Hello from India, couple late thirties with 2 kids

[DesiGirl]

Really great forum, learning a lot so thanks everybody.

Couple in late thirties, Mom already retired from Megacorp, Dad trying to pack the bags ASAP (next 5-7 years realistically). 2 young kids ( 6 & 9).

Since we are in India there are lot of things which are different compared to US :

Inflation : Atleast 6%, food inflation could be as high as 10-15%
Guaranteed returns : 8% in RBI Bonds, 9% if you are above 60 but offcourse inflation is huge
Tax Rates : It should be possible to plan so that tax outlay is < 10%
Market returns : Average 12-15% easy but volatility is really high

Goals :
Kids education : 250K invested, should take care of Post grad education + Marriage expenses (Another quirk of India, spending serious money on kids marriages is not really optional specially for girls)

House: We are constructing 2 houses, one is for self and another one for rental. Both will be paid off.

DH's Retirement: he is making good money ($75K+ which is probably $300K+ based on PPP) but doesn't have a life, is working 12-14 hours avg. . Our expenses are controlled ( around 18-20K per annum, changes based on $-Rs rate).

We are expecting $6K+ in rental income which will be assigned to vacation expenses (discreationary), so we can happily survive in $14-15K. At such young age don't feel comfortable going beyond 3% withdrawl rate so working towards corpus of approximately $550 K. (10% tax rate considered). In India we can be self-insured for medical with a capital of $40-50K. One normal dr. visit could be done in $5 Dr. fees (or even lesser) and $5 for medication. Complete medical exam would cost $100 or less.

We hardly have $150K in Retirement folio and we are saving $30-35K every year towards the goal. will be putting all the raises/bonuses into it. Hope for 10+% returns. (could be lot more as Indian market goes or go down by 50% :-( as kids folio went but recovered all of it)

What bothers me is high infaltion and high volatility of returns. I would love to go down to 2% withdrawal rate but would take lot more years to save and I don't want my DH to suffer his job more than absolutely needed. I could possibly get a job paying $15-20K pa but that will have huge impact on quality of life and kids education. (DH & kids get 3 freshly cooked meals on table + are expected to contribute almost no time & effort to running of house) Or may be go for 20% stocks and mostly fixed income (Guaranteed by Govt. of India). Also our flexibility is limited with 2 young kids, after they go out we can adjust our expenses lot easier. Also houses will be approximately worth 350K & 250K so extreme case we can liquidate them in later years. Currently its possible to get a 2-3 bedroom apartment in $50-60K so houses are a bit of McMansions (specially by Indian standards

Oh BTW I recently became CFP (Costed me < $1K on self-study basis) and am trying to do CFA course work (on self-study basis again) so I am qualified enough to make this life changing decision and manage the folio for 40-50 years of expected retirement duration.


Thanks for reading. Your ideas, suggestions, thoughts welcome.

-DesiGirl

 

[landover]

Welcome to forum. I think your plans are achievable. There is one think you want to consider, since India in developing fast, inflation in service industry will be much higher because lots of people will have more discretionary income. I think food and durable inflation will not be a problem in long run unless whole world has the same problem. I am guessing that India's per capita income in next 20-25 will be similar to that of Brazil/Mexico today.

Your investment in houses is a good choice since land is scarce in metro cities and everybody want to live there due to infrastructure and facilities. This is good inflation hedge. But rental returns are tiny since people expects a high rate of appriciation in real estate.

I know the job pressure in India. If it is in IT industry, I think people are doing a lot of damage to their health due to work pressure.

Education in not cheap in India, you pay a lot in good private schools though little in government universities (provided child managed to get in).

 

[DesiGirl]

Thanks landover.

Good point about service inflation, did not think about that.

Rental returns are in the range of 2-3%.

IT industry is really brutal I don't think people can continue working till 60.

For education expenses pie is fixed so if Govt colleges don't pan out then PG will be on kids. I'm tutoring them hard and making my contribution because getting subsidized education makes lot of financial sense.

Even more concerns are about lack of data. in India we hardly have return data for 40 years for SENSEX (main 30 stock index) so forget about the whole market so not really sure what values to assume for long term. There is no real Bond Market, interest rates on CDs (or Fixed Deposits in India) has gone down from 13-14% to 7-8% in last 20 years so can't be very sure about those returns. Things are really in a state of transition. Hard to plan 40+ years retirement with that.

