My journey to Financial Independence & Retire Early (FIRE)

I live in India and I am on my way to Financial Independence

Photo by Scott Graham on Unsplash

As I write this in the July of 2021, I am painfully aware of my massive privilege as I see millions in my country and in others devastated by the pandemic. I hope we are able to get over this soon; and I am doing my small bit in whatever way possible to help others through it.

I am on my way to achieve financial independence. I can retire in the next 10 years if I stick to my plan on savings, investments and expenses. I am 45, married with a 6 year old daughter, elder parents who are dependent on me and I live in India.

What does Financial Independence mean for me (as it would mean different things for different people) ? For me it means the below things:

1. I have Savings which will sustain me for the next 30 years post retirement at my current lifestyle with a 7% YoY inflation accounted (inflation is the real killer) without any additional income.
2. It gives me the freedom to use my time the way I wish. If I want to I can work (a job that has less income and more time for myself) or choose to pursue anything else that doesn’t earn me an income (obviously within my means).
3. I can fund my daughters education (& possibly marriage if that’s still remains her norm in 20 years).
4. I can afford to take reasonably lavish trips once every 2–3 years with my family (We love to travel).
5. I can handle any reasonable financial emergency (medical or otherwise) without significantly impacting my retirement plans.

How I got here & how do I plan to get there?

Basically three things;

1. Planning and executing that plan (for the last 10 years and the next 10).
2. Luck (Yes I did get lucky with a few things and I was able to leverage it).
3. Relatively simple lifestyle (Goal is Minimalist lifestyle but I am far away from it).

Let me double-click a little on the above three.

Being in India, for most middle class families we are not used to planning for retirement and that’s because our parents didn’t, and it was never discussed as as openly as it should have been.

If you ask our parents, most will say their pension (one’s who had that option) or their children are their retirement plan (especially the one’s who have son’s) or a combination of those two.

We (born in mid 60’s to 80’s) are a generation caught in between this thinking and the reality of the new culture where we cannot rely on our kids (i strongly believe we should not be in a situation to rely on our kids as it’s tough on them).

We live in a culture of spend now pay later.

We know we will get married, have kids, buy a house, buy a car (last two not necessarily in that order and hope the first two in that order as per societal norms) and at some time retire. We assume we will handle the expenses for all of these when we come to it. We never plan for it (neither did I for half of my work life). We live in a culture of spend now pay later (credit cards & easy loans). We have a cultural block to discuss about Money (personal Money & not how’s the market type talks) with people outside your immediate family.

Also there are a few other realities that we need to accept which is applicable more to us than our parents;

1. Average life expectancy has increased over generations, which means we will live longer than our parents in terms of age. This is largely due to advances in medicine.
2. Culturally we are quite different in our lifestyle (which is consumption driven) than our parents. We tend more towards spend now and pay later whereas our parents came from save now spend later mind set (and I am not just talking about money but also our health).
3. We may not be able to keep our jobs till the age of 60/65 (whatever is the official retirement age). This is because we are constantly being challenged by need of newer skills, our ability to endure the stress and strain of ever changing, demanding jobs as we age and the jobs itself being disrupted by Automation, Artificial Intelligence and whatever new technology throws at us.
4. We are more socially estranged than our parents.
5. We have more fear (because we have more stuff physical and mental, we fear we will lose it) than our parents that limits our capacity to accept & deal with the unknown.

I have fear of losing this financial comfort that I have now, specifically not for me but for my daughter.

In short what I am saying is that the first step is to realize you need to have a plan. When should I plan for it? Probably as you start to work. Did I have this plan when I started to work? Hell no. I started to think (emphasis think not plan) about retirement as late as 10 years back (when I was 35) and for the first few years did a few things right but got a lot of it wrong. I started to have a plan for retirement only about 4 years back.

So the question; isn’t it too early to have a plan as you start your first job? Yes it’s too early to assume a plan that you make then will work for you through your life ahead. There are lot of unknown’s at that point. What kind of job you will end up liking, what is the salary and growth that you can expect in that job, will you have a family (it’s your choice to have one or not), where would you want to settle, what kind of a lifestyle you want. You may not have answers to all of it so how do you plan so early?

When I say plan early, first part of planning involves getting financially literate. Financially literate doesn’t mean being an expert on Finance and economics but at basic level understand how money works, what are the ways to invest, how to calculate returns, understand taxes, budgets and expenses.

As I started out 20 years back, the only thing I understood to some extent was Fixed Deposits. I didn’t understand Stocks, Mutual Funds, Taxes and various investment options and their tax liabilities. Not that there wasn’t any information on this available; a simple Google search would have helped. But i never had the inclination to learn this and neither did anyone tell me to (neither will anyone tell you too). I understood Mutual Funds about 5 years into my job as I worked with some Mutual Fund companies develop their software (I am in the Software Industry if you hadn’t guessed it by now).

I started investing into Mutual Funds & dabbled a bit in stocks but never really understood all of it and didn’t put in an effort to as well. The investments too were very small and were based on hear say and star ratings on Financial websites (never go by Star ratings). Most of my savings went into fixed deposits. Also did a couple of LIC investments again based on friends & uncles recommendations which were influenced by the agents that they knew.

