Retire Early in India

PPF Limit Increase : Duh!

2012-02-24T00:59:00.000+05:30

I had written a series of articles in November 2011 about the change in the PPF rate of interest and its general economic implications. I got some pretty interesting comments based on that series like the one here. (Are PPFs really that risky) I seem to have gotten so carried away by that series, that I completely missed the fact that the PPF Limit was also increased at the same time. Effective December 1st, 2011, the limit per year for PPF investment has been increased from Rs70,000 to Rs1,00,000 per annum. (Yes, that's 1Lakh Rupees per year) This means for the current financial year, if you had already maxed out your PPF contribution of the year for Rs70,000, you can now go in and add an additional Rs30,000 before March31, 2012. Starting next financial year, you can invest upto Rs1,00,000 into the PPF account. This sounds like a good deal to me. Now as long as the finance minister could also increase the 80C limit, we would all be in good shape!!

Personal Finance News : MCX IPO

2012-02-23T01:21:00.000+05:30

The MCX IPO opened yesterday February 22nd, 2012. MCX is the commodities exchange in India, and will be the first publicly traded exchange. I have seen good reviews about this IPO at all major financial sites, and most reputed financial advisors seem to be recommending this IPO. I figured I should apply for it as well, and did so yesterday morning. Interestingly I seemed to have forgotten that retail investors can now invest upto Rs 2Lakh in an IPO. Earlier the limit used to be Rs 1Lakh. Was checking out the Business Standard early this morning, and it claims that the MCX IPO was subscribed 91% on the first day with 1.5X in the retail category (clearly I will not get full allocation), 0.16X in HNI (this is very surprising; does the HNI community know something that I don't?) and QIB portion 0.74X (again not hitting the limit) In any case, the deed is now done, and we shall see how the allocation works out!

Early Retirement in India : Extreme Style

2012-02-21T22:46:00.000+05:30

Previously I had published a blog entry about one of my role models Jacob Lund Fisker. Jacob is the driving force behind Early Retirement Extreme, a philosophy of living in general that espouses the concepts of simple living, aggressive savings, and an overarching desire to become financially independent as quickly as possible. Jacob's also published a book about his early retirement experience that is a must read, if you can get your hands on it. Now a lot of the examples that Jacob cites in his book are relevant only in the US, and would sound very out-of-place in India. So I always looked upon his thoughts as more of a vision and guidance, than as specific steps to follow to reach my own financial independence and subsequent early retirement. For example, Jacob suggests that instead of using a dryer to dry your laundry, you could "air-dry" your clothes after washing, to save on electricity. Well guess what! none of us in India can benefit from this wisdom, since we all hang our clothes out to dry in the sun anyways. There are several other examples like this one, which led me to believe that there isn't really much that we can takeaway here in India from Jacob's lifestyle and early retirement experiment. However, recently I had some time to review several of his blog posts on Early Retirement Extreme, and here is something thought-provoking that I came up with.

There is a particular post on his website that is very relevant to us here in India. But before I get into the specifics of the post, here is a little quiz question for you. Which is the more expensive country to live in? India or the United States? Which country has the higher standard of living? India or USA? Which country has the stronger currency, and where do you expect cost of services and general cost of living to be higher? India or the US?

If you answered the US for all of the above, you are no different from me, and a million other folks. You naturally assume that since the US is the more developed country, and since the standard of living is higher there, the general cost of living (in Rupees to make it a fair comparison) should be much higher in the US. So basically the salary or income that you get here in India, will never be sufficient to live in the US, right?

WRONG!! Here is a very very interesting post from Jacob that walks us through, in great detail, how he manages to live in one of the more expensive places in the US (the San Francisco Bay Area) for only $7000 per year. That's right, you read it correctly, $7000 PER YEAR ONLY. Convert that into Rupees assuming $1 = Rs50, and you get Rs3.5L PER YEAR expenses to live in the USA. Now the San Francisco Bay Area is pretty expensive to live in, and it would qualify the same as living in one of the major metros in India. In fact, if anything, the cost of living there should be much higher than it is here in any major metro or Tier 1 city. However, Jacob for over 10 years, was able to live for only $7000 per year, or Rs3.5L per year, which in turn is less than Rs30000 per month.

Now of course, even Rs30000 is a lot of money for the average Indian to earn per month in India. However the point here is that it IS possible to significantly reduce your expenses to extremely low levels. If it can be done in a high consumption economy like the US, then surely it can be done, in a much more aggresive fashion here in India. This thought is the basis of my goal to save about 85% of my take home salary. I have stated this goal before, and after re-reading Jacob's post, I am now even more committed to it. Are you with me?

I made a mistake : Fixed returns can lead to Early Retirement

2012-02-19T23:16:00.001+05:30

Several months ago, I had stated to my wife, quite brashly if I may add, that debt-like returns would not find any place in our retirement portfolio. I have been in a tearing hurry to grow our retirement corpus and I thought that the slower growth rate of debt-like investments, when compared to equity based investments, was something I could not tolerate. In fact I was so convinced about my logic, that I even posted a blog entry justifying my position. I could not have been more WRONG!! However, like all good things, ones financial strategy is also never 100% right, and there is always room for improvement. I have now realized my mistake, and made room for some more fixed income into our retirement portfolio. There is one key recent investment opportunity though that triggered my change of heart. If you are a keen follower of personal finance, then you already know what I am talking about! Yes, I am of course talking about ...

... tax free infrastructure bonds. But before I get into the details, here are some related thoughts. The biggest fear I have with building a retirement portfolio is taxes. Taxes can take a huge bite out of my withdrawals from the retirement portfolio when I eventually need the money! I cannot afford to pay anywhere from 10% to 30% of my withdrawals to the government. Unfortunately there are only a few ways in which you can protect your retirement portfolio from taxation. Your EPF and PPF contributions follow the EEE concept. This means that the money going into PPF/EPF is not taxed, it grows tax free, and is not taxed when you withdraw the money. However, there is a maximum limit to how much money you can save this way. PPF maxes out at Rs1Lakh per year (was Rs70,000 earlier; increased to Rs1Lakh since Dec'2011) EPF is limited to 10% of your basic salary if you are a salaried employee. My next target is typically the long term capital gains route. Currently long term equity capital gains are taxed at 0% So you can stash all of your retirement portfolio into equity based investments, and withdraw them via SWPs (Systematic Withdrawal Plans) without worrying about taxes (assuming naturally that you have held these investments for more than a year) However, the first problem with this approach is that equity based investments tend to be high risk, and you do not want to be withdrawing from your equity portfolio in a market downturn. Also with the new proposed DTC (Direct Tax Code) around the corner, this benefit might be withdrawn at any time.

Dividend income is the other possibility. You can currently invest a large part of your retirement income in dividend yielding equities (either through directly buying high dividend yielding stocks, or through dividend mutual funds) and live off the yearly dividends that they generate. However, though dividend returns are currently not taxed, that could also change once the DTC is approved.

I am not aware of any other means currently to protect your retirement withdrawals from the taxman. In this scenario, the announcement of the tax free bonds came as a welcome relief, and really perked my interest. Back in 2003, the government of India had announced RBI relief bonds at 6.5% tax free interest. Unfortunately at that time I was not focused on my retirement planning. As I learned more about the taxation policies, I began to realize that there were very few avenues to save money, and build a portfolio that could generate sustainable and predictable yearly returns, without paying a fat share to the government. The US allows for investments via ROTH IRAs. This structure, allows you to channel your investments (upto a limit of course) through it such that your withdrawals are tax free. The ROTH IRA is basically a TEE structure. The money going in is already taxed, but once inside the structure, it can grow tax free, and can be withdrawn tax free. This is a powerful method to rapidly grow your investments. In India the only TEE structures are life insurance policies, ULIPs, and pension plans. Pension plans and traditional endowment policies are typically linked to fixed return instruments, and hence their returns tend to be low. ULIPs are no different from long term MF investments from a taxation perspective. India currently does not provide a formal TEE structure like the ROTH IRA.