-DesiGirl

 

[Rich_by_the_Bay]

DesiGirl, welcome to the board. A high volatility/high return environment can be managed. In the accumulation phase (say up to 5 years before FIRE) time will smooth things out. But as you get closer you might wish to consider any of the various "bucket" strategies where you keep 5 or more years in cash and CDs, another bunch in intermediate bonds and the like, and a lot in equities but which you won't need to touch for decades.

I suggest you read Lucia's "Buckets of Money" and the Boglehead guide to retirement among others to acquaint yourself with the concepts. In a nutshell, you place your money at low, intermediate, or high risk partitions depending on how far down the road you will need it.

 

[walkinwood]

Starting in your mid 40s (projected retirement) leaves you with about 50 years of retirement. I would use a fixed percentage of portfolio method of withdrawal rather than the conventional SWR formula. Refer to Bob Clyatt's 90/5 rule. Check out
Bob's Financial Website

You have already realized that the SWR studies are based on US markets and may not be applicable to Indian markets. That's where the % of portfolio makes sense. However, you need to have enough padding so that a 50% market drop doesn't send you back to the workforce. (I'm acutely aware of this, having experienced it myself)

I'm not an investment expert, but I think a volatile equity market is best handled by a large dollop of fixed income - maybe 50-50 or even 40/60 equity/fixed.

 

[lucija]

Let me just say that I know very little about India, its market stability and its overall economic stability....

However, if I was you the following would be a big concern of mine...

....
Good point about service inflation, did not think about that.
....
Even more concerns are about lack of data. in India we hardly have return data for 40 years for SENSEX (main 30 stock index) so forget about the whole market so not really sure what values to assume for long term. There is no real Bond Market, interest rates on CDs (or Fixed Deposits in India) has gone down from 13-14% to 7-8% in last 20 years so can't be very sure about those returns. Things are really in a state of transition. Hard to plan 40+ years retirement with that...

It seems you will have hard time accurately estimating spending (due to overall lifestyle inflation). Also, can you really depend on investment income over there? What is your fall back plan?

From what you shared so far, when you both retire you will have 50% of assets in 2 homes and 50% riding the market. Would it make more sense to have the 75/25 split between real estate and market investments?

From what I have seen in countries without mature markets real estate seems to hold value better and, ultimately, acts as a safer and more lucrative investment. So, how stable is real estate in India? Since you are already planning to be a landlord, why not pick up another apartment or two or a perhaps a business rental? You can always choose to liquidate real estate and invest in markets if that makes sense later on...

 

[DesiGirl]

Thanks for some very good points Guys. I am so glad to be interacting with people like you. Unfortunately Early Retirement or Retirement Planning for that matter is such an underappreciated concept in India that more than half the CFPs won't even be able to define SWR or Monte Carlo so even without Indian Context the inputs from this forum are still quite valuable.

I will make sure to go through the references mentioned in detail ; Bob's website, Lucia's Buckets & Bogleheads website. I think I have briefly looked at them.

OK to serious stuff now :

AAP during Retirement :
Braodly expenses would be 25K (depends on inflation in next few years, we are tracking expenses to get data on our personal inflation and accurate cost of living data)
Out of this approx $7500 is meant for vacation and this will be used from Rental income (If less income then less amount used for vacation)
Assuming remainder to be 20K, corpus of atleast $660K needed (3% WR) + $50K for Medical Emergency. The AAP is going to be 60:40 to 40:60 Stocks & Cash (No real Bonds in India). On Cash portion 8% guaranteed returns are available as of now. So broadly 250K in Real Estate, 350K in Stock and 350K in Cash + 50K Emergency/Medical in cash.

Once again I agree with the point of not using 3% and inflation adjustment subsequently. It will have to be a variable withdrawal based on market conditions. I'm working on a few possible strategies and running them through home-grown Monte-Carlo in Excel. I'm generating random returns for stocks using RANDBETWEEN (-40, 65) etc. and as expected higher the volatility, lower the withdrawal rate which is sustainable even with same average returns. I know this is Equal distribution (too fat tail) instead of normal but I guess riskier ruthless assumptions are better. Please Comment.

