form of automobile based transport.  Formula F1 has been for years pioneering cutting edge advancements in technology that eventually filter their way down into stock road cars that you and I can buy out of a showroom or dealership.  Advancements in engine technology (horsepower, lighter engine blocks, turbo, internal engine coatings etc), brakes (Anti-lock Brake Systems or ABS, disc brakes, carbon composite brakes etc) fuel injection systems, car body and chassis (streamlined carbon fibres, exotic composites, safety glass etc) and virtually every component of car design, have been pioneered on F1 cars, before making their way into productized road cars.  This has helped improve the safety, reliability, comfort, and cost of the road worthy car models that you and I can buy off the dealership.  This is one of the key reasons that several car manufacturers and car component manufacturers, own or sponsor F1 racing teams, since it gives them an excellent platform to showcase their latest technology and also test it under extreme conditions before implementing it on the thousands of cars that they manufacture and sell. 

Now here comes the punchline:  I propose that early retirement enthusiasts, such as yours truly, are the F1 cars of the retirement and personal finance industry.  We are the ones that come up with the exotic plans, asset allocation strategies, frugal living methods, safe withdrawal rate computations, risk-reward analyses, long range retirement planning, innovative use of financial products, early adopters of new products, market influencers to develop new products, you name it, that relentlessly pushes the envelope on personal finance and retirement planning.  As the myriad of wealth management firms, banks, insurance companies, Asset management organizations, Financial Planners, etc continue to come up with advancements, methods and strategies, we are the ones who are most likely testing them out in the real world, in our extreme early retirement scenarios, to make sure that they are "road-worthy" for the average traditional personal finance and retirement aspirant.  The purpose of this blog is to share the results of this "F1 road testing" of my personal retirement plan with you, so you can incorporate pre-tested, sure-shot, aspects that are relevant to you, in your financial planning.

By the way it looks like Sebastian Vettel of team RedBull is the winner of the inaugural Indian F1 Grand Prix.  I hope to emulate him in the world of personal finance and retirement.

Economic benefits of major tax cuts: explaining the myth

I never thought I would say this, but I am loving me econ class right now. The topic we are discussing in class right now is fiscal policy. Being a democrat, I always felt like big tax cuts and less government spending was not the best answer to reducing our deficit, but now I feel like I actually have a proven, statistical reason to support my "hunch."

I've learned that there are two major actions the government can take to boost spending or "jump start" the economy. It can either enact tax cuts (supply-side economics) or increase spending (demand-side economics).  However, according to my econ book, tax cuts will always have less of an impact than increasing governmental spending, because tax cuts indirectly affect the economy (b/c this affects people's income, and people most likely won't spend their complete income - some of it hopefully goes to savings. This does not affect GDP).  Governmental spending, on the other hand, is a direct injection of money into the economy resulting in increased demand, and increased GDP.

I think that reasoning is right. =/ If I explained this wrong, please help me!

Our optional reading included an article by Alan Murray, "'Dynamic' Scoring Ends Debate on Taxes, Revenue" (from 2003!). Now this article broke it DOWN.

It explained why so many people were arguing that tax cuts will be majorly beneficial to the economy (even though basic economics, as I just explained, already knows it isn't). There was this guy, Art Laffer, who met with Dick Cheney and Donald Rumsfeld in 1974 and "sketched a curve on a cocktail napkin suggesting that a cut in income taxes could provide such a spark to the economy that government revenues would rise, not fall" (Murray). This graph, however, did not have any numbers on either axes. Murray does a really nice summary of the debacle, but it comes down to this: the Congressional Budget Office (CBO) did an extensive study and used dynamic scoring (which was invented to figure out the "numbers" for the graph), but unfortunately those "numbers" did not prove anything. 

Murray says, "using some models, the plan would reduce the budget deficit from what it otherwise would have been; using others, it would widen the deficit. But in every case, the effects are relatively small. And in no case does Mr. Bush's tax cut come close to paying for itself over the next 10 years."

On top of that, the two "models" that did show an improvement in the deficit as a result of the supply side (tax cut) strategy were models that assumed "that after 2013, taxes would be raised to eliminate the remaining deficit."

His conclusion:
"Certainly, tax cuts can improve overall economic growth. And certainly, revenues may rise as a result. But at current levels of taxation, those effects are relatively small. There is no free lunch."