Therefore when the tax free bonds were recently announced, I was pleasantly taken by surprise. I mentioned to my wife the moment I noticed this investment avenue that we should take full advantage of it. I had completely forgotten my earlier statement that I would never include debt-like instruments in my retirement portfolio!! The opportunity to lock in tax free returns of over 8% for 15 year periods was too good to pass up. I will not get into the details of the tax free bond offerings from NHAI, PFC, HUDCO and IRFC here. You can easily find tons of literature describing the various aspects of these bond offerings on the internet. Suffice it to say that guaranteed pre-tax returns of upto 12% per annum (for folks in the highest 30% income bracket) were too mouth watering to pass up. Obviously several people thought the way I did. The HNI allocations of all these bond offerings were over-subscribed within days. Fortunately all of them had separate allocations for retail investors like you and me. There was a limit of Rs5L per bond offering in the retail category, which I thought was high enough for most retail investors. In case you had more money available to invest, you could have spread 20L across the 4 offerings, and a total of 40L if you and your wife applied separately. At 8.6% tax free returns, you can generate ~Rs29K per month tax free for the next 15 years guaranteed!! This is possibly the highest guaranteed returns post-tax that you can generate across any existing TEE schemes.

No wonder I had to admit my mistake, and change my retirement investment philosophy. My only regret at this time is that I could not free up enough capital to invest in this tax free offering. If there are more tranches of such offerings in the future, I fully intend to watch out for them, and plan upfront to free up some more cash to invest in such risk free and tax free opportunities. Did you capitalize on this opportunity for your retirement portfolio? Such no-brainer opportunities do not come very often! It would be interesting to know how many of you participated in this bond offering. Let me know.

Stock Market Index in India (Part II)

2011-12-06T17:57:00.028+05:30

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.

When first established in 1986, the SENSEX comprised of the 30 key stocks that best represented the Indian economy of the time. Names like Zenith Ltd, Ballarpur Industries Ltd, and Hindustan Motors, represented the cream of the Indian manufacturing sector, and hence were included in the 30 strong SENSEX. Here is a listing of the BSE SENSEX from when it was first established. How many of the companies on the list, can you recognise as household names today? It is amazing that in a relatively short period of 25 years several companies that were considered as the shining stars of the economy at that time, are no longer familiar to investors, or have even ceased to exist. How many of us own Mukand Iron and Steel Works Limited in our portfolios today? Do we even know that this company was established in 1937, and that Mahatma Gandhi himself intervened in 1939 to have Jamnalal Bajaj and Jeevanlal Motichand to take over the company from Lala Mukand Lal, after whom the company is still named? How many of us encourage our kids to consider joining Premier Automobiles, or Zenith India Limited, when they grow up?

To provide some perspective on the time scale here, remember that the oldest stock exchange in the world, the Amsterdam Stock Exchange was established in 1602 by the Dutch East India Company (another connection to India!) for dealings in its printed stocks and bonds. So even with the much shorter time scale of the BSE SENSEX you can get an idea of the upheaval that markets can undergo with the changing fortune of economies and specific companies.

The early days of the SENSEX are an interesting case study. Since the index was established in 1986, but backdated to 1978-79, the SENSEX had the same set of constituents from 1978-1986. With the base set at 100 in 1978, the SENSEX debuted at 549 on April 1st, 1986. For the next 10 years, there was no change in the SENSEX components (with the exception of Zenith India Ltd, which was dropped and replaced by Bharat Forge Ltd in 1992) even though there were substantial changes to the universe of large liquid companies. As a result, by the time we got to the 1993-96 timeframe, it is debateable if the index was truly a good measure of the Indian economy of the time. We will see in my next post, how this was rectified and the SENSEX again became an accurate barometer of the Indian stock market.

Stock Market Index in India (Part I)

2011-12-05T17:55:00.000+05:30

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.

India boasts the first ever stock exchange established in Asia, from as early as 1875. (In contrast, the Tokyo Stock Exchange began formal operation in 1878) However, the earliest documented meetings of stock brokers was even before this in the 1850s in front of the Town Hall, Elphinstone Circle, now called Horniman Circle. Some of the earliest participants at that time were from the Gujarati and Parsi communities. In those days, Elphinstone Circle was a favourite hangout of the Parsis, which probably explains the choice of location. Here is a picture of Elphinstone Circle courtesy oldphotosbombay.blogspot.com

You can see the Town Hall building in the picture (the one with the triangular roof, and Greek style columns in front) Over time the meetings moved to a few different locations, before settling in at Dalal Street (literally Brokers Street) in 1874, and in 1875 becoming an official organisation known as "The Native Share and Stock Brokers Association". (Notice the propensity during the colonial days to refer to all things primarily Indian as Native) Since then for the last 135+ years the Bombay Stock Exchange has been based on Dalal Street. The BSE is currently housed in Phiroze Jeejeebhoy Towers, at Dalal Street, Fort Area, Mumbai, India. As recently as 2002, the exchange was simply called "The Stock Exchange, Mumbai".

The BSE SENSEX which most of you are probably more familiar with was established in 1986, with the base value taken as 100 on April 1st, 1978, and base year as 1978-79. In contrast, the Dow Jones Industrial Average or DJIA in the US was established as early as 1896, with representation of 12 stocks from leading American Industries. So clearly on a comparative basis, the SENSEX is still in its infancy as a stock index. The SENSEX is a weighted average of 30 component stocks representing large, well-established and financially sound companies across key sectors. In my next post, I will drill down a little into the components that make up the SENSEX, and how they have evolved over the years.

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

2011-11-23T21:08:00.002+05:30

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.

Let us take a closer look at the PPF scheme in India and see if it has any similarities to the Ponzi scheme in the US from the early 1900s. For starters the PPF interest rate is pre-defined by the government at the beginning of every year, and for decades has had no correlation to market returns. The interest rate is in fact a political issue, and is decided by politicians, rather than economists. Typically the interest rate is kept higher than prevailing market rates, ostensibly to encourage small savings, but also as a political ploy to please the voting populace. This is similar to Mr.Ponzi with his promises of a higher rate of return than otherwise possible in the broader market.

Secondly, the PPF scheme is pretty opaque in terms of how the account is managed, where the money is invested and current status of the scheme. Asset Management Companies (AMCs) in India are regulated by SEBI and are required to publish a detailed list of their financials every quarter, that include their investment portfolio, balance sheet, expense ratio, rate of return etc. The PPF scheme on the other hand is nowhere near as transparent. A recent audit of the EPF (Employee Provident Fund) scheme showed an excess of funds, that prompted the finance minister to increase the rate of return for the last financial year in the EPF scheme. The "finding" of these excess funds, in itself, was hotly debated for the correctness of the financial audit. Mr.Ponzi also did not maintain clear records, and it was impossible to fathom where the money deposited by his investors went.

The PPF scheme depends on new investors coming in yearly with their fresh deposits to keep the scheme running. When the collection began to drop for this financial year, the government stepped in and increased the interest rates to make the scheme more attractive. This has been done in the past as well, to keep the inflow going. The inflows into the PPF scheme are required, to fund various projects run by the government. The payouts from the PPF scheme are guaranteed by the government, and are not dependent in any way on how the scheme may have performed in that financial year. Again this is similar to Mr.Ponzi in that, he guaranteed his returns and they were not dependent in any way on how his business performed.