Seven years into my Job, I got married in 2005, bought a small house on loan. The decision to take a small house in hindsight was not that great. I probably could have been able to afford a bigger house with a larger EMI as both me and Wife were working then. We both had careers with reasonable growth expected over the next few years. But I took the non-risky way out by settling for a smaller house. Followed it by a car purchase which was second hand and made full payment from my Savings without any loan.

While I started out with many mis-steps, I got a couple of things right from the start (my father insisted on it and educated me on this). As soon as I started working, my father made me take Medical Insurance that covered me, my father, mother & my sister. This is very important as you will understand once you age (especially now during the pandemic) medical expenses come unexpected , is one of the things you cannot avoid, prices of which have constantly been increasing, and you have no choice but to pay a premium if you want prioritised and perceived good medical care. Also ties back to the old adage of “Health being your Wealth”. You lose your health, you lose your wealth literally especially in these times.

I also took out a policy covering my Computer (it was worth INR 50K back then in 1999) against damages and theft.

The other thing that I knew well was how credit cards worked. I knew always to pay the full amount every cycle to avoid high interest charges. I have so far never defaulted on my payments and never paid any interest on my bills. It also helped me build a good credit score over the years.

At the end of my first 10–12 years of working life, I was comfortable financially (that's what I thought then), had some Mutual Fund investments that showed impressive returns (only later to realize I have to see returns over the years and not just an absolute number) and most of my savings in Fixed Deposits (Hint: was paying tax on interest income every year). Both my father and mother had couple of medical issues which thankfully got covered by the Insurance that i had through the company that I worked for. Till now I didn’t have a plan and never did think about retirement. I was 32 then. If me and my Wife were to lose our jobs then, I doubt we could have made it three years before we went completely broke.

We traveled together quite frequently, ate out, bought stuff that we liked but never splurged on anything that was totally unnecessary or beyond our means. That doesn’t mean we didn’t buy anything that was unnecessary. We were guilty of that then and we are of it sometimes now too.

But we were reasonably happy with our small house, small car and for some reason both me and my Wife (more than me) are very grounded in our approach to spending money. We saw people who had bigger houses (bigger EMI’s) & more than one house (more EMI’s), bigger cars (bigger EMI’s) always had this sword hanging on them. We knew we shouldn’t get more into debt by buying things that will financially tie us down. It also helped that my parents had their own house which they stayed in and it was just a 5 minutes drive away (quite a few people don't have this privilege and hence go in for a larger house as parents too stay with them). We also didn’t have kids then which meant we didn’t have added expenses of their upbringing, education and this urge to have a separate room for the kid (thereby a larger house).

All of this gave us the freedom to travel more frequently (we spent more to travel to some remote Indian places that most would then for a trip abroad) and we liked it. We unknowingly preferred experiences over things. That was the lifestyle choice that we made. But that doesn’t mean this is the only choice and the right choice for you. You need to find what suits you and what makes you happy.

One major shift happened then when I moved jobs and got into a Sales role with a Software MNC. This is where luck played it’s part and I did very well for the next 7 years professionally. I consistently over achieved on my sales targets, made good bonus and grew in the company. I was able to generate some wealth at a fast rate. Luck favored me here in my job, I had the support of my colleagues and I made good of this opportunity which helped me make some “hay while the sun shined”. My lifestyle too allowed me to save most of it and spend some of it.

You might think this did it for me. Well yes and no. Yes, because it made me wealthy, No because I still didn't take the right investment decisions. I put most of it into Fixed Deposits with auto-renewals. While I did a few Mutual Fund investments here and there, 90% of my investments was Fixed Deposit. This is outside the EPF which now is a significant part of my retirement corpus.

By now you must have guessed I am no fan of Fixed Deposits. In hindsight the almost 15 odd years that I invested heavily into Fixed Deposits I could have been in much better position financially (may be could have retired right now) if I had invested a large part of it into Equity (Stocks, Mutual Funds, ETF’s) or even Debt Mutual Funds. The primary reason’s for this are

1. Fixed Deposit interest rates have been falling consistently through the last 15 years and is expected to keep falling.
2. Fixed Deposit interest earned is taxable every year at the rate at which your other income is taxed. So it’s not the most tax efficient investment.
3. Partial liquidity is an issue with Fixed Deposits. Let’s say you have a Fixed Deposit of 10 Lakhs and you want 2 Lakhs for an emergency, you cannot just withdraw 2 lakhs of the 10 lakhs principal without breaking the entire 10 lakhs Fixed Deposit. Most Banks also charge a penalty for pre-mature withdrawal of a Fixed Deposit.
4. While largely they are considered one of the safest investments (Risk free), there is always a risk of the Financial Institution providing the Fixed Deposit going bust (as has happened with a few in the past 2–3 years leaving depositors high and dry).

So after about 17 years into my work life, I had created some wealth, most of it invested into Fixed Deposits; and I continued with my life with no plan for retirement.

