The mood is sombre all around us. Life has changed a lot in past few months. Death is no more an abstraction for most of us, it has hit us very closely by impacting our near and dear ones. People across all age groups, and more recently the younger ones, too are getting severely impacted by the pandemic. We all plan and invest for the future – our future, our children’s better future. Is the heightened uncertainties, like the one being witnesses currently, calls for changing the plan?
The idea of FIRE (Financial Independence, Retire Early), originated in the 1990s, adhered to delayed gratification. The individuals of this thought process saved roughly about 50% of the monthly income for 20 -30 years to meet their goal of creating a sufficient retirement corpus. This need is different for each individual based on current income, geographic location, the investment mix (faith in the stock market!).
The pandemic has brought in extreme uncertainties, the approach of YOLO (You Only Live Once) is the new mindset. The focus has shifted from the destination to the journey. People want to live their best life NOW instead of reaching the magical number of 60 (retirement age in India). So, does it imply that we all should shun the FIRE approach? We should take expensive vacations, go to fancy restaurants, buy the latest iPhone, splurge on luxury cars, etc. (Of course, after the lockdown)
Unfortunately, the answer to this question is not so straightforward. As per the statistics, roughly about 20% of the population in India will hit the conventional retirement age of 60 by 2050. When it comes to preparedness for the same, most people rely on their children to provide them the necessary financial support. Typical investments done in retirement planning by an average Indian are in the PPF and NPS, with few looking into alternative avenues. However, rising inflation rates, coupled with declining interest rates, present a challenge for the investors. Time is running out for the young and old alike when it comes to retirement planning. The combined assets under management (AUM) of the National Pension System (NPS) and Atal Pension Yojana increased to 33.09% year-on-year (y-o-y) to touch ₹5.59 trillion as of February 2021. As of the end of February 2021, the total subscriber base was at 4.14 crore, up from 3.40 crore in February 2020 (a y-o-y increase of 21.85%). Sadly, it’s not enough.
Government of India’s recent announcement to cut the interest rates on the small saving schemes should act as a premonition for reduced rates on these instruments in the future.
It is clear that in this dynamic and challenging environment, one can achieve nirvana only by following the middle path. Instead of ditching the FIRE in its entirety, embrace the FI – financial independence.
FIRE may not be for everyone, but YOLO cannot be the answer for everyone! Some may perceive early retirement as freedom, but others may not. Work is not always about money but also a part of our identity and our role in society. But securing a financial future, having financial freedom, and physical, mental, and emotional well-being is essential for everyone.
Few key takeaways to achieve the desired Financial Independence –
- Wealth is a function of our spending habits. Take control of the amount of money you spend. Remember small amounts matter – The Latte effect. The small amount of regular discretionary expenses is burning a hole in your wallet. Analyze how much you spend in a month on that daily coffee, eating out, amazon purchases and unused subscriptions, etc. Reducing these expenses might help you contribute positively towards the environment too. This connection between wallets and environmental conservation may be a good motivation to begin.
- Do not underestimate the power of compounding. Use your financial resources efficiently. Make your money work with you. The sooner you start, the less amount you have to save overall.
- Be financially disciplined, not necessarily frugal. Avoid owing money to your future self.
- One cannot over-emphasize the importance of being financially literate, irrespective of age, gender, and occupation.
- Have a well-diversified investment portfolio. Intelligent investing along with discipline is sure shot a recipe for success. Take cognizance of the changes in the risk-taking ability, tax structures, inflation, riskiness of the asset class, new emerging investment avenues.
In the end, it’s all about balancing – having a good life while preparing for a safe and secure future. Live life to the fullest – spend time with family, take care of physical and mental health. Have the financial breathing space to live life on your terms – shopping, traveling, painting, starting a business, working part-time, or doing something you enjoy. So my dear investors, ‘you live only once’ may seem an attractive thought in present tumultuous times, but if you are Financially Independent, trust me, you’ll live every day!
Dr. Taunika Jain Agarwal Ph.D.