My conclusion
So, if we care about reducing the deficit, it looks like at some point we will have to start PAYING TAXES.

Early Retirement Extreme : Jacob Lund Fisker

Jacob has put together an extremely well written blog detailing his path to achieving early retirement at an accelerated pace.  You should browse his writings here at Early Retirement Extreme -The choice nobody ever told you about.  Here is a short synopsis:  Jacob got his PhD in Theoretical Physics by the age of 25, and then worked for 5 years in the US.  During this time, he saved upwards of 75% of his income, and invested it wisely (though not necessarily with great success)  At the age of 30 he was done with the rat race, and by 33 he had completely retired.  Some of his suggestions (like eating frugally, basically eating only one type of canned food) are very extreme, but then that is the entire thesis of his blog.  He has several other suggestions on frugal living, some of which I agree with, and several that I do not.  Jacob also does not have any kids, so that makes his situation very different from mine.  I think planning to retire early, when one has kids to take care off and raise poses some unique challenges that he wouldn't be aware off.  Finally his current lifestyle seems to be a little on the "edge", with a high risk medical insurance strategy, and extreme frugal living

In any case, his determination is what makes his early retirement possible, and there is a lesson to be learned there.  On the other hand, I postulate that his extreme approach is not necessary in the India context.  Our environment in India allows for a moderate lifestyle without incurring significant expenses.  I will try to provide some insight into how we plan to achieve similar savings goals as Jacob, without necessarily living a life as frugal as he did/does.

Early Retirement : Safe Withdrawal Rate (SWR)

Safe Withdrawal Rate or SWR, in the context of retirement (early or otherwise), was a term coined by William Bengen.  Bill wrote about SWR in the Journal of Financial Planning in October 1994.  He proposed that once you have accumulated your retirement corpus, you should withdraw only 4% of the corpus for your expenses on a yearly basis (adjusted for inflation of course).  As long as you maintain the 4% withdrawal rate, you will never run out of money throughout your retirement years.  If you increase your withdrawal rate to 5%, you have a high probability that your money will run out before you die. 

This is a very fundamental thought that every retiree has to go through.  How much can I afford to withdraw every year for my living expenses?  If I withdraw too much, I run the risk of running out of money soon.  If I withdraw too little, I am forcing myself to live a more frugal lifestyle than I can afford, and will not be able to live my retired years to their fullest potential. 

Bill based his analysis on historical return rates of stocks and bonds, and looked at real scenarios over the last 75 years.  He analyzed different withdrawal rates, and back tested the probability of your initial retirement corpus running out, across various time-frames over the last 75 years to prove his hypothesis.  This is a seminal piece of work, and if you have the interest, you should read the original article by William Bengen. 

Amazingly enough, financial planners in India, almost never quote or even refer to Safe Withdrawal Rates.  The entire concept seems to be alien to wealth managers here.  Typically a simple mathematical formula assuming a 6% or 8% inflation rate is used to figure out how your expenses in retirement will increase.  The effect of compounding is then typically used to frighten the lay person with the large numbers that invariably result from the long 30-40year retirement scenarios.  Finally a 12-15% rate of return is assumed on your invested corpus to figure out how long your corpus will last, or how much you will need to save up to last through your retirement years.

Of course the SWR will vary from country to country based on the historical data, current inflation scenario, future GDP growth prospects etc.  Currently financial planners in India seem to take these into account in a ad hoc manner, and are in general oblivious to SWR in the Indian context.

I recently came across a study done in Japan, that attempts to determine the SWR in emerging markets.  I have contacted the authors to understand their thesis a little better, and seek permission from them to share their results with you. 

In the meantime, I will publish a couple of more articles describing how SWR works in the coming days, with some examples and illustrations.

Early Retirement : Philip Greenspun

Who the heck is Philip Greenspun?  Well Phil has a PhD from MIT, has started several successful businesses, seems like an extremely articulate and witty guy, has his pilots license, and most importantly retired at the young age of 37.  If you'd like to read up more about him, here is where you go: Philip Greenspun on Early Retirement

Retire Early and Travel

Now that I have become "more involved" with my retire early planning, I have come across a lot of material out there, about people who have already trudged this path and taken the plunge.  I love reading about these "case-studies" as it helps to fine tune my own thinking.  One more such example is about Warren and Betsy, the folks at Married with Luggage.  They have retired at the age of 40, and plan to travel around the world.  They also document all their expenses here.  I think the learning for me here is (1) It is important to make a plan and then put in all my energies to execute to it (2) It pays to be methodical, particularly when it comes to documenting expenses (3) It helps to be internet web savvy.  You can churn out a lot of good material, if you are very comfortable with the medium. 

