January 22, 2019
We try to guide people towards achieving a concept called ‘financial freedom’. This means that people reach a stage at which they work because they want to, not because they have to.
This is how we judge whether someone has reached financial freedom:
There must be adequate health insurance.
An emergency fund of between 1 year and 3 years’ normal living expenses must be set up, depending upon whether there is health insurance and the quantum of health insurance that the individual has.
There must be no loans.
The individual must own a residential apartment or house.
There must be a corpus, income from which takes care of normal living expenses in retirement. Adjustments may be made for pension receivable if any.
There must be a growth corpus, preferably equal to twice the regular returns corpus.
Children must be financially independent.
An example will explain things on the financial side. Someone is retiring today. He is married and is responsible for his spouse. He and his spouse have a decent family floater health cover. They have no loans, own their own residence and the children are financially independent. Their normal living expenses are Rs 60,000/- per month. We would want them to have an emergency fund of Rs 8 lakhs.
The regular returns corpus would be approximately Rs 110 lakhs to provide an after-tax return of Rs 7.2 lakhs per annum. The regular returns corpus would be invested in a range of instruments from bank fixed deposits to government bonds to debt mutual funds to small savings instruments depending upon the yields availability from time to time.
The growth corpus would have to be Rs 220 lakhs. This would be invested largely in equity and real estate.
So, with financial assets worth Rs 338 lakhs, there should be financial freedom in this case. This is of course simplistic. The required corpus can be reduced if one or both of them receive DA linked pensions, if there is rental income, etc.
This is how we calculate financial freedom.