FIRE me now

For the last 16 years, Vivek Reddy is off the Monday morning blues. The former chief executive of India's first private sector mutual fund, who hung up his boots in 2002 when he was just 40, doesn’t care about the otherwise busy Monday mornings. "These days I have five exciting options for each moment of my waking day," he says. Designing a house, planning a vacation for friends, playing tennis ... the list goes on for Reddy, who can easily pose as a poster boy for the not-so-popular FIRE movement (financial independence, retire early) in India.

The FIRE concept that involves living frugally and saving enough to retire early is gaining popularity across the world. But in India, the dream of freedom from the daily drudgery of nine-to-five schedule gets shattered in a world full of inflation-fired uncertainties. 

Given that most people start earning by 22-23 years of age, they have two decades of corporate/ entrepreneurial life before they can call it a day. The question is if two decades are adequate to build nest eggs that will last for another 3-4 decades.

Financial Planning

"Chalis tak note chapna. Uske baad mukti and enjoyment," says 28-year old Sandeep Sharma, who works 14 hours a day at a stock broking firm. A whole ecosystem is built around the FIRE concept. Financial investment firms love it because it helps them pull in customers.

Rakesh Singh, group head - investment banking and private banking, HDFC Bank, says he is seeing a growing trend of clients achieving early financial freedom and then pursuing something they are passionate about. But planning and executing the FIRE blueprint is very important. An investor who starts earning at 23 years of age has 17 years to build a retirement corpus which should last for the next 40 years, factoring in inflation, especially in the retirement years, as the expenses would go up every year. This would entail a lot of savings.

"High savings rate of anywhere between one-third to half of one's post-tax income would necessitate expense discipline and planning a lifestyle within her/his budget. Keeping in mind that she/he is investing for long horizons, they should invest almost all money into good quality equity funds/stocks portfolio. It would be important to avoid any large liabilities (including any high cost loans) to be able to attain early financial freedom closer to the targeted retirement age," says Singh. Clearly, this is a tall order.

Some are having second thoughts about early retirement, even after accumulating quite a pot of money. "I started early, and made some good stock investments. At the moment, I have an investment kitty of Rs 2.5 crore. It may look impressive. But will this be enough if I live till 85? I saw my uncle who took an early retirement and had to go through a terrible financial ordeal after 10 years into his retirement. I don't want that to happen to me," says A Krishnan, who is in her mid-forties.

Will a Rs 2.5 crore corpus last her lifetime is a genuine concern. All early retirement plans are subject to risk, chiefly inflation. 

Known Unknowns 

Price rise is no longer silently eating away our savings. A bypass surgery costing less than Rs 1-2 lakh ten years back is Rs 3-5 lakh today as medical inflation grows in double digits (12-15% annually). In another 10-20 years, it may cost much more even if inflation grows at a steady pace. Nobody can predict it right.

Early retirement means things would be so difficult. Future expenses like a child's education and marriage are not insulated from inflation. And those costs are rocketing. 

"Most likely, your child will hate you for not saving enough! With no or little income, saving for your child's education or marriage is a near impossible task. If you assume you need Rs 20 lakh for these purposes some 25 years down the line, at 8% consumer inflation rate and assuming your investment grows at 10%, you will need to invest Rs 1.25 lakh every year in this period. Investing Rs 1.25 lakh every year for a quarter of a century at a time when you have opted for 'early retirement' is a pipe dream," says Sayantan Ghosh, economist, Indian Institute of Development Economics.

The Indian rupee is quickly losing its purchasing power too. Assume a 40-year old retires today with a princely sum of Rs one crore. In three decades, this will have the same purchasing power of Rs 25 lakh today. That's because inflation is at 5%. The only way to get a defensive shield is to invest in assets that grow much faster than inflation. Most invest in 'safe' investments, which earn practically nothing. Equities have the power to grow one’s capital at a faster rate and hence can help build the corpus facilitating early retirement.