Early Retirement : Monthly Income Sources

I am very interested in developing passive income sources to meet my monthly expense needs.  Currently we are stuck in the economic rat race, with all of our monthly income coming in from our salaries.  We have no other sources of income (other than some small interest earnings from our savings bank accounts; which I actively try to minimize, since I am not interested in accumulating any debt income)  We also get some dividend income from stocks, but that is too small at this time to make any significant impact to our overall income profile.  We do not have any rental income either.  So my Oct'2011 snapshot of monthly income sources, looks as follows:

Now this is a pretty depressing picture to look at from an early retirement perspective.  Ideally I want the bulk of my monthly income coming in from non-salary sources.  At this time we are 100% locked in to our jobs since we are completely dependent on our salaries for monthly expenses.  Over time, I will need to come up with additional income sources to first supplement, and then replace our current salary based monthly income.

Household Savings Rate

Earlier this month I had stated my intent of saving 85% of our family take home income.  I am still unsure if I can achieve this aggressive savings rate, but I am pretty sure that over the last few months, our savings rate should be around the 50%-60% levels.  This got me wondering as to what the average household savings rate is across India/World.  So I went searching for this data, and here is what I dug up from GFMAG.

I have reproduced the following table from the above site here for convenience. 

The shocking statistic for me was that across the world over 2decades of time the annual average household savings rate maxes out at 20%, with the most common savings rate being in the mid to high single digits.  Now of course the need to save could be different in different countries.  Typically countries that have a higher proportion of social security, should have lower savings rate since there is less of a drive to save for a household, as the government is expected to provide support post retirement. 

Though countries like India and China are not listed in this survey, I would assume we would naturally have a much higher savings rate since our government does not provide any kind of social security whatsoever. 

In any case, the fact that the average savings rate is much below my 85% target, gives me a lot of confidence.  On average, people do not retire early, and continue to work into their late 60s.  For me to be able to retire in my 40s, I need to be doing something that is not the average, and I hope my aggressive savings rate will make the difference when compared to the average joe.

Retire Early Lifestyle

No discussion about early retirement can be complete with mentioning Bill and Akaisha Kaderli.  They could in some sense be considered as the pioneers of the early retirement lifestyle, both of them having retired at the young age of 38, back in 1991.  They currently blog their travel and retirement adventures at their Retire Early Lifestyle web page.  Take a look at it, if you are short of motivation.

Dividends are the way to retire early

I have always been fascinated by dividend returns from stocks as a means to support my income needs once I have actually retired.  Dividends are particularly exciting since they are not taxed at this time (of course once the new tax code kicks in, dividends may be taxed as well)

As an example Azim Premji, the promoter of Wipro, took home Rs1345Crore (approx USD$269 Million) in the form of completely tax free dividends in 2011.  Of course, being a promoter of Wipro, he owns about 74% of Wipro shares. 

Now I cannot dream of owning so many shares of a leading blue-chip company, but I plan to start in my own small way.  I have identified Hindustan Unilever as the company in which I will invest to secure dividend returns.  I started with ERU2.37 invested in Hindustan Unilever.  That investment is currently worth ERU3.13, which is a healthy 30% gain.  However, my primary motivation behind this investment is not stock capital gains, but the steady stream of dividends from this FMCG company.  So henceforth, I will separately track all dividend returns from this investment, and also re-invest it back into HUL shares to grow my nett investment corpus in HUL.

Finally, while I wait for the dividends to accumulate, I also use a fairly risky options call writing strategy to derive additional monthly income.  For the Oct25'2011 expiry, I have made ERU0.18.  This is a very small number, but given that the risk is high, I do not have the guts to write more calls.  Still it is a 5.7% monthly return on my HUL investment, which is quite significant.  I will continue to try my option call writing for the Nov'11 expiry, and in the meantime re-invest the Oct'11 expiry gains back into HUL shares. 

Lets see how this strategy pans out over the long run.

Savings Rate or Investment Returns?

