that fi cash

I have written about index investing many times, and I have written about how it is possible to make a reasonable amount of cash in order to claim financial independence. I have noted that making Rs.10 m in India should be relatively easy for anyone. Not many are privileged to be in that camp though. 

The purpose of this post is to assess how much cash is sufficient to sustain long term financial independence. There is the 4%-rule which says that: find out the current annual costs; multiply by 25; and that would be the cash required. This is how it is implemented: in the first year, withdraw 4% of the cash; for the second year, withdraw the first year number increased by the annual inflation rate; and so forth for the subsequent years.

Suppose that a family was able to accumulate Rs.5 m in financial assets at the beginning of 2000 and that the cash was invested in the Nifty-50 index. Assume that the family's annual costs at the time were Rs.125,000 and these will increase by annual inflation rate of 6% each year. That means for the year 2018, the annual costs will be about Rs.360,000. This is a very reasonable assumption for an ordinary family in India. Let us also assume that there will be no further investments.

As of 3 January 2000, the index was at 1592.20; and with Rs.5 m, about 3140 units could be bought; let's ignore transaction costs. On 1 January 2001, the index closed at 1254.30. The family will have to sell about 105 units for its annual costs of Rs.132,500 for the year. The remaining units on that day will be 3034, and the market value will be Rs.3.806 m. On 1 January 2018, the index was at 10435.55; annual costs are Rs.360,000; and units to be sold are about 35.

After the sale on 1 January 2018, the family will have 2016 units with a market value of Rs.21 m, a sizable number. All that the family did was: strived to make Rs.5 m as quick as possible, invested that in a diversified index, and had fun in life, doing what they liked to do. There is no pressure of working for someone else and meeting deadlines. No commuting time. Focus on things that mattered most and enjoyed that work. Leisurely meals. Lots of fun. If the person was age 40 at the time of financial independence, he or she would be worth Rs.21 m at age 58 which should be sufficient to lead a fun-filled life. I have not considered dividends that the index stocks payout. That should be yields of say, 1-2% as additional annual cash. 

The markets are not linear; and we have considered the exact moves of the market from 2000 to 2018. In fact, the index closed lower for (January) 2001, 2002, and 2003. Due to this, the market value reduced from Rs.5 m to Rs.3.043 m in January 2003. The family was not bothered by the PE; neither bear market, nor bull market. Heck, there weren't any more investments either. 

The only linear assumption was the inflation rate of 6%. We could tweak that here and there, but Rs.360,000 a year of annual costs are pretty reasonable in today's times for a typical family in a low-cost smaller town; it may be lower, but not higher. Why should this ordinary family be living in high-cost cities after financial independence when there are options for lower costs, better weather, and more leisure?

With that income, the taxes will be zero. Yes, we have ignored transactions costs; but I have made a bigger point: that it is not very difficult to be financially independent in India for anyone. For qualified professionals, it should be much easier, but even ordinary people can achieve it. The key is the behavior, not excuses. 

We have also ignored the asset allocation, investing fully in equities. But again, I wanted to make a bigger point, remember. A case could be made for the family to take up part-time work (that qualifies its criteria of fun) to meet just annual costs, and the annual realizations from equity (unit sales) are invested in bonds each year. Over the years, the family would be able to have reasonable amount in debt too. 

Even applying that 4%-rule - Rs.200,000 initial annual costs with Rs.5 m - the closing market value of investments will be Rs.14 m in January 2018. Good enough for that ordinary family. But I don't think, that typical family will have Rs.570,000 annual costs in today's times. Yet the point is made, isn't it?

If the family was able to accumulate Rs.10 m, instead of Rs.5 m, and had double the costs - Rs.250,000 in 2000 and Rs.720,000 in 2018 - the market value of investments would be Rs.42 m in January 2018. This is in fact possible for qualified professionals. Even initial year costs of Rs.420,000 which will be Rs.1.2 m in 2018, the market value would be Rs.26 m in January 2018.