Early 2000s in India had a lot of Public Sector Undertakings (PSU) float a voluntary retirement scheme popularly known as VRS. If you choose to live in a Chennai suburb in your late 40s or early 50s with no loans and a house to your name, then the monthly recurring expense of 5,000 rupees with some set aside for additional expenses like repairs, medical etc annually amount to about a 1,00,000 rupees. The VRS plans gave a mouth watering deal of 15-20 years of annual expense. A lot of people who opted for this were in the middle management who were bored of waking up to go to office everyday. Most of them had a thought of becoming freelancers or do simple jobs to keep up the cash flow and not disturb the nest egg.
The reality was harsh, I have first hand information from near & dear ones and neighbours. The problems I observed were that
- Skill was not up to date in their field as a lot of them were middle management.
- Lacked the marketing and networking skills needed for a freelancer, unable to advertise and convince businesses to give them work.
- Did not understand uneven cash flow, inflation, investment diversification etc as they always had ever increasing salaries paid monthly, their entire corpus was bank deposits.
- Continued with their pre-retirement high income lifestyle.
- Did not cover themselves with medical insurance, one critical illness away from bankruptcy.
A majority of them ran out of their retirement benefits within 6-7 years when they were hit by inflation – medical, food and education went faster than retail inflation where the interest rates were lagging behind. From being their own boss they had to take their kid’s help to live peacefully in just a short span of a few years. They were not able to find jobs as a free lancer; even if they did, they didn’t manage to break even. They also felt too shy to cut down their status symbol items in front of their near and dear ones.
Unless we have a passive source of income like a rental income or income from an established business/equity that can grow with inflation and cover monthly/annual expenses comfortably, it is very hard to achieve financial independence through a retirement corpus alone. A lot of FI/RE (Financially independent, retire early) blogs explain that we need to have a minimum of 300 times our monthly expense or 25 years of annual expenses in the corpus to achieve that. These have been inspired from low inflation economies not for India, I had observed that what looks good for 20 years in India usually runs out within 6-7 years.
Financial independence for a regular salaried citizen is extremely hard, especially for the people I observe who are on the consumption based economy, are encouraged to take loans for their purchases. What we need to plan for is financial resilience. More about it in subsequent posts.