I see several articles and energy spent on figuring out how to maximize ones investment returns.  There are tons and tons of websites dedicated to guiding you on how to increase your stock market returns, or to find the best loan rates, or the highest FD rates.  Yes, I believe all of this is important, since you wouldn't want to be stuck with a less than optimal investment return, when better returns are available for the same product and risk profile.  However, the key realization you need to have is that, investment returns are not in your control.  You can try your best to increase your returns by a few percentage points, but for the most part you have no guarantee that this will happen.  Also, going for increased returns always goes hand in hand with a higher investment risk that you will have to take on. 

Instead I propose that you should spend your energy in figuring out how to increase your savings rate.  For starters this is completely in your control, so you can decide and implement any savings strategy, as long as you have the discipline for it.  Also most times I have found that a small increase in your savings rate, can easily offset any lower investment returns that you might see.

Here is a table that illustrates this principle.  I have calculated how many years it would take to save up 10 times your annual salary, if you make 0% to 20% returns (on the Y axis of the table), for different savings rates from 10% to 90% of your annual income (on the X axis of the table)

The first row is the simplest to understand, since it assumes 0% returns, or the equivalent of taking all your savings cash and keeping it in a bank locker.  Therefore, in this case, if you save 10% of your annual salary, it will take you 100 years to save up to 10times your annual income.  As you increase your savings rate, the number of years reduces proportionately.  If you are able to save 50% of your annual income, you can achieve your 10X target in 20years.  However, in real life, nobody keeps their money in a bank locker with 0% investment returns (unless it is black money!)

So lets take the example of 8% annual returns. In the current scenario of high interest rates, it is easy to achieve 8% investment returns by simply investing in low risk debt instruments (like FDs, MIPs, etc)  In this case, if you are able to save as little as 30% of your annual income, you can save up 10 times your annual salary in 16.9 years.  This may seem like a long time, but if you start at the age of 25, by the age of 42, you will have 10X your annual salary in your investment portfolio.  That is a very strong position to be in!  However, if you are not willing to wait that long, you can increase your savings rate to 50% (save half your annual income)  This will help you reach your goal in just 12.4 years.  Again starting at age 25, you would have met your goal at the young age of 33!  Clearly this illustrates the value of increasing your savings rate.

If you are willing to take on more risk, you can aggressively invest in equities, real estate, and these days even in gold.  Assuming an aggressive investment returns of 12%, you can see from the table that 30% savings will help you reach your target in 14.2 years, while an increased 50% savings rate will help you get there in just 10.8 years. 

This should clearly drive home my point that though investment returns are a good thing to chase after, an increased savings rate is a more powerful tool (and completely in your control) to help you reach your retirement corpus accumulation target.

Early Retirement : A kindred spirit

Here is a very interesting blog about a guy (and his family) who are living my early retirement dream.  Many of his examples and thought processes are very "American", but the basic concepts are the same, as some of the thoughts that I have. 

Hoping to get energized by his example, and pick-up a few tips along the way.

MMM

Want to Retire Early? No place for Debt Instruments!

One of my key learnings on this journey to early retirement, is that I need to give my current corpus the best chance of growing significantly over the next several years.  To achieve this aggressive goal, I have decided that my portfolio cannot have any debt instruments!  To put it simply, I will not be investing in Fixed Deposits, National Savings Certificates (NSCs), Post Office Monthly Income Schemes (POMIS), Recurring Deposits (RD) etc. 

 Now this is a bold statement, given that my parents always focused on debt-like products for all their savings.  However, I firmly believe that in the accumulation phase of my career, I cannot afford to take the path of low risk guaranteed returns.  Also, I already have a fair portion of my portfolio in debt-like products that I cannot avoid.  A part of my salary compulsorily goes towards the Employee Provident Fund (EPF) which is basically invested in debt.  I also invest in balanced Mutual Funds, as part of my MF portfolio, and these funds always have a portion of their AUM invested in debt.  Finally, I continue to service a home loan EMI, and I think it would be better for me to pay off that loan (if at all I want to invest in debt) than directly invest in debt instruments.

Do you agree with my strategy?

What are Early Retirement Units (ERUs) ?

I am extremely uncomfortable sharing the actual numbers about my salary, savings goal, final retirement corpus etc in a wide open public forum.  However, I think it would be very difficult to discuss any early retirement strategy without diving into some detail regarding savings percentages, investment plans, asset allocation etc.  So I figured the best way to get around this concern, is to share all my numbers with a scale factor included.  That way I can confidently share all the details, without being concerned about my privacy. 

