Stock Market Index in India (Part II)

We reviewed the origins of the Bombay Stock Exchange, in my previous post.  Established in 1986, the BSE SENSEX is the key barometer of the Indian Stock Markets and is widely quoted as a proxy for the overall Indian Equity markets.  When it was first established in 1986, the SENSEX comprised of stocks that were representative of the then pre-dominant companies and sectors.  Over the years the Indian economy has successfully completed its transition from a manufacturing basis, to a service oriented economy and now more recently biased towards a knowledge economy.  Several of the companies that were considered the bellwethers of the old economy are no longer part of the index, since the economy and concurrently their fortunes have changed in a large way.  A historical review of these changing times is critical to understand the fickle nature of individual stock investments, while learning to appreciate the stability offered by the index in itself.

Stock Market Index in India (Part I)

My early retirement plans are heavily reliant on a strategy that involves significant investments in equity linked products.  The bulk of my portfolio is invested in stocks and equity MFs, with the fundamental belief that in the long run, equity based investments will outpace all other forms of investment.  However, over the last few days I have realised that I have never really tried to understand the basics of the Indian stock markets.  I do not have an appreciation for the history of the stock exchanges, and some time spent researching on this front, will stand me in good stead while picking my future investment strategies.

PPF interest rate increase. Ponzi Alert! Like Social Security? (Part IV)

I started off this series of posts, in response to the change in rules governing the PPF scheme.  The interest rate for the next financial year has been raised to 8.6% from the current 8% for the PPF scheme.  I believe any defined benefit scheme that promises returns well in excess of market rates is no different from a Ponzi Scheme.  This is because no scheme can maintain a pre-defined level of returns which are not linked in any way to market returns.  Just because the scheme is backed by a government does not make it viable!  The government backing may ensure safety today, but in the long run the scheme cannot maintain itself.  We are already seeing this in the US with social security benefits.  The social security scheme in the US is also in some sense a defined benefits scheme, wherein you are guaranteed to get a certain payout when you retire that is linked to your prior years income and investment into the Social Security Scheme.  However, the payout from social security is not necessarily linked to market returns.  Hence, the scheme is under tremendous pressure to fulfil its obligations to payout to the millions of Americans from the baby boomer generation, as they retire. 

PPF interest rate increase. Ponzi Alert! Like Social Security? (Part III)

The Public Provident Fund Scheme, or PPF is arguably the most popular savings scheme currently available for small investors in India.  Literally millions of Indians, participate in this government backed scheme with the full confidence that their money is safe, and will grow over the years.  There are several detailed articles that you can find on the web, describing the benefits of the scheme, how to invest in it, and the rules and fine print for deposits and withdrawals.  You will also find every financial planner, first checking if you have a PPF account, and if not, encouraging you to open one, not just for yourself, but also for your spouse and minor children.  It is almost automatic today, for every earning adult (and in fact their minor children as well) to have a PPF account with money being stashed away dutifully every year, just like our parents did before us. 

PPF interest rate increase. Ponzi Alert! Like Social Security? (Part II)

Here is a picture of Charles Ponzi, carrying a gold handled cane and a diamond stickpin from August 1920 in New England, USA.  In my earlier post, I had shared with you the story of Mr. Charles Ponzi, who started as a small time con artist, and grew to become one of the most notorious, and certainly the earliest large scale swindler of all time. 

By the late 1920's, Charles was living the big life, with his business scheme seemingly unstoppable as more and more investors poured in their money to participate in his highly profitable business activities.  However, the banking authorities were beginning to get suspicious about this time, about the nature of his business, particularly since he seemed to spend very little time managing his business, and almost all of his energy talking about it and advertising it in the local newspapers. 

PPF interest rate increase. Ponzi Alert! Like Social Security? (Part I)

Charles Ponzi was born Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi on the 3rd of March, 1882 in Lugo, Italy.  He grew up in Italy and came over to the US in 1903.  He started off by doing odd jobs, including working as a dishwasher in a restaurant and later waiting tables.  He then went to Montreal, Canada and worked in a bank for a while as a teller.  Here he got his first taste of handling other peoples money, until the bank failed and the bank promoter ran away to Mexico.  Penniless, Charles was soon driven to frustration, and he forged a cheque, was promptly arrested, and ended up spending a few years in prison.  It was here in prison, that he met his role model, Charles Morse, a wealthy wall street businessman with a penchant for swindling his clients. 