Strategies I'm considering :

* 5 Buckets, first 2 of 5 years fixed income rest stock / bond.
* 3% of 50-50 portfolio
* Use the 8% return from Fixed income and move 3-6% on stock folio into fixed income for inflation adjustment
* Take money from Fixed income or Stocks based on stock market was good or bad last year.
* And a few more variations of these......

Safety Measures built in :

* Home Equity in 2 houses (600K at current value)
* 75K worth of Gold not factored anywhere
* 10 years into retirement kids would be gainfully employed and on their own so expenses will reduce.
* 25 years into retirement we should be able to cut down (After having enough of vacations & hobbies)
* Will go through at-least 1 year of dry-run (to make sure all the ts are crossed and i's are dotted) which will add buffer to corpus.

Please keep the comments coming. I'll share accumulation AAP in next post.

-DesiGirl

 

[Meadbh]

Desi, your posts are very interesting and you seem to be right on top of things. Can you explain why there are "no real bonds in India" ? How does the government raise capital to build infrastructure?

I'm also wondering what would stop you from investing in bonds abroad. Although with the returns you are getting on cash in India that might be a moot point!

It's fascinating to see the cultural differences in the way people save. Americans focus on the equity and bond markets; your inclusion of real estate is also common in Europe, where equity returns are heavily taxed. You have quite a bit of gold in your "corpus" (which is a new term to me and presumably is the same as "portfolio"). I know that gold is highly valued in India. The non-negotiability of planning for lavish weddings for your kids is also unique.

 

[DesiGirl]

Thanks Meadbh.

Yes India is a very different place. For eg:

* Optimistically only 5-10% population has any exposure to stock market.
* Only 3% of population pays any sort of income tax.
* The only one annuity available with COLA does 3% which is not even joke in India.
* Many retirees use withdrawal rate of 8-9% (all the interest) and consume it without any care for inflation whatsoever. Many people take the retirement proceeds to marry off their daughters and then expect the son(s) to provide for them.
* As far as retirement is concerned if my Husband were to quit his job and inform his family they would assume that he just lost his job. Even my social standing tanked big time after I quit my Megacorp IT job due to 2 small kids.. I would be lot more respected even if I take up a job which would pay like $100-200 a month for full time work

So yes India is culturally very different.

Ok as far as Kids marriages are concerned since everybody does that it would reflect very badly if you choose not to (and this would be the case for Love-marriage). If it is arranged marriage there is noway you can arrange it without willingness to spend significant amounts (I guess $75K in current money for my daughter, I may earn serious money in dowry for my son's marriage if he comes up good and I choose to do that) Lot of Gold will be used for the marriage kind of purpose and also I consider it to be hedge if things really go bad.

Ok some bonds in India like RBI Bonds or NABARD bonds etc. behave exactly like cash, no trading in secondary market allowed and they give you guaranteed interest + capital @ maturity (typically 6-7 years). Secondary trading of Govt. or Corp Bonds takes place amongst Institutional player, individuals have limited access. Bond Funds are there but returns are lower than cash so mostly individuals do not bother, only big players.

Govt. raises lot of Money thru Big Players as well as small investors who get nice returns from Govt. . For example they give 9% to senior citizens and 8.5% on Provident Fund even though these returns are not viable in market.

Ok now our accumulation AAP :

We are saving approx $2K . third goes to fixed interest 8.5% REtirement scheme (EEE - tax benefit at invest time, interest is exempt as well as proceeds are exempt from tax, see Indian govt is nice ;-) , third goes into stock market (DCA or Systematic Investment Plan in India) and third is currently locked at 10.25% fixed interest (Recurring Deposit) but will mature in 6 months and will be invested in stock Market.

1/3 of our existing retirement folio is in PF (8.5% interest), 20% in market & rest in Megacorp Stock & options. (We are in process of diversifying as and when we can, but I have only accounted for vested stocks, so unvested / future amounts should hopefully add some to kitty)

We have access to International stocks & Bonds but currency rates vary widely and developed market returns cannot match Emerging market (difference in inflation)

Sorry after you pointed I realized that Corpus is probably Indian investment industry slang for POrtfolio.