Now of course, Mr.Ponzi's scheme eventually failed when there was a run on his money. When all the investors panicked at the same time, and asked for their money back, he was obviously not able to repay them and his business folded. I do not expect this to happen with the PPF scheme, since it is backed by the Government of India. If there is run on the PPF scheme, all they have to do is print new money and return it to the people, so there is zero risk of default. In other words the scheme is simply too big to fail. This is similar to what has been happening all over the world economy from the big banks in the US, to entire countries in Europe. After years of mis-management, these big banks or countries (effectively schemes) are considered too big to fail and bailed out by either their own governments or an international body (like in the case of the bailouts in Europe) However, when you print/create money, you are actually defaulting in some sense, since the value of the money decreases. So in effect, even though you will get your money back from the PPF scheme, it will have much less value than you are entitled to. Mr.Ponzi also tried not to default his scheme by borrowing even more money (effectively what the government does, when it prints more money) but was not able to do it in time. The PPF scheme on the other hand does not have this problem, and so it can continue to operate legally, borrowing as much money as needed (by printing more money) to make sure that no payouts are ever defaulted.

This has been a long series of posts, and I hope I have clearly articulated why a defined benefit scheme that guarantees a certain rate of return, that is higher than prevailing market rates, is no different from a Ponzi scheme. This is true not just in India with the PPF, but also in more developed economies like the US which has Social Security. (In the past the US also had company sponsored defined pension plans, that effectively destroyed several company finances. Today all US companies have shifted to a 401K like approach, that promises market linked returns, and not pre-defined benefits) In India, the NPS scheme is similar, in that it only promises market linked returns, nothing more, nothing less. On the other hand PPF, EPF, and other such defined benefit schemes continue to operate as government sponsored Ponzi schemes.

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

2011-11-22T01:12:00.005+05:30

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.

The PPF scheme is undeniably very attractive, which is what makes it so popular for millions of small investors in India. The government has positioned it as a must-have part of every investors portfolio, and most financial planners will tell you the same thing. Heck, even I have a PPF account and diligently put away the maximum limit in it every year. Let's go through some basics of the PPF scheme.

For starters, the money you invest in the PPF scheme, is pre-tax. This is some-what similar to the 401K in the US, and by investing your pre-tax money you actually save on tax, since the money invested is deducted from your gross income. The government sets a limit of Rs70,000 per year for investment of pre-tax rupees into the scheme (again similar to the US 401K which has an upper limit for yearly investment). Next, any investment growth in the PPF scheme is completely tax free. This is a huge benefit, since your money can continue to grow for the 15 year tenure undisturbed by taxation, which usually takes a huge chunk out of your investments outside of the PPF scheme. Again, this is similar to the 401K scheme in the US. Finally, once the 15 year term completes, you can withdraw your money completely tax free! This EEE treatment of the scheme is unmatched in the world! The 401K in the US is EET, with the final withdrawals from the 401K taxed at the prevailing income tax rate at that time. However in the PPF scheme in India, even withdrawals are not taxed, making it unique and extremely attractive to investors. This is a tremendous gift form the government of India to the people, since in effect, it means that the money invested in PPF is never taxed!

Finally the returns from your investment in the PPF scheme, are also decided by the government. The PPF is a defined benefit scheme, in the sense that the government unilaterally announces the rate of return in the PPF account. The PPF scheme is fairly opaque, with no clarity on how the government expects to make the rate of return that it promises. Typically the PPF interest rate has been above prevailing market determined interest rates. The table below shows the PPF rates since the inception of the scheme.

Notice from the table that over the years, the government has promised and delivered a rate of interest that is much higher than the prevailing market rate at that time. Every time the market rates have gone up, the government has been forced to increase rates in the PPF scheme, to keep money flowing into the scheme. Again this year, as the RBI has increased interest rates to keep inflation in check, the collections into the PPF scheme have dropped significantly. The government depends on having a strong cash flow every year into the PPF scheme, and it had to increase the interest rates for this year to keep the scheme viable. The government from this year, has pegged the PPF interest rate to the 10year G-sec yield with a margin of 0.25%. So if the G-sec yield is 10% for a given year, the PPF interest rate will be 10.25% Notice again, the artificially inflated interest rate for PPF, to keep the scheme attractive to small investors. Do you see a pattern here?

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

2011-11-21T00:09:00.001+05:30

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.

When the government authorities requested to review his business books, they began to realise that Mr. Ponzi's company hardly kept any business records. Other than the name and addresses of his investors, there was precious little in terms of financial accounting, investments, profits earned etc. Naturally since there was no real business, there were no business records either! The only recourse they had was to question his investors, and Charles cleverly gave them the names of his early investors who had no cause for concern, since they had indeed received their money back, including the promised profits.

Charles' downfall really started with a publicity agent he hired to help spread the word about his business. This publicity agent got a close look at how Charles was siphoning off money from the newer investors to pay his earlier customers without making any actual profits, or even running a real business. He wrote an article in the leading newspaper of the time, about how Ponzi's business we robbing people by taking money from many, and re-distributing it to some. This caused a massive panic among the populace, with everyone asking for their money back and making a run on his business. Ponzi tried to return as much money as he could, but that was just a tiny fraction of what he owed to his thousands of investors. Early investigations by the bank authorities found that he owed USD $7 million, to his investors. The federal authorities swooped in quickly and arrested Charles. Further audits of his finances revealed that he owed about USD $20 million (remember these are in 1920's dollars) to his investors. Most of his unfortunate investors were wiped out, receiving less than 30 cents on the dollar. Charles was arrested, indicted and convicted on counts of fraud and larceny, and spent several years in prison. He was not finished with his swindling methods, and found ways to continue his nefarious activities after being released from prison.

His main claim to infamy however continues to be his first large scale scheme that he ran, and all subsequent business schemes where the crux of the strategy is to pay early investors by collecting money from newer investors, have since then been called Ponzi Schemes.

The Public Provident Fund Scheme or PPF, was issued vide Government of India, notification No. GSR1136 dated 15th of June 1968, and further amended from time to time. It is a savings scheme that also serves as a retirement planning tool for many who do not have a structured pension plan covering them. Individuals and HUFs can open a PPF account. A person can have only one account in his name. The initial PPF account has a maximum tenure of 15 years, and your investment is ideally locked in for the entire tenure. This rule is in place to encourage long term savings behavior from investors, with a penalty system in place for early withdrawals. Investors can choose to extend the scheme beyond the 15years, in blocks of 5years each. The PPF scheme is probably the most popular savings and tax management schemes for small investors in India. The first thing that most salaried employees (and for that matter self employed businessmen) do, once they start earning a regular income, is to open a PPF account and start saving and investing for the future. The PPF scheme is backed by the Government of India, and thus there is no risk of the scheme failing. Since your money is so safe in this investment avenue, millions of Indians are invested in the PPF scheme, and the new generations since 1968 are taught by our elders to compulsorily invest in the PPF scheme, as a safe means to accumulate and grow your corpus in preparation for retirement.

Next time, more about the PPF scheme, and some amazing similarities to Mr.Ponzi!

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

2011-11-20T00:08:00.001+05:30

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.