Wait a minute, you might ask!  What does this biography about Mr. Ponzi, have to do with the PPF rate increase in India?  And where does the Social Security angle come in to play?  Well read on my dear friend, and soon all will be clear. 

LBYM : Dining out, A Luxury? In India !!

If there is one thing that I like to splurge on, it is food.  Both my wife and I like to sample different cuisines, and between us we have a wide range of foods that we enjoy dining on.  However, one constant source of disagreement that comes up at home is regarding how often we get to eat out.  I think we don't eat out often enough, while my wife feels that eating out is too expensive and she'd rather experiment with home cooking to expand her already wide portfolio of tasty recipes.  I usually disagree, and feel that it is too much effort to slave away in the kitchen day in and day out, and eating out twice or even thrice a week is completely justified.  Given that my wife works as well, I think it is only fair that we reduce as much work at home, while spending on something that we both enjoy, i.e. dining out.  Something happened this Friday though, that has made me re-think my stance on how often we should be going out to fancy lunches and dinners.

Cost of Living in India : Light South Indian Lunch

Last weekend we had gone out for a bout of shopping, and stopped at a small road side hotel for a quick lunch.  The plan was to grab a few South Indian snacks like idlis, dosas, vadas etc and make a lunch out of it.  We were both hungry and so was the baby, so we figured a couple of dishes each would do the trick.  The place we picked was part of a larger chain that is supposedly popular down in South India.  A small outlet, with self service, and seating for about 15 people.  Well maybe it was the time of day (around 12:30pm) that we picked, but they had run out of idlis.  They didn't have masala dosas either, so I settled for a plain dosa.  Mrs. B decided to go with a plain uttapam, and we decided to supplement with a plate of lemon rice.  Lets just say that we have had better when it comes to South Indian fare.  The taste was authentic, but not necessarily top notch.  It was the cost that took us by surprise.  Each of the 3 dishes cost Rs25, for a total lunch bill of Rs75.  For the level of service and ambiance, which wasn't spectacular given that we were in a roadside outlet, and the taste which wasn't something to reminisce about, we thought the food was very overpriced.  Needless to say we will not be eating there again.  There was a time when South Indian snacks were considered to be the cheap fast food of India.  I guess at Rs75 for 3 dishes, the inexpensive status is being challenged.

Cost of Living in India : Flat Maintenance

Most of us in Tier1 (or for that matter Tier2, Tier3) cities in India live in apartment complexes or buildings.  We all share common amenities with our building/colony neighbours, and typically pay a monthly maintenance fee to help maintain the shared amenities.  The more modern complexes boast everything from swimming pools, children play areas, tennis courts, badminton courts, squash courts, fancy clubhouse, library, gym, jogging track, etc.  There is also the general upkeep of the building that needs to be considered including lifts (elevators for those of you in the US) lobby area, water pump, building exteriors etc that needs monthly spending. 

How much home loan can I get? (Part II)

In the Part I of this post, I had described a seemingly well set couple; Gaurav and Sneha, planning to buy their first home.  They had taken all the right steps in budgeting their home loan eligibility and are ready to take the plunge into home ownership.  Their financial planner approves of this step, and has given them the go ahead.  However from an early retirement aspirants perspective, they are making a huge mistake, that will potentially ruin any chances they might have of exiting the financial rat race early.  Where did they go wrong?  Isn't owning your own house a good financial milestone?

How much home loan can I get? (Part I)

Buying a home in India, or for that matter anywhere in the world, is a big decision for most people.  It is most likely the single biggest purchase you will ever make in your lifetime.  Gone are the days when one used to save for a lifetime, before finally being able to afford a small home towards the end of your career.  Today India is growing by leaps and bounds, and the average home buying age in India is dropping every year.  The Associated Chambers of Commerce and Industry of India (ASSOCHAM) estimates that the average age for home buyers in the 1980s was 55-58 years in India.  In stark contrast, since 2000, the average age for first time home buyers for personal use has dropped to 30-38.  Many first time buyers are either just married, or many times choose to buy a home even before marriage.

