‘What is your definition of financial freedom?’, is a question I get asked by readers from time to time. Opinions and definitions in this regard vary widely and often a matter of convenience. Some call it financial freedom, some, financial independence, some early retirement!
Here is my take on this subject. The following should have been in a flow chart form, but I am too lazy to draw one.
Can you quit your present job to do nothing or whatever you want?
If ‘NO’ go to part II below.
If ‘YES’, proceed to Part I
Can your corpus handle day-to-day expenses for the rest of your life (including the typical expenses of your partner, or spouse)?
It implies, You are
- retired if you do not work for money anymore.
- financially independent if you work for money when and how you feel like it. The income can be spent or invested without constraints, unless something out of the ordinary occurs. You are neither dependent on your spouse or on anyone else for income.
Assuming the corpus is large enough and nothing abnormal happens, you can be retired or financially independent for life. You can switch between the two states at will or remain in one state for as long as you want/can.
- You are dependent on your parents, partner or spouse to support you while you explore your options. Obviously a less than ideal situation which we shall not discuss further.
- Your corpus can handle day-to-day expenses for some years to come, but not for the rest of your life. You are free to take a break, pursue a passion that would give you a steady income down the line (before your corpus runs out!). You can handle your typical family expenses for a few years without depending on your partner (who may or may not be working). It seems fit to say that you free to do what you like but not whatever you like (like not working again).
You need to work, but you are free to choose your line of work. You are financially free as long as your income steadily increases and the dependence on your corpus to provide monthly income decreases.
Financial freedom is not permanent. If something goes wrong -you are out of work, your income does not increase enough – you might be forced to take up a job that you are not too thrilled about …again.
You cannot quit your job, but would like to asap to be either independent or free.
Here is a checklist
1) Are you investing like your ass is on fire?
2) Are you investing productively?
3) Have you factored in at least 8% inflation after you quit your job?
4) Are you confident that you can lead a frugal life? Good but dont depend on it too much!
5) Are you hoping to beat inflation? You might, but it is best to plan with zero real-return after taxes.
6) Are you influenced by blogs like Money Mustache, Early Retirement Extreme? Don’t be. They are clueless about Indian inflation levels. So understand retirement mathematics first. That is universal. Underestimate the longetivity of your corpus.
7) Do you like the idea of a safe withdrawal rate? Don’t. Will not work for our inflation levels. You will keep withdrawing more and more as time goes by. Are you ready?
8) Have you assumed a real return for your entire portfolio or only your equity component? Common mistake. You need a good amount of debt. So don’t expect too much returns from your folio.
9) Understand volatility. Don’t assume a SWP from an equity fund will work. It might, it might not. You can’t take that chance.
10) Keep your CV up to date. You never know, you know!