BTW I did spend sometime on Bob's site and will continue to do that but what is 90/5 rule?

-DesiGirl

 

[DesiGirl]

Just to clarify apart from $2K monthly savings approx $6-12K comes in form annual bonus / stocks etc. to make annual savings upto $30-35K .

 

[Rich_by_the_Bay]

BTW I did spend sometime on Bob's site and will continue to do that but what is 90/5 rule?

95/5 Rule means taking a fixed percentage of your total portfolio each year (typically 4 - 4.5%) but not lower than 95% of your previous year's withdrawal).

This results in some fluctuation in your annual income but has the advantages of never letting you run out of money and historically having a somewhat better long-term return than the traditional 4% rule (4% of total value initially, with that withdrawal amount subsequently adjusted annually for inflation).

 

[Bestwifeever]

Nothing to contribute but welcome! Our DD's father-in-law is from India and it was very hard for him to cut the guest list for the wedding!

Are your bank CDs insured by a goverment program (in the US we have Federal Deposit Insurance Corporation that covers up to a certain amount)?

 

[Meadbh]

Sounds like India is a hectic financial environment right now, Desi!

Wow, a fixed income product with 10.25%. I'm envious! Can "furriners" invest in these products, and if so, how? Are there guarantees? And what would be your recommendations for Indian stocks to watch/invest in?

 

[walkinwood]

Strategies I'm considering :

* 5 Buckets, first 2 of 5 years fixed income rest stock / bond.
* 3% of 50-50 portfolio
* Use the 8% return from Fixed income and move 3-6% on stock folio into fixed income for inflation adjustment
* Take money from Fixed income or Stocks based on stock market was good or bad last year.
* And a few more variations of these......

Keep it simple. You have to be able to do this year after year even as you get older. You'll get ideas as you read through the literature that has been recommended. Also google Bengen to read his articles on SWR - he was among the first to really delve into it.

 

[walkinwood]

...
This results in some fluctuation in your annual income but has the advantages of never letting you run out of money and historically having a somewhat better long-term return than the traditional 4% rule (4% of total value initially, with that withdrawal amount subsequently adjusted annually for inflation).

We decided to keep a separate "emergency fund" to smooth withdrawals when the market fell too much or if we had a big unplanned expense. I thought we would have to use it in 2009, but we managed to drop our expenses to match the 4% withdrawal from the 1/1/09 portfolio value. Our emergency fund is about 5% of our withdrawal portfolio value. I have no data to tell if that's a good value or not.

 

[Rich_by_the_Bay]

We decided to keep a separate "emergency fund" to smooth withdrawals when the market fell too much or if we had a big unplanned expense. I thought we would have to use it in 2009, but we managed to drop our expenses to match the 4% withdrawal from the 1/1/09 portfolio value. Our emergency fund is about 5% of our withdrawal portfolio value. I have no data to tell if that's a good value or not.

Good point: if you are using the "% of Total" approach, that emergency fund can be a great ballast during the down years. I wasn't thinking of it that way, but that's a strong point in its favor.

 

[eridanus]

Sounds like India is a hectic financial environment right now, Desi!

Wow, a fixed income product with 10.25%. I'm envious! Can "furriners" invest in these products, and if so, how? Are there guarantees? And what would be your recommendations for Indian stocks to watch/invest in?

Inflation would eat that 10% up in no time, assuming you're investing in rupees. Bad idea.

India Inflation Rate

 

[DesiGirl]

Thanks for lots of useful ideas and making me feel so welcome.

Thanks for clarification Rich_in_Tampa .

Bestwifeever (I like ur handle, I have same opinion of myself deposits in individual banks are insured upto $2250, but Indian banks have govt. control and they are extremely conservative so I do not know of any big bank failing or getting any close to that ever. There was no impact on banks whatsoever during recent financial crisis.

Meadbh, foreigners cannot invest but currency rate risk is big for somebody who is not living in India. As far as stocks are concerned most SEnsex stocks are decent (specially Infosys and I do like SBI) but simple thing is India is high return due to higher risk / emerging market.

Good point on keeping it simple walkinwood, will try to pick one of the strategies, clearly document do the spreadsheets, put the extreme limits so all that is left is brain-dead execution. Excellent suggestion on keeping Emergency fund for super-bad years, that is definitely getting used in my plan.