"However, traditionally Indians prefer to invest in fixed income instruments like PPF and EPF, life insurance policies and gold. Overdependence on debt instruments to build the retirement corpus will inevitably lead to deferment of the retirement goal," says Rahul Jain, head, personal wealth advisory, Edelweiss.

Retirement blues

Beyond finance, there are emotional challenges too. "The first six months to a year is not easy, for sure. You miss the SMS that announces your monthly salary credit. You may have to be prepared that you are not going to have the same 'acquisition' lifestyle like buying cars and houses or flying business class on holiday, etc," says Rishi Piparaiya, a former multinational C-suite executive, who left his corporate life at 41.

Also, inadequate education on personal financial planning and investment management can harm retirement plans. 

42-year old Ravi Dixit found that out the hard way as he saw his early retirement plan literally go up in smoke. He bought a 2BHK flat in 2008 for Rs 60 lakh. Some time back, he moved into a bigger flat that cost Rs 1.4 crore. He took a loan of Rs 80 lakh and now has to pay an EMI of Rs 75,000. The new home is bigger, but he doesn't have money to save, let alone invest. Dixit can’t think of leaving his job for the next 10-15 years. "I will be 56-57 by then. Might as well work till 60, if I can," he quips.

One early retiree talks about a concept called two-stage retirement. Satish left work as a graphic designer eight years ago, and he thought he would do well teaching kids in his posh residential area about arts like painting, craft, etc. "I was 45 then and had received a good property share from ancestral house that got promoted. For first five-six years, things were moving okay. But I can tell you today, things are not that good," the 53-year old bachelor says. His income source has dried up as he is no longer the cool fine arts teacher even though he sports his salt-n-pepper look. His property share money that was invested has been depleted a lot due to frequent withdrawals. "I shudder to think what will happen in the next 15 years, because already I have cut a lot of costs. I have switched to prepaid phone, removed cable connection, I take the metro and even use AirBnb to rent out a room in my house a few times," Satish says, his voice betraying his nervousness. 

Early retirement isn't really a socially acceptable solution. Your wife or husband isn't going to do a high-five if you tell them you want to move away, far from the maddening crowd. Ketan Karkhanis, head - retail sales, ICICI Securities says that in the Indian context we are still at an early curve of aspiration. "Coupled with the fact that culturally it is embedded in us to keep working till we are physically able to (for self-employed) or permitted to (for salaried), and hence the concept of early retirement has still not sunk in among us. Here we take pride in contributing even post retirement," he says.

Freedom from greed

There are some who have taken the bold decision to chase a true calling. They have quit high-paying jobs to do something less taxing, both mind and health. Engineering and MBA graduate Sankalp Sharma quit his bank job at 34 and turned to farming. But it isn't a cakewalk. "Honestly, when I talk to people around, a lot of people of my age believe that farmers have it easy. They couldn't be farther from reality. We farmers are heavily dependent on geographic, climatic and market conditions, however hard we may try. Now I am not as financially stable as a banker, I agree and there are multiple challenges and sleepless nights. But peace of mind and time to breathe takes the cake for now," says the Bhopal resident. 

Despite the inspiring stories, planning and saving for FIRE is a tall order. 

“We are a low per capita income country. While considered a low-cost country, the expense to income ratio in India is high. Factors like high real estate cost (average Indian household holds 77% of its asset in real estate), credit-led consumption boom and fascination for gold (11% of assets are in gold and other precious metals) reduce the disposable investible surplus. This, in turn, delays formation of a sustainable retirement corpus,” says Karkhanis.

Indians are underinvested in long-term insurance and pension products as against their global counterparts. Also, social security schemes that take care of a lot of expenses in retired years globally are almost missing in India.

The hurdles

• High expense to income ratio in India
   
• High real estate cost
   
• Credit-led consumption boom
   
• Fascination for gold
   
• Not a socially acceptable solution
   
• Inadequate education on personal financial planning
   
• Improper investment management