Let's get back to Mr. Ponzi. He moved back to the US, got married, and tried his hands at several businesses that did not succeed. He chanced upon an International Reply Coupon, and hit upon the idea of using this IRC in a form of arbitrage, which is not fundamentally illegal. I could get into a bunch of jargon to explain what he was upto, but it could get too technical and obscure the real motive of his scheme. Suffice it to say that he used the IRC scheme as a front to explain how his business made profits. Basically he promised his investors that his business would be able to generate 50% profits in 45 days and 100% profits, effectively doubling your investment, in 90days! Clearly any sane investor should know that such phenomenal returns are not possible, no matter how profitable your business is. Still people fell for the scheme in droves and began to invest in Mr. Ponzi's company. The beauty of his scheme was that, for his early investors, Mr. Ponzi truly returned 50% profits in 45 days, and doubled their money in 90 days. Of course he did not have any underlying business at all, so there was no way for him to make any profits, let alone the astronomical profits he was promising. So you might wonder, How did he manage to meet his commitments to his early investors? Simple! He took the money from his later customers, and gave it to his early investors as "profits". In reality, there was no business, no investment and no profits. All he did was collect money from more and more investors, and give a portion of it to his early investors as profits. He used the bulk of the money collected to finance his own lavish lifestyle He bought a huge mansion, and had air conditioning installed (a huge luxury in the early 1900s; akin to having your own personal helipad these days) He maintained several personal bank accounts, and funneled the huge amounts of cash he was collecting into these accounts.

The scheme was so well managed, that most investors did not have any inkling that something was amiss. Many of his investors never actually cashed in the stupendous profits that they were supposedly making! They were just happy receiving monthly paper receipts that showed how quickly their money was growing. These were of course just worthless financial statements on paper, and there was no real money growth. Still the documents looked formal enough to fool many investors, and several in fact rushed to add more money into the scheme, to benefit from the extraordinary "returns".

The first sign of trouble started coming in, when a few investors became suspicious about how Ponzi's business was making any money at all. A finance writer in a leading newspaper of the time, published an article suggesting the whole scheme was a scam. A few investors panicked and asked for there money back. But Mr. Ponzi was a smart and daring operator. Not fazed by this small setback, he quickly returned the money to these few investors along with the high interest amounts that he had promised. He then sued the finance writer, and won the case in court. At the same time, he ran several advertisements in leading newspapers extolling the virtues of his business, with testimonials from the few investors who had actually received money from him. This in turn led to a new frenzy of investing in his firm, with more and more people flocking to put their hard earned money into his scheme, so they wouldn't be left out, from the phenomenal returns that their relatives and friends were supposedly making from Mr. Ponzi's business.

Thus, he was able to run his scam for quite a few months, continually collecting money from more and more new investors, and using a small portion of it to pay off his early investors to keep them satisfied. Most of the money simply went to support his lavish lifestyle and excessive spending habits. In my next post, we will see how the scheme finally collapsed and its implications to his unfortunate investors.

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

2011-11-12T13:51:00.000+05:30

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.

I have always thought that eating out in restaurants is not very expensive in India, when compared to elsewhere in the world. Of course, if you choose to go to the fanciest of hotels that is rated 5-stars, a dinner for two can get to be very expensive, but these would be reserved for the choicest of occasions and hopefully rather infrequent. I am talking about a casual lunch for two in a relatively nice restaurant, with a comfortable ambiance, tasty food, and overall an excellent way to spend a couple of mid-day hours. In the US, a lunch for two could easily cost upto US$30, comprising of a starter, a couple of entrees, and maybe a shared dessert, or a couple of (non-alcoholic) drinks. That's about Rs1500 which is a lot of money in the Indian context. Typically eating out in India is no where near that expensive. So I convinced Mrs.B this Friday to take some time off from work, to grab lunch at a restaurant that we both like, but hadn't visited in a while. We got an auto, and were at the restaurant within 15mins at the stroke of noon. We were early for lunch (by Indian standards) and so the restaurant wasn't even half full. We got our choice of seats, and asked for the menu. The first surprise that came our way was that the restaurant did not offer a-la-carte, off the menu orders for lunch. The only option was the lunch buffet priced at Rs275 per person. The buffet spread looked inviting, with a good mix of vegetarian and non-vegetarian dishes. My wife liked the mixed vegetable tikkis, while I binged on the chicken wings. The noodle soup was also pretty good. They had a live chaat counter that was too good to pass on, so we took a mixed plate of dahi-puri and pani-puri. For the main course, both of us liked the red thai curry with plain rice. The dum-aloo and dal makhani looked very rich, so we just tasted a little. The chicken hariyali was perfectly spiced and so was the amritsari machli. After such a heavy lunch, we barely had room for dessert. Mrs.B settled for the fresh fruit on offer, with a plate full of watermelon and pineapple. I managed to put down a brownie with some strawberry icecream. The service was fair, and we got to spend a good couple of hours enjoying the meal, and each others company. All in all, a delicious lunch that was well worth every penny.

So I was cleaning out my wallet this morning, and I took a closer look at the bill that we'd paid for the lunch yesterday afternoon, that got me thinking about how much the lunch really cost us. We took an auto to the restaurant that cost Rs27 and one on the way back for Rs31. The buffet cost Rs275 a piece, with a 14% VAT tax, and 10% service charge. Now of course we are paying for all of this with our after tax rupees, so there is that additional income tax burden to consider. Putting it all together, here is what the final cost comes out to:

I have added up all the components that the lunch cost us, including the income tax that we have paid being in the 30% tax bracket. It is easier to understand this data in a graphical format. See the pie chart below which shows the same information as above in percentage terms.

The surprising learning for me, was that only ~50% of our total spending went towards the actual lunch. The remaining 50% went towards paying the government, the waiters and the auto-wallah. Now I am not grudging paying the auto-guy and the waiters since they are providing a service. The government on the other hand takes a huge 37% chunk out of my lunch spending for limited returns. The double taxation on my hard earned rupees in the form of VAT (double cos I have already paid income tax while earning the money, and now have to pay VAT while spending it!) is particularly painful. Here I haven't even accounted for the fact that the restaurant is also making a profit on my lunch spending, and the 52% that is attributed to lunch above, in reality is shared by the restaurant as profits, and my own value for lunch.

Maybe Mrs.B has been right all along about cutting down on eating outside in restaurants. I need to pick up a recipe or two to try out on my own at home. This has definitely been eye opening for me; what do you think?

Cost of Living in India : Light South Indian Lunch

2011-11-10T17:35:00.000+05:30

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

2011-11-10T01:37:00.000+05:30

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.

Finally there are security guards (watchman in Indian lingo), and the maids (bai in some parts of India) who take care of the general cleaning of common areas like stairs, parking lots, driveways etc. All of these shared amenities, utilities and services need to be paid for, and that is what the monthly maintenance fee covers. The more recent complexes that are coming up, are being planned like mini-cities with everything one would need from shopping, schools, office spaces etc integrated into the living community. These are typically so large, that they need professional management companies to take care of the upkeep of the entire community. This is similar to condo or home association fees that you'd have to pay in the US, and I am sure there are similar methods in place in other shared living communities.

In the older buildings that I have seen, it is common place to have a per flat maintenance fee that you have to pay monthly. For example in my parents building, every flat owner pays Rs5000 per 3months as maintenance fee. In my earlier building where we used to rent a flat, we paid Rs1200 per month as maintenance fee in addition to our monthly rent. Currently we live in a little more upscale housing society, and our monthly maintenance fee is linked to the square footage of every individual flat. In our complex we now pay Rs1.65 per sqft for monthly maintenance. So for example a 1000sqft flat owner will have to pay Rs1650 per month, while a 1500sqft flat owner would be paying Rs2475 per month. This kind of arrangement is fairly common in mixed size colonies wherein different flats have different sizes ranging from 1BHK to 3BHK. Even though I think the maintenance fee is very high in my complex, we are still in the mid-range for a Tier1 city. I have seen several of my friends how live in more modern integrated complexes paying as much as Rs3 per sqft for monthly maintenance. For a larger sized 3BHK flat of 2000sqft in such a complex, the monthly maintenance alone would amount to Rs6000. This is almost the same as the total monthly rent that several of us used to pay just a couple of years ago in our city! Villa complexes which are the rage in the housing market these days, for the single family house style living that they promise, and the integrated town-ship environment, have even steeper monthly maintenance fees. Interestingly enough, tenants are sometimes charged a higher monthly maintenance fee than home owners, so if you are planning on renting, make sure to understand from the landlord, who will be the paying the maintenance? Is it included in the monthly rental or do you have to pay it directly to the building association?

