Alternate approach to FIRE

[tinamar]

Core of investment is to cover the monthly cost of living: Assume that current expenses monthly are: 60,000 INR (This includes following items at current cost: house maintenance, food, phone+internet, house-help, fuel, electricity+gas, personal expenses, OTT subscriptions, medical expenses if any), therefore annual expenses are 7.2L and tax included at 10%, it comes out to 8L INR annually. If this was supposed to come from a fixed deposit (safest bet, at 6%), the total corpus should have been 84L INR (please see the note below to see what is not included in this expense).

Assume that currently, one has 40L in corpus, and at a saving rate of 125K per month, it will take him/her 69 months of investment to reach the corpus and once this corpus is formed, it should not be touched and it will cover the basic necessities as outlined if an untoward event were to happen. The modest (10%) rate of growth of this corpus will also take care of inflation (6%) over a period of time, meaning the returns from this corpus will be in line to the expenses at given point of time.

Once this corpus is created (you can play around with values in spreadsheet), then the next set of savings can be channelled to other expenses (e.g. buying a house, setting up funds for children, car, travel, etc.). If the saving rate is higher than 125K, the additional amount can be routed to the other goals.

What do you folks think? Feel free to poke hole(s) in this approach.

Link to spreadsheet here.

What is not included? (Create separate goals for them, and channel money over and above annuity saving rate)

• Home is paid for and no rent expenses (only maintenance is accounted for)
• No outstanding liabilities (e.g. car loan, education loan, personal loan, property loan etc.)
• Kid's education is paid for, their expenses are from their own funds (to be created as a separate goal)
• No extraordinary expenses (e.g. health complications, family spending in marriage etc.)

Edit 1: what's not included to be treated as goals of required and save for them above annuity saving rate.

Edit 2: made changes to google sheet formula and updated the write up accordingly.

 

[robary]

@tinamar Overall approach looks interesting. Couple of things that jumped out at me:

• To get 8L of interest at 6% pa, one would need a deposit/corpus of 134L or 1.34Cr. 84L at 6% yields 5L.
• An instrument that yields inflation + 2% would probably be volatile and not suitable for drawdown, i.e switching between the corpus for growth and income would need adjustments and potential tax impact arising from there
• For tax stuff, income upto 8L can be obtained tax free in old regime by having 1.5L which is "rotated" from ELSS funds or PPF. This is, of course, subject to change with tax laws.

 

[tinamar]

@robary Thanks for pointing out the math. Will make corrections.
A lot of debt funds pay 7.5% and above, are fairly stable. Taxes can be otherwise contribute to buffer if not paid to govt per tax deductions.

 

[tinamar]

corrections made.

 

[zashmaster]

@tinamar Cross posting this to /r/FIRE_Ind

 

[esta]

@zashmaster Thanks

 

[tinamar]

@zashmaster Thank you.

 

[mrdean36]

@tinamar Too much complicated math. Don’t use fd returns for covering living expenses. Use this simple math. 75% equity 20% debt 5% liquid. And 3% of corpus you are allowed to spend in a year. That will give you 1.5years of expenes in liquid fund, 6-7% years of expnese in debt. Every year do that same rebalancing, move 3% from debt to liquid and 3% from equity to debt. You can take a break if markets are not favourable

 

[tinamar]

@mrdean36 on the contrary, I've tried to simplify the math - by proportioning what needs to go into annuity savings vs other goals.

 

[resjudicata]

@mrdean36 This is likely good for FI and retirement at age ~60. 3% may be a bit too optimistic for RE (haven't seen any good research for 30+ years of retirement). 2% is likely better.

 

[inneedindeed]

@tinamar A bunch of points:

• As someone who did these calculations over and over again, your initial corpus of 1.33 Cr lasts exactly 20 years (assuming 6% inflation of expenses, and 8% corpus growth). - Reason? After the initial few years, your inflated expenses will start eating into your corpus.
• You said you'd take 3.5 - 4 years to reach this corpus. In 4 years, the required corpus as per your calculations should be 1.66 Cr because of inflation. Just saying.

A better way of creating your spreadsheets is doing it the noob way. My recommendations:

• Create a detailed spreadsheet with each row being a year (or even month if you want that level of detail). Getting into the details is important because when I started my initial FIRE calculations, the number was 1.6 Cr. And now with all the details and more realistic calculations, the number is around 4.8 Cr. That's a 2x difference.
• You didn't specify your age here, but that's important. Assume you are going to live until 100 years in your calculations. The worst thing to happen is you planning everything assuming you'd die at 70 and living past that (lol, sorry!)
• Always deduct the expenses first, and then add the returns of the remaining corpus. Meaning, if you have 1 cr and yearly 10L expenses, don't calculate the interest on 1 Cr (but instead, do it on 90L) because you'd be spending the 10L over the year -- it won't earn you your calculated interest.
• Plan to keep 2-3 years of expenses in FDs at any given point in time (as the market could be down). Account for taxation as per current rules. It makes the Excel a bit crazy, but it is what it is. You're "planning", and you need a viable plan.
• Account for increased taxes. Your expenses will inflate too fast and your tax rates jumps too. All FD interest income is taxed at normal income tax rates. Capital gains are different, yes.

Finally, it never hurts to assume slightly worse scenarios while planning for FIRE because it is easier to earn now to add to your corpus vs earning later when you realize your corpus is melting down quicker than anticipated.

 

[resjudicata]

@inneedindeed Well said. I would not have commented if I read yours first.

Finally, it never hurts to assume slightly worse scenarios while planning for FIRE

This is the crux. Everyone jumping on this FIRE trend ignore this key point to "retire" as early as possible. No, you have not achieved your retirement corpus and you will realize it in your 70s, good luck getting it all together at 70s.

 

[cindy143]

@inneedindeed this comment needs more likes...hits the nail on the head.. most of us live for 30-40 years in retirement, so why dont we have speadsheets with 40*12 rows which will show us projected cashflow/expenses automatically, this will help in visualization effectively

 

[resjudicata]

@tinamar

Assume that currently, one has 40L in corpus, and at a saving rate of 125K per month, it will take him/her 69 months of investment to reach the corpus and once this corpus is formed, it should not be touched and it will cover the basic necessities as outlined if an untoward event were to happen.

Agree.

The modest (10%) rate of growth of this corpus will also take care of inflation (6%) over a period of time, meaning the returns from this corpus will be in line to the expenses at given point of time.

How are we getting this modest 10% growth? I thought corpus was kept in FD and all the return (or growth) will get used up as expense. Correct me if I am wrong here. Also, I don't think we can get 10% returns without getting into equity (which brings risk and liquidity issues).