I was recently quoted in Economic Times WEALTH (8-14 February 2024) in the Q&A section where a panel of experts answers readers’ questions related to various aspects of their personal finances.
The exact question and the answer –
Here is the text version of the query and the reply –
Q – I am 44 years old. Below are my current corpus numbers:
Equity and mutual funds : Rs.3.75 crore
NPS: Rs 30 Lakh
Flat worth Rs 25 lakh
Fixed income instruments (Bank accounts, FDs): Rs. 40 Lakh
Overall current corpus : Rs. 4.7 crore
My monthly expenses are Rs 1.7 lakh.
I have my own house for staying purpose that is without any EMI and big enough to stay for next 10-20 years. My objective is to quit my corporate job by 2025 and I expect my portfolio will reach Rs. 6 crore by then (with future investments). At overall portfolio level, I intend to allocate equity:debt ratio of 70:30 then which makes it Rs 4.2 crores in equity and Rs 1.8 crores in debt. And I expect a weighted average return of 14% (16% in equity and 8% in debt) on my corpus that provides approx. Rs 84 lakh per year, which after expenses (Rs 20 lakh per year) will provide a surplus of around Rs 64 lakh every year.
Is it a safe way of quitting and then working on my start-up?
A – While your total asset base is about Rs 4.7 crore, it must be noted that Rs 30 lakh in NPS will not be available immediately and up to age 55-60. Also, your flat of Rs 25 lakh isn’t liquid enough (unless generating rent). So the net current asset base available for income generation is slightly lower at Rs 4.15 Cr (spread across MFs + Stocks + Bank Accounts + FDs). You have mentioned that your current residence is good for next couple of decades and hence, there won’t be any major expenses towards that.
Now you mentioned that by 2025 (the year that you plan to quit working), you will have about Rs 6 Cr, which includes current corpus plus future investments. But this seems to be based on the assumption that market will ‘definitely’ go up over the next 1 year and hence, your existing Rs 3.75 Cr in equity instruments will also ride the wave up. This is definitely possible but given the nature of equity markets, its not guaranteed. Markets can fall as well in the short term. Also, remember that Indian markets have done very well over the last few years and hence there is a case for mean reversion. Not saying it will definitely happen but that the future expectations of investors should be suitably adjusted.
Another interesting thing I see is that your return expectation is 14% from portfolio of 70:30 Equity:Debt (with equity giving 16% and debt 8% average returns) during income generation phase. While generating 16% from equity is possible, it must be said that that it is an overly optimistic expectation for average returns in future for most people. I don’t know how your portfolio rolling returns over extended periods and across market cycles have been. And more importantly, how much of that can be attributed to market run ups and to individual skills.
So I may sound like a killjoy here, but I think there is a need to readjust your ‘average return’ expectations lower. You may definitely do even better than 16% in some years. But let’s not rely on great market returns when making financial planning assumptions for income generation. At best try to use only 1-2% real rate of return (portfolio returns vs your effective inflation) when planning for income generation from a given corpus. Anything more and you are playing with luck.
I strongly recommend you engage with an investment advisor to help you do the real and proper financial calculations for portfolio income generation. That is not to say that your Rs 4-5 Cr portfolio isn’t enough for your Rs 20 lakh starting annual expenses. But it is just to stress test your financial situation so that you can make the job-quit-decision on more solid footing and better peace of mind.
Also, there are no details of your dependents. So if need be, get your life properly insured via term plans and also have a big enough health insurance. More so because when you start up, you will not have any corporate health coverages to cover the risks.