Let me know of the monthly maintenance fees that you are paying currently, and do mention the type of complex and city (Tier1, Tier2 etc) that you come from. I will try to compile the information, and track how things are changing over time.

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

2011-11-09T01:17:00.000+05:30

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?

For starters let us look at some "role models" to see how they spend their money. To help with this discussion, I will pick people that you have most likely heard of (unless you live in a cave) Let's start with William Henry Gates III, or Bill Gates to you and me. He lives in Medina, Washington in a home that is approximately valued at US$150M. In the 2011 Forbes Wealth rankings, Bill is estimated to be worth US$56Billion. Next, we will profile his close friend and legendary investor, Warren Buffett. Warren lives in Omaha in his 50+ years old home, that is probably valued at US$1M. Warren's networth is estimated to be US$50Billion. Picking an Indian name next, let's talk about Lakshmi Mittal, the steel magnate and CEO of ArcelorMittal who is known for his ostentatious displays of wealth. Worth a whopping US$31Billion, Lakshmi owns three prime properties on the "Billionaire's Row" at Kensington Palace Gardens that are collectively worth US$1.2Billion. Speaking of ostentatious, closer to home, we have our own Mukesh Ambani estimated to be worth US$27Billion. He has just finished construction on his dream home in Mumbai called Antilia, which is considered the worlds most expensive single family home in history costing an estimated US$1Billion. So what is the common thread in all of these numbers? Clearly all of these folks (with the exception of Mr Buffett) like to live large and have the money to be able to afford it. However, even in the most extreme case in the above examples, the amount of money "invested" in the primary residence is not more than 4% of their overall networth. These business leaders with their enormous spending ability, choose to spend an extreme of 4% (and on average less than 1%) of their networth on their primary residence.

Now lets contrast that with Gaurav and Sneha. They are just starting off on their careers, and by no means do they consider themselves rich and wealthy. In fact they are firmly entrenched in the category of the new middle class in India. However, with their goal to purchase a flat worth Rs52 lakhs, their networth would have to be Rs 13Cr, if they want to match up to the 4% primary residence spending guideline from above! Clearly, by this metric they are spending much more than their means, on this new flat purchase. Now I have picked the extreme examples from above, to really up the contrast on spending strategies. In reality, given the extremely high networths of the individuals I have considered it is not surprising that only a very small portion of it is spent on their primary residence. However, it does illustrate the point that many times we over-estimate our spending capacity based on our ability to maintain the cash flows required to fund the expense.

Like I described in my earlier post on Compound Interest 101, the initial years when saving/investing for a financial goal are crucial in terms of corpus growth. In the early days of Gaurav's career, his networth will primarily grow based on the quantum of his savings. Only after his corpus has reached a significant amount, will the power of compounding take over and continue to power future corpus growth. In this crucial early period of his career, when Gaurav should be saving and in turn investing aggressively, he is choosing to block up as much as 50% of his net take home income (not to mention the 15% down payment on the home) in his primary residence. Now the primary residence can be considered an asset as well (most financial planners do that) since it does have value, and is not a depreciating asset. However, since it is your primary residence it will not bring in any income on its own. The value of this asset might increase, but this is only a notional or paper growth in assets, since there is no way for you to monetize this asset, unless you sell your house (but then where will you live?) Reverse mortgages are slowly finding popularity in India, but this is a step that you will only take once you are deep into your retirement years.

In summary, though Gaurav is eligible to take on this level of financial commitment, once he signs the home loan papers, he might as well kiss any hopes of early retirement goodbye. Once the home loan documents are signed, he has tethered himself to the bank, and for the foreseeable future (25 years is his home loan tenure) will work 33% for the govt (assuming he is in the 30% income tax bracket), another 33% for the bank (since he will be paying off 50% of his take home, or 33% of his gross income, towards EMIs) and only the final 33% for himself. In effect for every 3 days of work that Gaurav puts in (and I am sure he works in a high stress environment to be able to command such a high salary) he only gets paid for 1 day (since the remaining 2 days worth of income is taken by the govt and the bank respectively) Gaurav will have to continue slogging away at work, and the situation will most likely get tougher for him, if his wife Sneha were to choose to stop working (since her income is also accounted for in the home loan eligibility computation)

For early retirement aspirants, the conventional thought of paying around 45%-50% of your take home income for home loan EMIs is a non-starter. I am not suggesting that you should not buy a home. Just realize that your primary residence, is a paper asset that does not bring in any monthly income, and though it appreciates in value, the gains are only notional. I would recommend a much more conservative 15-20% of your net take home salary to pay for any home purchase, leaving plenty of monthly income in hand for aggressive savings and investments. Particularly for folks early in their careers, aggressive savings is critical to unlock the power of long term compounding of wealth. Dial down your first home purchase aspirations and give yourself a shot at quick financial freedom and early retirement. Else follow conventional guidance, buy the best home your money can buy, and commit yourself to decades of daily grind in pursuit of financial freedom.

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

2011-11-06T19:57:00.000+05:30

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.

In most Tier1 cities in India, the trend I see these days is that once a person graduates from college and begins working, the first big ticket purchase they consider is a car, and the second one is a house. In most Indian families, even after the children start working they typically continue to live with their parents and siblings. After a few years of working when they are 25-28 years of age for boys, and a couple of years younger for girls, the thoughts turn towards owning a home. Guys typically prefer to buy a smaller new home (maybe a 1BHK) just prior to getting married, so they can move in as soon as the wedding is done. The other alternative is to buy a bigger new house (upto a 3BHK) so the newly weds can have their privacy, while still living with their parents. Girls on the other hand might typically wait to get married, and then right away begin the search for a home, since the joint income of the husband-wife couple is more than enough to afford a good home. Many times the quality and size of home you currently live in, or plan to buy soon, can be a critical factor in influencing the choice of life partner, with families preferring to create marriage alliances with their social and financial equals (as measured by the size and quality of their dwelling!)

Buying a home in India can also be a very emotional decision, heavily influenced by family, friends, peers and the unique social environment we live in. Peer pressure plays a big role here as you see your friends and colleagues purchasing homes. There is also a desire to show that you have "arrived" and the best way to do so, is buy purchasing the biggest house you can afford. A nice upscale colony, with a fancy clubhouse, tennis courts, gymnasium, walking/jogging track etc helps in setting the bragging rights, even though you may have to pay a stiff monthly maintenance fee for several of these amenities that you probably never use!

Of course we always rationalize to ourselves that surely we deserve the best house we can afford. We want to provide the best living conditions for our parents given that they have sacrificed so much for use. We want our kids to have the best amenities, and access to swimming pools, tennis courts, basket-ball courts, play areas, etc, since we did not have that luxury when we were growing up. The list of reasons is endless, and I am not debating right or wrong. I had the same thoughts while we were trying to figure out where to buy a home ourselves.