The second major shift happened when we had our daughter our first kid. Now from suddenly from a DINK couple we turned to SIK (not a good acronym but stands for Single Income Kid). Now not only did we have to deal with parenthood at an age when most have kids entering teens, but also had to think about our Finances differently. One is the added monthly expense (which isn't much if we have a simple lifestyle which we did), but now also have to think about her Education and any other expense till she is financially independent. Yes in India we tend to fund our kids till either they get married or they get a job and are financially independent.

We were both 38 when we had our daughter. In our experience it’s easier to raise kids when we are younger and to have the energy to keep up with them till they proverbially “leave the nest”.

I still didn’t have a retirement plan, neither was I thinking of one. I continued with my Fixed Deposits, little bit of Mutual Funds, a decent EPF and the late-comer to the party, my Company Stocks that I owned (which was now looking up and showed promise).

The thought of a plan started in one our trips along with friends where someone mentioned about their relative who does Financial Planning and incidentally stays close by our house.

After much coaxing I finally visited the Finance Advisor and honestly it opened my eyes to a few things that i hadn’t known. It also re-enforced some of my decisions around Real-estate (I don't like it as an investment), avoiding debt (all of my car purchases have been without loans).

A short note on real-estate and why i don't like it;

1. Their prices are over-inflated and without any logic to it.
2. Their returns compared to the cost of EMI’s in the last few years has tapered.
3. There are a lot of legal issues especially in a country like ours where projects stall and people money is stuck. Legal procedure in India drag for years.
4. The tax breaks that were available earlier no longer apply which makes it less attractive.
5. They are ill-liquid (takes time to sell & you can’t sell it partially).
6. You also have to spend on maintaining them.
7. There is a considerable effort (loss of mental peace) managing renters to earn from it.
8. You are sucked back into the Debt cycle every time you purchase real estate as an investment.

It took a couple of sittings and we had a plan;

1. Current monthly expense (max) along with yearly projection for the next 40 years with inflation.
2. Recurring large spends (trips, anything else).
3. Planned large spends (new House, Car, Daughters Education, Marriage).
4. Emergency funds for unplanned spends.

This gave us the Corpus that would be required when you retire.

Take that and start with what you already have and figure out how to address the gap. For me addressing the gap would take roughly 14 years of investment (that means i need to keep a job which pays me almost the same that i make now for the next 14 years).

Now considering the options on investments, their probable returns (avoid anybody who promises returns above 10%), tax liability you break into buckets that address your short term and long term goals and start investing into it.

About 4 years back I started on this journey, split my investments across Equity, Debt, Fixed Deposits.

At the same time I also started discussing with couple of my colleagues on their retirement plans and i learnt a lot from them too. A lot of credit to my friend Allan from whom I learnt a lot on personal finance.

Now instead of putting all my eggs into trusting a Finance Advisor, I have split my investments across two (one largely manages long term and the other short term). One is a Fee only advisor (ideally recommended) and the other is a commission based one.

Over these years I have learnt (and i am still learning) how to measure their effectiveness and will keep reviewing my portfolio every year or two (I used to check it every day earlier but then grew wiser not to). If I feel something’s not working out for me I will sound it off with my Advisor (which i have done once) and re-balance my portfolio.

So this is how I ended up with a retirement plan. I am glad I did even though late and I hope it helps me retire with financial freedom.

If I were to summarize key lessons, they would be;

1. Get financially literate. There is enough material that explains all of the concepts in a way anybody (without a Finance / Economics degree) can understand.

2. Plan early & start Investing early (power of Compounding is awesome).

3. Purchase Term Insurance and Medical Insurance with adequate cover.

4. Avoid ULIPS, Endowment plans and such schemes from Insurance Providers.

5. Avoid getting into the Debt trap especially to get into hype cycles, social signalling. This is the sword hanging on your head that doesn't let you live freely.

6. Outsource Financial Planning & Execution to somebody who is capable and pay them as it will give you time to focus on living your life rather than worrying about it.

7. Identify your priorities in life and adjust your life-style accordingly.

8. Have a balance between “Spend Now Pay Later” and “Save Now Spend Later”. You live only once.

9. Have Nominee and chain of ownership in case of an eventuality clearly done so that your family doesn’t have to run around to claim your hard earned money in difficult times.

10. Document all your investments and share it with your partner, so that they can operate in case of an emergency. Keep it regularly updated.

What does my retirement plan look like ?

70% of my Corpus is in Debt (Long Term Horizon). This portfolio is managed by a Commission based advisor.

20% of my Corpus is in Equity (Short to Medium Term Horizon). This portfolio is managed by a Fee based advisor. My plan is to get this part of portfolio to 40% and the Debt piece to 50% over the next 7–10 years.

5 % of my Corpus is in EPF.

5% of my Corpus is in Employee Stock Options.

Last but not the least also have a plan on where will you invest once you retire to get that steady income and also at the same time have the least tax liability.

P.S. We still live in the same “small house” and have been able to make more space for the essential by ridding ourselves of the non-essential.