A reader says, “I am a regular reader of freefincal. I am wondering whether I will be able to be financially independent in the next 20 years. My Background: I am 34 years old and working for an MNC. My wife is a homemaker; she is 31 years old. We have a three-year-old daughter”.
Expense Details:
- Our current monthly expense is 60,000₹.
- Additionally, the recurring annual expense comes to around 1,00,000₹ per year.
- My daughter’s current (Pre KG) school expenses are 1,50,000₹.
I will be paying my daughter’s college and marriage expenses. I am planning to give 100 sovereigns of gold for the wedding. I have saved 25 sovereigns already for this. So I need to buy 75 sovereigns in the next 20 years.
Income and Savings:
- My monthly take-home post-tax and post deductions are 2,00,000₹.
- Total EPF contribution is 45000₹ per month (Employee and Employer contribution put together). I am expecting a 7%-10% increase in pay every year.
I own a flat in my native; my parents stay in the house. Currently, the potential rent is around 10,000₹. During my retirement, I expect that house to provide me with rent. The house’s current worth is 60,00,000₹. There is no liability for this currently.
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“I have shares of my current employer worth 65,00,000₹. My employer provides shares worth 12,00,000₹ (after tax) per year. I am expecting that to continue. The current PF corpus is 24,00,000₹. Given all these, how should I achieve financial independence in the next 20 years?”
We have the following general observations and recommendations.
- First, ensure a robust emergency corpus equal to at least one year’s expenses.
- Your current expenses are about 35% to 40% of your annual. This is excellent, but you have three long-term goals – financial independence, your child’s education and marriage.
- Do not expect the stock options to continue in future. Think of them as a bonus but expect nothing.
- Your portfolio is likely to extremely heavy with stock options. This is a huge risk. Despite their recent performance and future projections, we recommend periodically selling these shares when you are free to do so and invest in a mix of diversified Indian equity and debt.
- You should aim for 40-50% fixed income (debt) in your portfolio and the rest in equity (including stock options). This is a tough ask, but this is a safer place to be than having stock options as the dominant component.
- Remove the property in your native place from the equation for now. Neither its value nor its rental potential is relevant now.
- Punching these numbers into the freefincal robo advisory tool, we find that you are close to the halfway mark in your financial independence journey.
- For your retirement goal, invest at least 80% to 110% of your annual expenses (excluding any expenses for your child or parents) each year. Include your EPF contribution and stock options as investments.
- Your next priority is your daughter’s education. Please use a goal calculator with at least 10% inflation to plan for this.
- Regarding your intention to buy gold, we only need money for that, and there is no need to accumulate it now. Since her marriage is more than 20 years away, you can invest the intended amount in a mix of equity and debt and tall a call on the gold purchase when you are ready to cross that bridge.
In summary, you are on the right track to achieving financial freedom in about 20 years. However, we suggest gradually reducing the weight of stock options in your portfolio, not taking them for granted and rethinking accumulating physical gold.
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Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
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