Let us take the example of 29 year old Gaurav who is married for a couple of years now to Sneha and is soon planning to have kids and start a family. This is of course a fictitious example, but helps to illustrate my point better. Before Gaurav and Sneha decide to have a child, they would like to purchase their first home. They would like to go for a 3BHK, since 3 bedrooms would give the family enough space and privacy once they have a child. Since both Gaurav and Sneha are salaried employees, they expect one set of parents (either Gaurav's or Sneha's) to stay with them almost throughout the year, to help with taking care of their child. A good apartment complex near the upcoming outer peripheral road would be a good place to invest in a home, since there are several new developments happening in that area. Good schools are expected to come up there soon, and both their offices are also within a 10Km radius. The first thing Gaurav does is search online for how much home loan can he get given their combined joint monthly income. Gaurav and Sneha are very disciplined and do not spend extravagantly. They do not have any personal loans or student loans and pay off their credit card bills promptly. Their joint monthly take home income is Rs 80,000. Gaurav and Sneha approach a leading bank to negotiate a pre-approved home loan so they can decide on the budget for their dream home purchase. The bank informs them that they typically sanction a maximum EMI of 45-50% of the net take home salary, and encourages them to jointly apply for the home loan to maximize the total loan amount. Also since they dont have any other personal loans, or credit card debt, and their credit rating is impeccable, the bank agrees to extend the eligible monthly EMI to 55% of their take home pay. This means the bank estimates that Gaurav and his wife can comfortably pay a monthly EMI of Rs 44,000. After all the bank manager also has home loan disbursement targets to meet, and a young couple with a strong employment history is an ideal customer for the bank.

Gaurav decides to maximize the tenure of the loan to further bump up his overall loan eligibility. The maximum term with this bank is for 25 years. The home loan interest is a floating rate of 10% per annum. Based on these parameters, Gaurav is eligible for a home loan of Rs 44 Lakhs (I used the home loan EMI calculator available here at ApnaPaisa) Since the bank will only fund upto 85% of his loan, his maximum budget can be Rs 52 Lakhs with the 15% margin money of Rs 8 Lakhs being Gaurav's responsibility. Gaurav and Sneha are overjoyed by this and sign up for the pre-approved home loan. They can now buy a flat of their choice upto a maximum budget of Rs 52 Lakhs. This is a fairly conventional storyline, and is repeated hundreds of times across various banks in India.

So what is wrong with this story? Well nothing much, if you are counting on a conventional financial plan, with traditional milestones of marriage, family, owning a home, working hard till the age of 60-65, and finally leading a happy retired life. But this does not work for early retirement aspirants. In my next post we will dissect this case study from an early retiree's perspective, and see why this plan cannot co-exist with thoughts of early retirement.

Inflation in India

2011-11-06T12:50:00.000+05:30

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.

First it would be instructive to look at inflation in a mature developed economy like for example the US. In recent years the US has not experienced significant inflation levels, with the inflation rate hovering around 3-4% for the last decade. The following is a chart from Wikipedia that shows the US CPI Inflation over the last century.

Over the last couple of decades since 1990 US inflation rates have been relatively stable and low. Inflation rates of around 3-4% seem very comfortable and makes financial planning over the long range, a tad bit easier. The interesting thing is that in the 70s inflation was very high averaging in the high single digits, and peaking at 15%. My key takeaways from this graph are that even in a mature economy inflation if not controlled can go up significantly, and also the variability in the inflation rate cannot be avoided particularly over timeframes that range over decades (like hopefully my retirement days)

Now lets contrast this against the inflation rates seen in India. I found this historical annual CPI inflation data on the Worldwide Inflation page.

As you can see inflation in India since the mid-70s has averaged around the 10% mark. The 1999-2005 period in recent memory is almost like a "Golden" period from an inflation perspective, characterized by low levels of inflation, and possibly the resultant bull market. However, the recent high inflation rates that many of us are complaining about, is just a return to the mean that our parents struggled with through the entire earning careers. The early-70s seem an aberration due to the events of the time like the India-Pakistan wars, and more importantly the oil-shock of 1973-74. Before that the mean seems to hover around the 10% mark. There is not much point looking at inflation data prior to the 50s since the conditions in pre-independence colonial India were very different and lessons learnt from that period are most likely not applicable today. My key takeaway here is that the India has always worked with a high inflation rate of 10% and I don't see the norm changing in the near future. Periods of low inflation (in the low single digits) are few and rare, and should be taken advantage of, as and when they occur. In the meantime, we should be looking back to the age-old methods used by our parents to combat high inflation rates.

Here are some, at first glance non-intuitive, but extremely sane financial decisions that I have seen people make as a result of the prevailing high inflation environment.

We tend to stock up on non-perishables as we know the same product is going to cost more next month. In these times of rising incomes, people have more purchasing power, and I routinely see them buying large quantities of soaps, cosmetics, house-hold cleaning agents, even grains, biscuits, basically anything that is non-perishable and can be stored for a month or longer. Every super-market you walk into, you can see sales on bulk non-perishable goods, and people willing to buy these bulk products (for example a pack of 5 soaps, that will probably last a family of 4 for 3-4months) knowing fully well that the same item will cost 5% more in a few months.

Real estate has seen a crazy spiral of inflation driven price increases. There is a mad rush to acquire property due to the fear that the same house or plot of land will appreciate between 15-20% in a year, pushing it out of your spending capacity. Builders and property development firms take advantage of this phenomenon by launching huge developments with 100s and nowadays 1000s of flats, with the firm belief that they will be able to find customers to lap up these offerings. The average joe is in a rush to buy property to "lock-in" today's price, since he/she knows that in as little as 5-7years the same property will cost double the price.

Wages are caught up in an inflation driven spiral as well (economists call this cost-push inflation) as employees clamor for higher wages in order to maintain their lifestyles in a high inflationary environment. This in turn drives up costs further, and adds to the cycle of inflation. The new Gen-X and Gen-Y employees have become used to this environment and typically expect wage increases in the double-digit percentages. This expectation (which has been met in recent years) leads to unhealthy financial decisions that are dependent on future expected wage hikes. The younger generation is willing to make bigger purchases, most times leveraging on loans, expecting to be able to repay them with future wage increases.

It makes financial sense in a high inflation environment to accumulate (or hoard) products and assets. In addition to hoarding what you can afford with your current wealth, most folks begin to leverage by taking loans to accumulate assets beyond their current means. The thought is that the high inflation environment will continue, and future loan re-payment will be with a de-valued currency that is progressively easier on the borrower.

Health care costs continue to spiral, making it difficult to estimate insurance premiums and how much insurance cover to purchase. Insurance firms increase annual health care premiums, and keep releasing products with higher insurance limits, and more innovative schemes like top-up insurance products with high deductibles. There is also a brisk trade in life insurance policies since the term insurance that you bought 5 years ago for Rs 10 lakhs cover, no longer seems adequate today simply because of the de-valuation of currency due to inflation.

Finally, retirement plans are most impacted, since any form of fixed retirement income (PPF, NSC, FDs etc) is typically not inflation indexed and hence doomed to failure. Equity and real estate are probably the only forms of inflation indexed investments that can combat the high prevailing inflation rates. And predicting a retirement corpus to enable early retirement becomes a herculean task to estimate with any reasonable degree of accuracy.

The positives in this story are that, high inflation environments have existed before in mature economies, and are fairly typical in other emerging economies even today. We should be looking for strategies for wealth management and growth that have worked in these environments in other countries, and adapt and apply them within the Indian context today. This would be the right approach since, "The middle class learn from their own mistakes, while the rich learn from others mistakes!"

Is 1 Crore enough to retire on in India?

