by Kaul Ankur
Last month I met the Senior Manager of a leading Products company, I was amazed at the financial jargon he threw at me. I was listening to what he was saying, and then he said something that did affect my thinking a lot.
All he said was ... Plan your retirement. Don't let the society decide when you are going to retire instead you decide when you are going to retire. And retire early.
It was quite hard to digest in one go but after pondering a little about it, I began to see the light. The idea is simple enough. Below I have attempted to structure my thoughts in a structured manner.
1. What are the factors that will contribute to your taking the decision of retirement?
a. Your Commitments:
The biggest and the most important factor that will decide when you are going retire are your commitments. In other words I will call these commitments as your liabilities. Sorry, if this offends you in any way but the truth is that all your commitments are financial liabilities. Yes, your kids, family and every other person dependent on you financially is a financial liability.
b. Your Assets:
The second factor is just the opposite of the first one. Assets are things which act as a source of income for you. So the more assets you have the more easily you can counter liabilities.
2. Does your income matter?
Honestly speaking it does not. Even if you have a low or a mediocre income but you have a high F.Q. or Financial Intelligence, chances are that you can retire early. There have been many cases in the history where people like Sportsmen of Film stars, which have had tremendous incomes, have become poor.
3. Savings are okay but they are not good enough.
The rate of inflation right now is much more that what your bank pays as interest, so that means if you are keeping cash in a bank account, you are running chances of actually loosing it year after year. A sum of 1000 bucks this year would hardly be equivalent to 500 in 5 years.
Before I can generalize these ideas, let me tell you how I plan to do this...
1. I have just started my career and am just 23. Considering the fact that I wish to retire at around 43, let me access what my liabilities at the stage would be and what assets I need to create to cover those liabilities.
a. General Monthly Expenses: I talked to quite a few people who are in the range of 40's and are working. On an average the expenditure on the basic necessities which excludes rent and education of children is around Rs.15 - 20k. This excludes any additional liabilities like Cars etc as well. There would be inflation and at that point of time this will grow a lot. But I am not getting into that right now as that will complicate things. Right now what I am going to assume is based on the current stats which are more factual.
b. Loans: Assuming very safely that I would possess a Car for myself and may be another for the family the loan EMI per month can safely be around Rs10 k at the present time. Another thing is a House. At present, I am living in my parent's house. I love it, but at the same time I feel that 20 years down the line I may be living in a bigger house with my parents and my family. So I can safely say that I will have to take a hefty loan for that and the money will amount to an EMI of around 30 k. Again I would like to point out that this kind of a house is more of a liability then an asset as all of us might think. So, it may happen that I don’t have such a liability but as I am right now just preparing myself, its better that I prepare well and for every possibility.
c. Education: Children's Education is another major factor. 20 years from now I would have kids. So I am estimating something around Rs. 15k per month as their education expenses.
d. Recreation: Hmmm... This includes holidays, and other entertainment needs. Let me keep it around 10 k each month (though I believe this is high again by any standards but that's what it is all about living a lavish life after you have retired)
So in all my total monthly liability at that time is going to roughly 85k. Considering what I assume a person at that stage would be paid in the current IT industry, I think I can safely assume that my income at such an age would be roughly Rs.4 million per year (Wow sounds a lot, But remember I plan to retire at this point of time. This means I wish to give up all this income). If I pay my taxes etc properly, this should translate to around Rs. 200K per month. This means a lot more than what my liabilities are.
So the idea is that if I plan to retire at such an age I should be able to collect assets which would give me a fixed income of a minimum 85k per month. I would however love to see that unto around 200K per month, as that would definitely mean my retirement is a good financial decision and would also cover for any contingencies.
So now the problem is clearly laid out before me. And I have to attack the various issues. I have to obtain some assets by which I can start generating some additional income. So in the next few posts here in my blog I will assess the various options that I have and will analyse each one and take decisions accordingly...