Inflation in India

Inflation is a much maligned but sometimes poorly understood phenomenon that has the most significant impact on any personal finance plan.  Particularly in a emerging country like India, inflation can be so rampant as to be the fundamental parameter that influences all investing decisions.  Inflation is usually defined as a rise in the general level of prices of goods and services in an economy over a period of time.  In the words of noted economist Sam Ewing, it is the reason why you pay $15 for the $10 haircut that you used to get for $5 when you had hair. 

Is 1 Crore enough to retire on in India?

If you had Rs 1Cr (approx USD $200,000) would you be able to retire right now in India? If you need to meet retirement expenses over 30 years, would Rs 1Cr suffice?  How much can you spend monthly, if you need the Rs 1 Cr corpus last over 20 years.  To understand these and several related questions, read on.

Compound Interest 101

Compound interest is the single most interesting and critical factor that impacts all projections of investment growth, retirement corpus accumulation, loan EMIs and payback tenures, etc.  For a concept that is so fundamental to financial theory, compounding can be exceedingly difficult for the average person to understand and fully appreciate.  This is fundamentally because with compound interest, the total corpus grows or declines in an exponential manner.  It is widely believed that the human mind has difficulty comprehending exponential behavior.  For example, Albert Bartlett a US scholar, once commented that "The greatest shortcoming of the human race is our inability to understand the exponential function".  In economics the exponential growth model is also known as the Malthusian growth model, after the Reverend Thomas Robert Malthus, who authored "An Essay on the Principle of Population", one of the earliest books on population growth rates.

Generational Finance NOT Personal Finance

Just do a google search for Personal Finance, and you will see tons of websites, blogs, articles, marketing pitches etc, all doling out advice on personal finance and how to go about achieving the various goals, investment decisions, savings rates etc associated with it.  It is amazing how much information and guidance gets dished out and consumed relating to this topic.  I guess, Personal Finance gets down to the core of who we are, what we do, and how we do it, and touches every aspect of our lives, which is why it is so hotly discussed, debated, talked about, and basically flogged to death on every financial TV channel, news media, or personal finance blog that you come across.

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.

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. 

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.

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.

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 Homepage

Here is a website that solely caters to the early retired, or the early retiring aspirants.  Retire Early Homepage, does contain a lot of useful material that you can browse through.  Unfortunately, for folks in India, most of this content seems to be geared for people in the US, and though the fundamentals are sound, the specifics cannot be applied as-is in the Indian context.

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?

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%

LBYM : Live Below Your Means

The key factor in building a retirement corpus, by far, is your ability to save (and invest) a portion of your income during your working years to fund your post-retirement expenses.  For those dreaming of an early retirement, it becomes imperative to save early and aggresively during your working days.  This concept has been discussed in great detail across the internet, and you can find many articles related to savings, frugality and a key retirement concept called Living Below Your Means (LBYM).  Simply described, LBYM refers to intentionally maintaining a lifestyle that is a little below what you can comfortably maintain.  The savings achieved by this approach can then be ploughed back into building your retirement corpus.  Now of course, this requires a lot of discipline to achieve, since in effect, you are giving up on your present comforts, to enable future well being.  Still, based on all the data I have seen so far, particularly from folks who have already achieved their early retirement goals, the key factor to enable this dream, is to save as much of your income as you can during your working years.  Thus, the earlier you want to retire, the larger percentage of your take home pay, you should be saving and investing for the future. 

This is something that should come particularly naturally for us folks in India.  Most of our family financial upbringing revolves around saving for a rainy day.  Interestingly I came across this lovely equation that describes the Indian philosophy beautifully.  The thought is that a persons happiness or contentment is a function of 2 factors; his/her needs or desires, and his/her belongings or assets.  This is represented as follows:

The western approach to enhancing happiness/contentment, is to aggresively increase ones assets and belongings.  The more one owns and possesses, the higher the numerator, and hence the higher the happiness levels.  The Indian (or eastern) approach is diametrically opposite to this philosophy.  The Indian approach suggests reducing ones needs/desires/wants.  This will reduce the denominator of the equation, thus leading to an increase in ones happiness quotient.  I found this simple concept a very intuitive way to understand and explain the LBYM concept, which fundamentally talks about the same thing in different words. 