2011-11-04T23:38:00.002+05:30

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.
Similar to the 1 million dollar mark (USD $1M) as a financial milestone in the US, in India in recent times, 1 Crore (Rs 1Crore) is the magic figure that is often talked about. It is not as small as 1Lakh which is somewhat easily achievable these days, but not so far out that it is completely out of reach for the diligent and disciplined saver. So lets say that through hard work, patience and discipline (or by winning the lottery) you have achieved the goal of having a total accumulated corpus (networth) of 1Crore. By total corpus, I mean the total amount you have in liquid investable assets like bank accounts, Mutual fund investments, FDs, stocks, etc. I do not want to include your primary residence as an asset, since you need it in your retirement days to live in. Any additional real estate equity (if you are lucky enough to have it) can be included in the total corpus, as long as you realize that the entire corpus will need to be utilized to generate income once you have retired.

Now the big question is Is 1Crore enough to retire on in India? Can you use this corpus to fund all your expenses and never have to work again? If you had 1Crore Rupees right now, could you give up your job right at this moment, and retire? Now this is a very tough question to answer, since it depends on several factors that will be unique to your situation. It is dependent on how many years you need to spend in retirement, do you have kids?, what are your monthly expenses?, do you plan to leave a inheritance for your kids, your health etc. Since I cant tailor this article for all situations, I will instead assume a range of expenses, and compute the probability of a 1Crore corpus enabling retirement.

I will also assume for the purposes of this example that you can generate a 12% annual rate of return on your invested retirement corpus. This should be the average rate of return across your asset allocation which could be in rental real estate, MFs, direct equity stock holdings and dividends, FDs, PPF etc

Another key factor we cannot ignore is inflation. Many times people forget to factor in this destroyer of wealth. I will go with an 8% inflation rate, since these days we are subject to rampant inflation, and I think it will take several years if not decades for the inflation rate to cool off.

With these basic assumptions let us first start with a simple example wherein you have accumulated Rs 1 Crore, and are now ready to retire. You estimate that your annual expenses will be Rs 6Lakh (Rs 50,000 per month) Can you fund your entire retirement expenses from your retirement corpus? Let's do the math and see how this works out. I have plotted the total corpus and the increasing annual expenses (since we have a 8% inflation rate) in the graph below, with the total corpus on the left axis and the annual expenses on the right axis.

Notice that in the early years your corpus keeps increasing since you are getting 12% investment returns, while you are not withdrawing much for your annual expenses. Your total corpus peaks in your 16th year of retirement at Rs1.6Cr !! Unfortunately for you, your annual expenses are also growing at the rapid 8% inflation rate. So in your 16th year of retirement you will need Rs19 Lakh to fund the same lifestyle which you could afford in your 1st retirement year at only Rs6 Lakh. Your annual expenses now keep increasing and make a significant dent in your total retirement corpus. From the 16th year onwards your corpus steadily decreases and finally runs out completely in the 26th year. So basically for this situation, you can fund a retirement of only 26 years. If you are in your 60s, then potentially 26 years should be sufficient to cover the remainder of your (and your spouses) life needs. Mind you, that you will not have any corpus left at the end of 26 years to pass on as an inheritance to your heirs. However if you are in your 50s, you could be cutting it close since in 26 years you will be in your mid 70s, which would be a terrible time to run out of money!

Finally, continuing to assume a 12% investment return rate, I show below how long your retirement corpus will last for different inflation rate assumptions and annual expenses. I start with Rs3 Lakh annual expenses (or Rs 25,000 monthly expenses) and keep increasing the annual expenses to as much as Rs 7 Lakhs (or Rs 75,000 in monthly expenses) For each of these cases, the height of the bar, shows how many years you can assume the Rs 1Cr corpus will last.

The blue bars assume an inflation rate of 8% and the red and green bars assume 9% and 10% inflation rate respectively. Naturally as the inflation rate goes up, your total corpus runs out faster. This table will help you pick an inflation rate you are comfortable with, and assess if you can retire with the Rs 1Cr corpus. For example if you are in your 50s and want to be conservative in your inflation rate prediction and go with 9%, then you should target monthly expenses of Rs 25,000 or lower (Rs 4 Lakh annual expenses) to ensure that your corpus will last for atleast 30 years (which is what you will need, to ensure you have money well into your 80s)

I hope this table will help you figure out if Rs 1Cr will be enough to fund your retirement dreams. You would be surprised at how little Rs 1Cr can fund in monthly expenses if the inflation rate continues to remain very high!

Compound Interest 101

2011-11-04T02:27:00.004+05:30

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.

Let us look at a few examples to better understand the power of compounding and its implications to financial planning. We will start with a simple goal of saving up Rs30 Lakhs in 25 years. This could be a financial goal that you take up to fund your retirement, or maybe plan for your child's higher education. Assuming a 12% annual rate of return, you would need to invest Rs20090 annually to achieve this goal. So far this is just basic mathematics, and is the kind of computation any financial planner, or online financial calculator can do for you. Here is a pictorial representation of how the corpus would grow over the 25 years, finally reaching a value of Rs30 Lakhs at the end of the 25th year.

Now here are some interesting observations that are a direct result of the nature of compounding. I have labeled them as Compound Interest Observations (or CIOs)

CIO1: The first thing I'd like you to notice is how exactly your total corpus grows over time. The exponential nature of the curve above leads to some interesting results in terms of the rate of growth of your corpus over time. This result may not be very evident when you look at the above curve, so let me show you the same curve in percentage terms below.

First lets focus on the red line at the mid-point of your 25 year investment plan. At the 12.5 year mark, your corpus only amounts to 20% of your final savings goal! So even though you have completed 50% of your investment timeline, you have only achieved 20% of your investment goal! Next lets focus on the second red line at the 20 year mark. At the 20 year mark you have completed four-fifths or 80% of your investment timeline, and still your corpus has only reached a little over 50% of your savings target. It is only in the last 5 years that the power of compounding really kicks in and catapults your investment to the final 100% target. The key takeaway here is that even though you are steadily investing Rs20000 annually, and the rate of return is also a steady 12% annually, the corpus growth is heavily weighted to the later portion of your savings timeline. In the early years a very small amount of the corpus will be built up, while towards the end as you near your goal, the corpus grows rapidly. This simple effect has profound implications on the impact of variations in investment ability, or investment return on the final corpus accumulated. As a case-study, this example clearly reveals why many people get frustrated with their savings progress. In the early stages of savings, the corpus growth is much slower (20% corpus in 50% time, 50% corpus in 80% time) and it is only much later that you can finally start seeing the magic effect of compounding. This effect many times leads to people giving up on their savings goals, since they are not able to see a proportionate increase in their corpus for the effort they put in (in the form of annual investments) during the early years. However, this example clearly shows that you need the patience to complete your investment timeline, to truly reap the rewards of compounding.

CIO2: The next point to closely observe is the yearly increase in your corpus. I have plotted the yearly increments in the total corpus for this example below.

Notice that in the first few years the annual increase is only around Rs20,000 to Rs40,000 per year. Whereas after the 15th year, the corpus grows by more than Rs1 Lakh per annum. This just reinforces the observation from the previous case wherein the rate of growth is hardly worth mentioning in the initial years, but the yearly increase is spectacular in the last few years of your investment timeline.

CIO3: Next lets look at how the yearly growth that is described above, is actually achieved. In the plot below, I show 2 lines. The blue line is the percentage contribution of your own investment to the yearly increase above (remember you are putting in Rs20K every year which will show up as an increase in corpus every year, but is really your own money) and the red line is the percentage contribution from the investment returns (at 12% per annum) to the yearly increase.