Eridanus, I know it looks bad but its not that bad. CPI has almost 50% weightage on food (where inflation is like 15-20%) but in real life for upper middle class food expenses are 10-15% of total expenses. ($250 for 4 of us including eat-outs) The main place where it bites is education ( Kids education costs $2500-$3000 p.a. ) but every other year goes up by 25-30%, no option other than changing to a cheaper, lower quality school so that is one of the big concerns. Currently our house rent is going up by 10% every year ($750 now) but that should be over by 2011 end when our own house will be ready.

We are basically looking at retirement in 3 phases :

* From Age 45-55: Kids responsibility, by then they would be 26 & 23 so clearly adults and on their own. They should be out of house for studies by 50 itself. Financially critical since do not have lot of flexibility to cut down.

* From 55 to 75-80 : Fun time hopefully health cooperates and we 're able to survive seeing each other for like 15 hours a day without distraction of kids. Would like to have money for vacations but lot more flexible to cut expenses down if needed.

* Post 75-80 :Slow down, material needs would go down so budget can be adjusted according to money left.

Currently full time maid costs $150 pm, trained nurse at home costs like $250-$300. Also with sensible approach joint families are still quite common in India and function well. Parents do things like monitoring kids, managing maids to get the house-work done while Adult children support medical issues, general running of the house so lot of families are able to strike a balance where it is win-win for both parties.

-DesiGirl

 

[walkinwood]

Good point: if you are using the "% of Total" approach, that emergency fund can be a great ballast during the down years. I wasn't thinking of it that way, but that's a strong point in its favor.

I don't know if I'm doing it the way you think I am. So, let me try to explain.

I took about 5% from my total stash at the start of ER and put it into an imaginary Emergency Fund. (I also created another fund to pay down my mortgage, but for this discussion, it isn't important). So, my first year SWR was 4% of 95% of my total stash (btw, that's a technical term - the joisey version of Corpus .

I include the emergency fund while calculating my AA (60/40 equities/fixed). And then I do some simple calculations at the end of the year to determine my Withdrawal portfolio (from where I draw 4%) and my emergency fund. Both fluctuate with the market.

 

[Rich_by_the_Bay]

I don't know if I'm doing it the way you think I am. So, let me try to explain.

I took about 5% from my total stash at the start of ER and put it into an imaginary Emergency Fund. (I also created another fund to pay down my mortgage, but for this discussion, it isn't important). So, my first year SWR was 4% of 95% of my total stash (btw, that's a technical term - the joisey version of Corpus .

I include the emergency fund while calculating my AA (60/40 equities/fixed). And then I do some simple calculations at the end of the year to determine my Withdrawal portfolio (from where I draw 4%) and my emergency fund. Both fluctuate with the market.

That is a bit different from what I envisioned, but the basic idea is the same: stash cash outside the portfolio so that sudden large expenses don't rock the boat too much from year to year. At least I think that's the goal.

 

[desihopeful]

Good to see someone in India thinking along the lines of ER. I glance thru this forum regularly, but rarely find material that is relevant in the india context. Your thoughts are encouraging .. maybe it is time for me to start my own thread.

 

[Meadbh]

Welcome desihopeful! Do start your own thread; I know your situation will be interesting and will start some good discussion.

I attended a financial seminar the other day and learnt that inflation in India is currently ~16%. The speaker indicated that best estimates are that stock markets in India and other BRIC countries will increase by high single digit percentages in 2010.

 

[HsiaoChu]

Are you native Indian? or transplanted? What's different?

Z

 

[DesiGirl]

Welcome to the forum desihopeful.

Early Retirement is not a very popular idea among Indians (Like Insurance is mostly used for tax benefits). Its NRIs (Non-Resident Indians) who still appreciate the idea. In fact I was reading a reputed newspaper and in an article on Retirement a bigshot from Pension Industry (ULIP) said 40 is good age to start saving for retirement and I'm like Oh my God.

Do start your thread would love to see another Desi who is willing to think and talk about Early Retirement, most of the people just ignore me (In India) when I mention word retirement (forget about Early part ;-)

-DesiGirl