Why my financial independence & early retirement plans were postponed by 4 years

Published: January 14, 2021 at 11:02 am

In the next edition of personal finance audits by readers, we feature an account of why Mr Tailor had to postpone his financial independence & early retirement plans by four years.

As regular readers may be aware, we publish a personal financial audit each December – this is the 2020 edition: How my retirement portfolio performed in 2020. This time, we asked regular readers to share how they review their investments and track financial goals.

Note No part of this article, particularly the goals, asset allocation and investment choices should be construed as investment advice. Kindly take stock of your needs and invest as per that. Each audit is different; some have a narrative; some a summary of actions. We request readers to focus on the benefits of structuring investments according to goals and the emotional benefits that come with it.  Now over to Mr Tailor.

I should have achieved Financial Independence and Retired Early (FIRE) today, on Dec 31, 2020. It was a wish I have nourished for over a decade and worked on seriously over the past 6 years. But I will not be able to retire. The date has now been pushed to Dec 2024. So, what went wrong? And what went right? Here are some learnings, that I hope the readers can benefit from.

Some basics about myself: Age: Myself 43, Wife 42, 2 daughters aged 8 and 1. Both of us are professionals and work in private jobs. Residents of Mumbai.


Key goals to have saved for before declaring retirement

  1. Retirement kitty large enough to sustain me and my family for the rest of my life (calculated through Freefincal Robo template – the number is quite sizeable as Professor Pattu does play it safe on this number)
  2. Kitty to serve my children’s education needs till they complete post-graduation, in India in regular admission seats; any expenses towards education abroad or paid management seats etc. is for them to fund through loans, in case I am not able to help with funding at that time;  
  3. Kitty to serve my health needs (in addition to personal health insurance that I already have) and a small back up buffer kitty in case other things go wrong beyond plan
  4. A home to stay in for the rest of our lives and other needs like a car etc.

Equity

Key highlights

  • Current allocation 60% (most stocks) plan to reduce to about 43% in 2024
  • Assumed 8% organic growth for the next 4 years
  • Year 2,3,4 invest 22% of monthly savings if needed as per asset allocation
  • If asset allocation goes higher, sell the excess and move to fixed income
  • The plan includes clean up of individual stocks to keep only high-quality large caps and move the rest to mutual funds

Key learnings

  • While I had the foresight to take the services of experts in their craft of identifying and buying good stocks, building a portfolio that lasts over 40 years is another game altogether; I have received good (paid for) advice on buying stocks and have seen most of my scripts soar by over 100% at some point of time or the other, no one gave me the advice to balance my portfolio, manage asset allocation and move profits and investments between assets. I believed, by holding for a long time, magic automatically happens. As a result, the individual stocks have turned over multiple cycles and I continue to hold them waiting for them to touch their past highs (XIRR in low single digits). So, the golden and the most critical rule is to follow asset allocation and practice goal-based portfolio approach (Professor’s course on this is an eye-opener and a lifesaver)
  • It will not be possible to manage individual stocks that have a considerable weightage in the overall kitty; a typical retirement kitty would be upwards of 5 CR, at 40% ratio here, equity  would be 2 CR; now imagine managing individual stocks worth crores at the age of 60+; too risky if one is not an expert; solution – move to mutual funds and there too the simpler the better (like the Index)
  • The sooner one builds the equity portfolio the better, as it gives higher returns, has a considerable learning curve to get it right and the time available can serve as a very powerful tool for managing asset allocation to one’s advantage during cycle turns
  • So, did anything go wrong in Equity part of my original plan? No! The equity portfolio has touched the number I had planned for if I was to retire today. Yes, it could have been much more, had I received some of these learnings 5 years back.

Fixed Income

Key highlights

  • Current allocation 40%. Plan to increase to about 57% in 2024
  • Continue with high VPF for next 4 years
  • Invest > 70% of monthly savings of year 2,3 and 4 towards building this kitty
  • Fixed income is only in EPF and PPF; since my home loans are with SBI Maxgain, the current account accumulation there serves as emergency corpus too; So, 0 Fixed deposits and 0 arbitrage/ liquid funds for me
  • Each family member has a PPF account, and it has already matured for both me and my wife; children’s PPF accounts are opened in 1st year of birth itself
  • This part of the portfolio is the largest piece for me to be built before I retire and since it is fixed part of the portfolio, the only variable involved here is whether I am able to invest that amount or not; that makes it easier compared to equity where there are additional market forces involved in deciding whether you will reach the goal or not

Key learnings

  • Yet to find a better tool than PF for building fixed income part of the portfolio
  • As I approach retirement and eventually since I will have to give up on my EPF account, Long term GILT funds seem to be the solution; will spend the next couple of years to learn and understand the cycles and how to manage them for maintaining asset allocation when the time comes
  • Again, given that Fixed income will be at a high ratio of retirement kitty, all available secure investment tools like Senior Citizen, Post office, FDs etc. will not be enough to hold much of the kitty and one will need to turn to Fund houses for managing it; the sooner one accepts that and invests in understanding those engines, the better it is 
  • So, what went wrong with Fixed income in my retirement planning? Nothing. It has not got accumulated to the desired levels because of the piece that follows next in the article.

Real Estate

Key highlights

  • This is an outstanding loan for the house that I stay in and will continue to stay in, post-retirement; Plan is to finish off this loan in 2021 by diverting a large part of monthly savings here
  • I have another investment property which gives me Rs. 30 k monthly rent. This will take care of all other kitties of Children’s graduation and post-graduation and once I exit it within the next 10 years, will also furnish the health and buffer kitty
  • My approach was to begin first with investments in equity, fixed income and real estate so as to build my income-generating portfolio before I spend on my liabilities (like the home that I will stay in); that explains why my equity portfolio is ready for retirement and so is my real estate investment portfolio
  • Now the final link – the original property that I booked for as my final stay apartment got stuck midway in construction with no scope of recovery, offsetting my portfolio and all plans; this forced me to take some hard calls, to completely write off over 1.1 cr of principal money already invested (with interest costs, the number is much higher) in that under-construction property, find another ready property as my final residence and start all over again. That explains the gap in the fixed income portfolio built and the extension of retirement date by 4 years

Key learnings:

  • I think it helps if one focuses on building the investment portfolio before one spends on liabilities; one does need to be emotionally strong and have a good solid plan
  • Things do go wrong! And when they do, it is the core principles that come to the rescue
  • My core principles have been:
    • High savings rate (50% of earned income right from my first salary to till date)
    • It is OK to be underleveraged; While I have had multiple home loans, I have never taken a loan till I have at least 70% of that amount already working and generating income for me somewhere else; I avoid paying interest from my own hard-earned money; my money works to pay interest
    • It pays to take help from experts in the field Had enrolled a financial advisor for self in 2007 and the contract with him even then was he would get a flat fee for annual advice and no commission from my investments/ transactions – what we now call the Fee-only advisor.
    • It is probably not possible to do it alone; Spouse has to be a partner in this journey and has to be happy about it; initially, we had issues on my needs vs wants approach; we resolved it – each month we keep aside some money that she can spend on whatever she wants; I never, never, never look at the MRP of anything that she has bought
    • Upgrade own knowledge continuously and be willing to invest the money as that ensures quality and seriousness (I undergo at least 1 skill enhancement course each year and keep money aside for it each month); This helps to have a backup in case of original plans not working or it helps improve original plans itself
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About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored three print books, You can be rich too with goal-based investing (CNBC TV18), Gamechanger, Chinchu Gets a Superpower! and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] com
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