As an example, if I use a scale factor of 10000, and my monthly salary is Rs30000, I would refer to it on this blog as a monthly salary of ERU3 (Early Retirement Units 3 = Rs30000 / 10000)  Similarly if I invest Rs100000 in Mutual funds, I would refer to it as a MF investment of ERU10 (Early Retirement Units 10 = Rs100000 / 10000)

In this manner, you will get a clear understanding of my savings and investment plans, and can easily apply it to your own situation by scaling up or down appropriately.  At the end of the day, it is the relative proportions of income, savings, investments etc that matter, and not the absolute numbers!

How much do I need to retire?

The big question for all early retirement aspirants is, "How much do I need to retire?".  I know this is a critical and difficult question to answer, since there are several discussions around this very thought in blogs and personal finance websites.  I realise that the final amount that one comes up with is very dependent on your personal situation, monthly spending assumptions, risk taking ability etc.  However, I am sure there is a common thread that you can find in the following thought process no matter where you are from. 

I am going to start with the assumption that I will require ERU1000 to be able to retire early (with some adjustments and frugality in my lifetsyle)  I will also set myself a stretch goal of ERU2000, which is twice my basic target.  This is to ensure that I am focusing on a larger goal, which should help me reach my basic target with more certainity, and hopefully earlier as well. 

To provide some perspective, my wife's and my current combined take home income is ERU7.34.  This means that my baseline target for overall retirement savings/investments is ~11.3 times my annual take home pay.  My stretch goal would amount to ~22.6 times my annual take home pay.  I will try to add some detail on how I arrived at these numbers the next time, but as of now, I think the stretch goal is practically impossible to achieve!  The baseline target sounds more realistic, but I will have to come up with a detailed plan on how to reach this goal. 

Let me know what your thoughts are regarding a safe retirement corpus?  What multiple of your annual take home pay do you need to have saved up, to be ready to retire?

Early Retirement : Networth or Corpus

One of the key vectors on your journey to early retirement, is the net accumulated wealth, also known as networth, or corpus, that you have at any point in time. You need to actively measure and monitor your networth at least once every 2-3months, and make a decision as to what your networth target is going to be when you actually retire. This is not an easy decision and will require a fair amount of planning, some mathematical computations, and the guts to actually implement this plan. For starters, I will try to put down my networth target, and my current networth, so I can see how far I am from my goal, and consider whether my 85% monthly savings target will get me to my goal or not.

I am very uncomfortable sharing the exact details of my personal wealth, salary, income etc on an online forum like this. So I will be publishing scaled numbers on this website. The thought here is for you to get an idea of my income sources, progress towards networth targets etc, without getting stuck in discussing actual numbers.

My next post will cover my networth target, and a plan on how I intend to achieve it.

How to Retire Early in India

I have seen several articles talking about a relatively recent trend of people planning to retire early in India.  In our generation today, this could be fueled by rising incomes/salaries, and the increased load that most of us face in the work environment.  So while in my parents generation, the objective was to keep working as long as possible to sustain ones family (usually extending well into their 60s), in todays generation, people are actively considering retiring in their 50s.  The popularity of VSPs (Voluntary Separation Programs) offered by companies, wherein employees choose to take an early retirement package, and leave the active work force voluntarily, is a clear indication of this growing trend. 

However, the one thing that I do not see in all of these early retirement discussions, is real life examples of people who have achieved their early retirement dreams.  I notice a lot of free advice easily available on the internet covering the basics of savings, investments, compounding, LBYM, etc,  but no real evidence of people successfully applying these concepts and realising their early retirement goals.  I also notice that the folks dishing out this advice, are not the ones who have actually achieved early retirement themselves.  So I really wonder how all of these so called financial planners and investment gurus, can be believed if they themselves have not walked the journey towards early retirement. 

My objective on this blog, is to document my own attempt at early retirement, step-by-step, backed up with my own data, lifestyle choices, investment decisions etc.  Based on my success or failures going forward, readers can take valuable lessons to apply to their own financial planning.  Either way, you as a reader cant lose! You can apply my successes to your situation, and steer clear of my failures to increase the probability of your hitting your early retirement goals.  Good luck to us all!