Think about this.  In the meantime, my next post will focus on some number crunching to determine what would be the right percentage of take home pay to target for savings and investments to enable early retirement.

Online Traffic: Most frequently used websites

To get most of my personal finance related activities done efficiently, I rely very heavily on the internet, with its readily available and almost instantaneously updated content, which is usually in a easily searchable format.  To me it is critical to have all the information I need, accessible quickly and completely, so I can read through it, and make a decision.  I also need to be able to execute these decisions, rapidly and securely online with the ability to track the status on the spot, and also later in time.  Keeping these requirements in mind, here are a few of the weblinks that I use frequently.  Please feel free to let me know if there are any others that you would like to suggest.

1. Banking: I try to do all of my banking online, everything from salary accounts, to demand drafts, to utility bill payments, etc.  Most of the leading banks have very user friendly online websites, and they are continually being improved to add more capabilities and utilities.  My strong suggestion to everyone is to move as much of their banking online as possible.  I do all of my banking with a couple of leading banks and find their websites are more than adequate to meet almost all of my banking needs online.  I never have to visit the banks myself for any day to day needs. 

2. Stocks: Stock investing is another activity that takes up a fair amount of my online bandwidth.  Most of the time is spent on reading up about the latest developments in the stock markets, understanding the implications of these particularly to my personal situation and making changes in my stock portfolio in tune with the market movements.  In general, I find it very difficult to find useful and detailed information about the Indian stock market in a structured manner on a single website.  I typically use MoneyControl for my basic stock information and some basic stock data.  My wife uses MyIris to supplement our stocks and shares research.  I also follow the US stock market quite closely, since I find it has a direct impact on the Indian market.  I use Yahoo's finance website for all of my US stock market information.  I would strongly recommend the Yahoo webpages for tracking and understanding the US stock market.  For some reason, the indian version of the Yahoo webpages is not as mature and rich in content, and so I have never been able to use it effectively.  Finally, I use ICICI-Direct, for executing all of my stock investments.  I find the website quite adequate for all of my stock investment, quotes, trading, and tracking needs, and so far have not found another online broker who is as good, or reliable.  My wife also uses HDFC securities and reports that it has the basic tools for trading, but not as good as ICICI-Direct. 

3. Mutual Funds: For mutual fund research we go to only one place on the web, Value Research Online.  It is the most comprehensive collection of MF research, analysis, data, comparisons, and recommendations that we have found so far.  I would strongly recommend this site for all your MF research and information needs.  It is unfortunate that there isnt a similar website for stocks available at this time.  I use ICICI-Direct for executing all of my MF investments.

4. Insurance:  Here is where I have struggled quite a bit to go online.  I have not been able to find a good website that compares all the insurance products out there (and the several more that seem to pop up everyday) both in the life and health/medical insurance space.  Do let me know if you have any good suggestions on this front. 

I will add more information here, as I keep finding new ways to use the internet more efficiently to fulfill all of my personal finance needs.

Why do I want to retire early?

The first thought that comes to my mind when I think of retirement is "early".  How do I retire early, and get out of this rat race?  I have been in the corporate world for several years now, and lately I find myself increasing dis-illusioned by the whole corporate atmosphere.  There has got to be more to life than dragging oneself to work everyday, doing ones best to claw your way up the corporate ladder, put in the mind boggling long hours and late night meetings, soak up the pressure of increasingly tight deadlines, and worry oneself about meeting mindless targets quarter after quarter, and sometimes day after day.  When I started my career, I never dreamt that there would come a day when I would feel like this.  Today I know that I am burnt-out, and I want out.  I figured the best way to keep myself honest to my goal, is to first acknowledge how I feel, and share my feelings out here.  Going forward, I intend to chart out a course of exit, and blog my journey to early retirement in this journal.  Lets hope this story has a happy ending.

India Personal finance websites

Here is a listing of personal finance websites that I have found which are specific to the India context.  I will add more as and when I find them.  Since I am a newbie to this space, I will refrain at this time from adding any comments.  I believe each website has its strengths and will appeal to a different audience.  Good reading!

Jago Investor


Raag Vamdatt


Asav Patel

Investment Yogi

Subramoney