Observe that in the first 3 years, over 70% of the yearly increase is coming from your own investment adding up to the corpus. The increase from investment returns is less than 30% in each of the first 3 years. This is why it is so critical to continue with your investment plans in long range products like ULIPs and insurance endowment policies well beyond 3years, since in the first 3 years, most of the "growth" is really your own money being returned to you. The cross-over occurs at the 6th year in this example, where both your investment of Rs20K and the investment returns are almost the same. Beyond this point, the investment returns steadily keep increasing and from the 20th year onwards, account for more than 90% of the yearly growth. At this time, your yearly investment of Rs20K becomes negligible since almost all of the yearly growth is powered by investment returns.

CIO4: The final observation I will make in this article is to drive home the point from CIO3. The graph below shows the percentage of your money (the annual Rs20K that you are investing) in the actual corpus that is available every year.

You will notice again that in the initial few years the percentage of your money in the total corpus is high. For example at the end of the 3rd year, ~80% of the total available corpus is your own money! (the Rs60K that you have invested in the first 3 years) Investment returns at the end of the 3rd year form only 20% of the overall corpus. Even after 10 long years, the total corpus comprises only 50% of investment returns with the remaining 50% being your own investment money. This again highlights the need to stay invested in long range products almost to the end of their lifetime, since during the early stages most of the corpus is your own money, with a low percentage of investment return based money.

I hope this article sheds some additional light on how compounding actually works, and allows you to better envision some of the implications of the way compounding grows your investments. No wonder Albert Einstein said "Compound Interest is the 8th wonder of the world. He who understands it ... earns it ... He who doesn't ... pays it"

Generational Finance NOT Personal Finance

2011-11-01T16:08:00.002+05:30

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.

Now typically, when it comes to the savings and investments part of personal finance, every single financial planner and wealth management guru seems to approach it in the same structured manner. The first step is to collect data about the person (or nuclear family) in terms of his/her current financial situation. This could be in the form of assets, liabilities, income sources, expenses, investments, insurance, etc. The next step is to document all the financial goals, and try to assign a timeline and a Rupee (or Dollar) amount to it. Then, typically the financial Yoda (Star Wars reference) will pull out a bunch of assumptions based on historical data and future projections, regarding risk and returns for different asset classes, and suggest a quantum of money for savings/investments and the asset class mix, to attain each separate financial goal. This overall summary is called the Personal Finance Plan, that is handed out to the client with a hefty charge for the service. I have seen this pattern repeated over and over ad nauseam, with only minor variations in the overall storyline.

Pictorially you could think of a Personal Finance Life Cycle to look like this.

The actual age at which you target these goals, or even the goals themselves may vary from person to person, but the concept is basically the same. For each financial goal, the planner will suggest a quantum of investment and an asset strategy that starts with an aggressive allocation plan, and then subsequently moves to safer and lower risk allocations as the goal gets nearer and nearer. This is the time honored method of PERSONAL financial planning.

I propose that this method has become dated and a new thought process is required to redefine financial planning. The key change in thinking is to plan in terms of GENERATIONAL finance, and not PERSONAL finance. Lets do a thought experiment for a minute wherein the same financial planner as before, is providing financial advice to the person above, and at the same time also to his father and son. To explain simply, lets assume that the planner is providing financial guidance to 3 generations of the family across their entire lifetimes, all in a synchronized manner, rather than looking at each persons financial plan in isolation. In this new scenario the planner will observe that major financial goals will typically come up in every 5year cycle (either for the grandfather, father or son; forgive the patriarchal assumption here, but I need to work with something and a matriarchal lineage would work just as well for this thought experiment) Basically every 5year cycle or thereabouts, major financial goals will mature, need to be funded and retired. So I hypothesize that a simple asset allocation of 90% aggressive investments (high return, high risk; be it equity, real estate, or whatever if the flavor of the day) and 10% safe investments (low return, low risk; be it CDs, FDs, debt or whatever works at that time) should be sufficient for the GENERATIONAL planner to meet all the Generational goals. At any point in time, there will be 1 goal that will be nearing maturity, and which will need funding, and all other goals will be at a longer timeline.

Fundamentally, I do not believe this is a new concept at all. In India, all large corporations (except the more recent ones) have been built up over generations and are tightly owned by a single family (Tata's, Birla's, Ambani's, Wipro, Mallya's, etc). This is also true, maybe to a smaller extent in the US (Walton's, Hilton's etc) Typically multiple generations of the family are involved in building up and maintaining the scale and size of the corporation and in turn the family wealth. Even in historical times, kingdoms were ruled by dynasties that held power for multiple generations (Mughals, Guptas, Mauryas, Peshwas etc). For that matter even today the Indian political system is dominated by one family, and I could argue the same for the US a few decades earlier (the Kennedy's) Taking a holistic view of generational wealth building, can help you develop plans that are better suited and optimized to help you meet all your generational goals and not just your personal financial goals. Also the longer timelines associated with generational wealth building, can significantly increase the power of compounding, and mitigate the probability of high risk asset strategies failing on you.

And the amazing part is that there are live running examples of this concept that you can look at right now! Trusts are fundamentally formal structures that enable generational wealth management. Trusts are able to look at long term trends and benefit from a longer timeline that allows them to make the right investment calls. For example the Harvard Management Company (HMC) maintains and manages the Harvard University Endowment Trust. The trust forms the backbone of the university funding, and all new grants and withdrawals are managed around the core endowment fund. You can think of your generational wealth also in similar terms, with core assets that keep growing form generation to generation, and your own personal income and withdrawal needs to be managed around the generational core. In fact in India we have the concept of HUF (Hindu Undivided Family) which is a legal financial entity, that can own and invest in assets, is a taxable entity and can be managed separately from your own personal financial entity, even while you are a partner in the HUF.

So in summary, I posit that taking a holistic view at Generational Finance is the secret of all the large wealth (or power) building efforts that you see in history, which take advantage of the compounding effects of decade and even centuries in generations rather than just years within a single generation. I also propose that there are already legal avenues like Trusts and HUFs where you can see this in action today. All you need is a paradigm shift in thinking from Personal Finance to Generational Finance, to open up new methods and avenues of investment thoughts and actions.

Let me know if you agree with my thought process on this.

ET Wealth : Family Finances : Oct31-Nov6 2011

2011-11-01T02:29:00.003+05:30

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?

2011-11-01T00:55:00.002+05:30

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

2011-10-30T18:00:00.003+05:30

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

2011-10-30T16:38:00.001+05:30

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.

Early Retirement Extreme : Jacob Lund Fisker

2011-10-28T19:19:00.002+05:30

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)

2011-10-27T19:24:00.001+05:30

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

2011-10-27T14:18:00.001+05:30

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

2011-10-27T13:28:00.001+05:30

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

2011-10-26T14:18:00.001+05:30

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

2011-10-26T13:25:00.002+05:30

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

2011-10-26T12:19:00.001+05:30

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

2011-10-25T20:33:00.001+05:30

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

2011-10-25T15:45:00.000+05:30

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?

2011-10-25T13:02:00.002+05:30

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

2011-10-25T00:48:00.001+05:30

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!

2011-10-24T22:54:00.000+05:30

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) ?

2011-10-23T20:13:00.002+05:30

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?

2011-10-23T20:02:00.000+05:30

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

2011-10-22T15:35:00.001+05:30

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

2011-10-22T13:12:00.002+05:30

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

2011-10-21T21:37:00.001+05:30

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

2011-10-19T19:31:00.000+05:30

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?

2011-10-18T20:58:00.001+05:30

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

2011-10-10T19:41:00.000+05:30

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

2011-10-09T20:49:00.000+05:30

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?

2011-10-01T03:30:00.000+05:30

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

2011-10-01T03:10:00.001+05:30

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