If you have Rs. 1 Crore in your bank account, is it good enough to retire?
Answering this question in affirmative or otherwise will not make or break your F.I.R.E. journey, in case you are pursuing one. However, it is a common question and asking more subsequent questions can help you arrive at a number about how much money you need to become financially independent in India.
(For the uninitiated – F.I.R.E. =Financial Independence, Retire Early)
To begin with, let’s try to understand how does this Rs. 1 Crore translate into cash flow which you’ll need to manage your day to day expense.
There are 2 possible cases –
- You don’t withdraw the principal amount at all, and live off interest and/ or dividends only.
- You keep on withdrawing from, and hence depleting the principal amount (i.e. Rs. 1 Crore). This is risky, as you risk running out of principal after few years. Hence, if you are planning to take earlier than scheduled retirement and aim to be financially independent, this may not be feasible. So I’ll not discuss this possibility further.
Now how much monthly/ yearly income can you generate with this?
- With current fixed deposit/ liquid fund returns, your returns are likely to be in range of 7-7.5%, which roughly turns out to be Rs. 50,000 per month post taxes. Now, if one gets really good returns or plans taxes efficiently, this number can be slightly higher – to the tune of Rs. 60,000 – 65,000. (E.g. tax free returns via PPF or bank deposits getting higher rate of returns or making use of senior citizens scheme which have higher interest rate)
- With equities you may be able to get even better returns. However, there is a risk associated with equities. More so if you are depending upon it for day to day expenses.
If you are depending upon your corpus for day to day expenses, then, you risk profile may be different. Capital protection, rather than capital growth may be your primary goal in such scenario. So your investment mix may be more skewed towards debt than equity.
Amidst all this there is major caveat – The 7% or so rate of returns considered may not be sacrosanct. The returns, for example fall dramatically if the interest rates reduce to, say, around 5% per annum.
Is this money enough?
There is no definitive answer to this.
If you have a frugal lifestyle, then this money may be enough. If not, this may fall way short.
If you have responsibilities like dependent spouse or kids’ education or taking care of elderly parents, this money will most probably fall short.
If you have some major life goals like travelling the world, then again this money may not suffice.
In addition there are some expenses which are likely to increase as you grow older – e.g. healthcare.
You need to align the money in hand with your goals and understand whether this money will be enough for your day to day expenses.
Power of inflation
The Rs. 50,000 or 60,000 or whatever you are making may be sufficient for now, but will it be sufficient 10 years in future?
In ten years, your cost of living would probably close to double. More so, if there is lifestyle inflation. To account for this you need more cash inflows. This can be achieved either by topping up your income with some active income or saving money (more than the inflation) from your passive income.
Are you sufficiently covered for the major foreseen or unforeseen expenses?
While the passive income may be OK for day to day expenses, but life’s expenses don’t always follow a linear path.
This brings us to an important point – How will you manage major expenses or emergencies?
For instance, you may need to have your primary residence (own house!) sorted, if you haven’t. Or plan for an unexpected medical emergency or something that may require long drawn (and expensive) treatment?
Unforeseen expenses can come in different shapes and sizes. You need to be prepared for them if you are aiming for financial independence. (or even if you’re not aiming for it!)
Living off passive income with Rs. 1 Crore as initial capital can be feasible only if you have
- a (extremely?) frugal lifestyle,
- have no major planned expenses in future, and
- are sufficiently insured and covered for most possible unforeseen circumstances.
- factors like rate of returns (or interest rate) going in your favor for a prolonged period of time.
However even with this, you become under-prepared even if one variable changes in your projected expenses. There may just not be enough buffer amount to absorb any kind of financial shock.
For most of us, even if you meet the above conditions, this may be too close a call. I believe that if the above conditions hold true for you, you may achieve partial financial independence. But in order to achieve complete financial independence (and retirement), this may be too close a call.
PS – I have deliberately not included age as a factor. However some of the factors will be factored in the “major life expenses” part.