A Simple Financial Independence Plan
Easy to implement Financial Independence plan
This is an interesting idea I want to explore. It is about allocating your funds for retirement planning. Let me call it the Financial Independence allocation since retirement has many connotations.
First things first.
In this idea, I assume that there will not be a stock market downturn that lasts longer than 5 years. We haven’t seen one in our lifetime, I will use that as a basis. Here is an interesting article to read on this.
The below graph also shows that in our investing lifetime, none of the market drops have taken more than 5 years to recover.
Of course, it is one thing to look at data and a completely different thing to experience your investment going down.
For now, we shall leave that emotion aside and stick with numbers.
Alright already, what’s the plan?
So, the idea is quite simple and not entirely my own either.
Set aside 6 years of expenses in debt funds. Let the rest of it sit in equity and compound.
As long as there will not be a down-cycle of more than 5 years, we are good.
There, that is the essence of the plan.
Figure what your annual expenses are and set aside enough to tide you through 6 years in the worst case.
This is the safety factor. You will likely withdraw from your equity investments on an annual basis.
You will touch your debt funds only in the case of the market going belly-up when you need money.
That’s it, this retirement or financial independence plan has only two components. 6 years of expenses in debt and the rest in equity. The amount you need is something that will vary for each one of us. That part is for us to calculate and understand for ourselves. You can look at this article for retirement planning.
What debt funds are we talking of here?
I would just keep this super simple. Pick 2-3 funds that are reasonable.
The idea is to protect capital, not seek returns.
If you are close to inflation returns here, that is good enough.
One way to do this is to look at ValueResearch
Pick the funds with consistent 10-year returns, large AUMs (assets under management) and low expenses.
You will find funds here that lend to Banks and PSUs. These are usually safe, based on which banks of course.
Do read up on Franklin Templeton and also the UTI scam.
We do need to be aware that we can never take our eyes off our investments completely.
An alternative that has come up is the REIT.
You can explore REITs for part of the debt allocation. I will do a separate post on REITs, if there is interest.
Caveat: Beware of chasing returns.
You are doing this to protect capital. Do not look at high returns here. Look at the safety factors, high AUM, consistent returns over a long period and low fees.
Debt funds also include funds that invest in risky bonds, from companies with low credit ratings. These will generate higher returns but at a commensurate risk.
Remember, no free lunch!
Any other types of debt?
I also think of PPF as a debt instrument. Depending on how you want to think of it you can include PPF in this kitty.
Of course, nothing else gives tax-free guaranteed returns like the PPF so I would think long and hard before withdrawing anything from the PPF.
There are other government schemes for those above 60 like the PMVVY and post office deposits. Guaranteed returns, though the returns are taxed.
That takes care of the debt part.
Now let’s talk Equity.
Here too, my intent is to keep it very simple.
Put money in the index.
Buy the Nifty 50, the Nifty Next 50 and that should be good.
We also have an option of investing in the S&P500 and the Nasdaq from India. So, you can add one of those to the kitty. The NASDAQ has given higher returns in the last few years.
If you have a higher risk appetite then you can also explore a momentum index. There are two such funds in the market now. The UTI Nifty 200 Momentum 30 and a similar fund launched by Motilal Oswal recently. They both follow this index by Nifty Do your research. Momentum tends to be very volatile.
With that, you should be sorted.
To start with, you need to know what is your annual expense. Once you have that figured out, put together a plan.
Build your debt fund investments over time to cover you for 6 years. Meanwhile, keep your equity investments going strong as well.
Key Takeaways:
- Calculate your annual expense requirements
- Build up your debt investments to cover you for 6 years of expenses
- Keep the rest in Equity so it can compound
- Do the research and choose appropriate debt funds. This is to protect capital and not for providing high returns
- Invest in simple index funds for equity
Just for fun, do read up about Mike Milken if you haven’t already. What cracked me up is that he goes by philanthropist now. Came up because I was talking about debt funds being risky.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.
great post