Early Retirement Killer : Inflation

The single biggest obstacle I foresee to any plans for early retirement is inflation.  Yes, I believe this is a bigger challenge than even accumulating a large enough corpus in the first place to enable retiring early.  India continues to reel under the pressure of rampant inflation, ranging from 8% to 10% in recent times.  The inflation rate is not the same across the various components of my expenses.  In particular there are three areas that seem to have persistently high levels of inflation that show no signs of letting up.

Health care:  The cost of medical care, hospitalization, routine doctors visits, and medicines, continues to go up at what feels like an ever quickening pace.  Health care premiums also continue to shoot up at the same pace, as insurance companies have to raise rates to remain viable. 

Education:  Learning, which should ideally be accessible to every single person, also seems to be becoming more expensive everyday.  Tuition fees from nursery and day-care, to higher education professional degrees are becoming prohibitively expensive. 

Real Estate:  In India real estate has always been expensive, but in recent times, has seen a phenomenal increase in per sqft rates.  Everyone wants to own a piece of real estate, and the increased demand is resulting in continually increasing real estate prices. 

The key challenge I see going forward, is that I will definitely need access to health care and education (for my kids) and potentially also buy real estate (either for my self, or as an investment for rental returns)  But due to steep inflation rates in these areas, (and certainly my salary is not increasing at the same pace) I am getting priced out of the market.  In other words, as time goes by, I will be able to afford less and less, in the health-care, education and real estate space. 

Do you feel the same way? and do you have any suggestions on how to deal with this?

3 yrs later: I finally understand the housing crisis

The “Return to the Giant Pool of Money” radio show from This American Life was really interesting and insightful. I am a little embarrassed to have to admit that I never really understood the “housing crisis” completely. I knew big banks and greedy investors were at fault and that they were giving people bad loans, but I had no idea how complex the whole system had gotten and how many players were actually involved. This radio show definitely cleared a lot of things up for me!

Two things that really suck out to me (that I didn’t know before):

1. The Wall Street people were looking at BAD DATA. No wonder this practice of giving NINAs, creating CDOs, etc., went on for so long. The data was telling them it was a good idea. This was a triumph of data over common sense. 
2. No one was looking at the big picture and thinking about the long term effects to the economy. There were lots of players in the game, from mortgage brokers, to banks, to investors and no one took responsibility, because everyone thought it was not their problem. 
3. These players were earning A LOT of money to make this system work. A ridiculous amount of money on commissions. These high commissions and high ROIs definitely propelled the problem and encouraged the loosening of the rules.

The show included the story of two people who started at the complete opposite ends of the spectrum and ended up in similar situations: Richard Campbell, the Marine facing foreclosure, and Glen Pizzolorusso, the sales manager making a lot of money selling bad loans/mortgages (and ending up losing everything).

I liked how they started with Glen and his lifestyle before the housing crisis and then transitioned to Richard and the beginning of the crisis and finally, back to Glen and the outcome of the crisis. Through interjecting these personal stories throughout the show in between the technical talk, it was really easy to understand how the mix of personal behavior, bad banking products, and loss of oversight lead to such a severe economic downturn.

I realize now that from the outside it’s very easy to point fingers and blame all the people who made lots of money from taking advantage of low-income individuals and families. But, really, we need to look at the whole financial system and the governmental laws put in place to support these risky actions if we really want to change things.

Go ahead, listen to it! "Return to the Giant Pool of Money"

Tracking Savings for Early Retirement

My previous post covered my aggressive intent to save 85% of our monthly take home pay for investment purposes.  The key of course is to have the discipline to maintain this aggressive goal and actively track it month by month.  To have any chance of success here, we figured we needed an easy and automated method to implement this, so we are forced into following this guideline for savings.  So our proposal is: as soon as both my wife and I get our monthly salaries in our salary accounts, we will move out 85% of that months' income into investments (through SIPs), or EMIs (for our home loan) or into our secondary bank account.  All monthly expenses will continue to be routed through our respective salary accounts, in the form of utility bill payments, monthly credit card payments, and cash withdrawals for day-to-day expenses.  Let me know what you think of this approach and if you have used something similar before.  We will kick-off with this method starting November 2011. 

Early Retirement : How much to save?

The key determinant of success to achieve your early retirement goals is your savings rate while you are working.  The higher the percentage of savings, the better chance you have of meeting your early retirement goal.  Now of course, the level of savings you can achieve is also dependent on your monthly income levels.  At the start of your career, when your monthly income levels are low, it will be very difficult to achieve a significant savings percentage.  Since you still have to meet your basic expenses for food, housing, clothes etc (the basic essentials) it will be difficult to increase your savings percentage.  However, as your career advances, and your monthly income levels go up, you should be able to start increasing your savings percentage, as typically your monthly basic expenses will not increase much after a certain level.  Particularly in the Indian context, it should be possible to save a very large percentage of your take home salary, if you stick with the principles of LBYM and do not unnecessarily extend your lifestyle. 

I always like to take aggressive goals when it comes to enabling my early retirement.  So far starters I am going to target a 85% savings rate on my monthly income.  This might sound like a huge portion of my monthly earnings, but the objective here is to be as aggressive as possible and find ways to reduce my monthly expenses to enable this savings target.  Just to be clear about my accounting method, here are a few assumptions I will make. 

1. The 85% savings target applies to both my and my wife's monthly take home income.  Any yearly bonuses etc will be additional savings and not accounted for in the 85%

2. All investments in stocks, MFs, real estate EMIs, insurance premiums, are considered as savings for the purposes of this exercise.

3. All expenses in the form of monthly food, entertainment, vacation spending, intermittent medical expenses, utility payments etc are NOT savings and will need to be accommodated in the remaining monthly 15%

Now that I have written this, it makes me wonder if I can achieve this level of aggressive savings, and importantly is there a way for me to track that I am really meeting these savings goals.  My next post will cover how I intend to measure my savings rate, to check how I am doing when compared to the target of 85%

Greece is the Problem? How Dumb Do They Think We Are?

There has been a tremendous amount of nervousness in public sentiment about the state of the economy.  Some of it is certainly legitimate, with the S&P 500 down double digits in the 3rd quarter alone.  As I started to write writing this in early October, much talk over the summer about the market tumble centered around the European debt crisis as being a primary factor.  Then last Thursday's local paper proclaimed "U.S. stocks surge after course of action is presented to strengthen Europe's banks and lower Greece's debt" following the S&P's 8% gain over the trailing week and I couldn't put off injecting some intelligent thought into this discussion.

While it is factually true that Europe has a debt problem, how can anyone give legitimate credence to that problem 'causing' the stock market decline? Let's look at the facts - last year between April and July the market plummeted over 15% because of the threat of Greece defaulting on their debt.  So far, so good, right?

Then, for the nine months between July 2010 and April 2011, the market went up 33%. 

What happened to Greece and the Euro debt concerns during those nine months?   Were they fixed?

Do the talking head really expect us to believe that the Greek / European banking problems signaled impending doom for three months in 2010 (causing the markets to drop sharply), then became magically cured for nine months (causing the stock market to soar majestically), and then become a sign of the apocalypse once again earlier this year - and now that there's a plan in proposed to fix them, markets should rise again?

If it sounds silly when reading the above paragraph out loud, forgive me for for interrupting the hysteria with facts. 

I cannot predict what the short-term future holds with regard to European banks, Grecian debt or stock market returns (and neither can anyone else - at least I don't pretend to!) But it seems far more likely to me that the current death-of-equities is, as usual, caused by media-driven fear as opposed to real economic disaster.

a little update on last year's retirement obsession

Almost a year ago now, I wrote a couple blog posts on retirement, because for some reason I was a little obsessed with it. Well I'm not that excited about it anymore.

Your retirement is FRAGILE! 

I did a lot of research and invested about $1750...now I have $1535, which is not that bad since we had a major downturn in the stock market about two months ago. But, still! I'm down $200...when I wanted to be making money. This really makes me question the whole system. I can't believe people rely on the this type of income to fund their retirement.  It seems absolutely crazy and risky.  Yet, it's the norm.

When I saw my account decrease I was sad, but I wasn't worried.  My retirement is many, many years away. This account is a good start, but if I loose most of my money I can always start from scratch again.  But, what about those individuals who are in their 50s. They only have a couple more years until they will need that money to live off of.  I cannot imagine what they are feeling watching the stock market crash the way it did this summer.

There's got to be a better way to save for retirement!

Social Security barely covers living expenses and it's complicated.  I tried calculating how much money I would get on their wesbite (http://www.ssa.gov/retire2/) and didn't get very far.

I say we bring pensions back for everybody! Why should government bureaucrats & public service people be the only ones who get them?