While those who have suffered a job loss or have taken a significant pay cut have been forced to recalibrate their plans, another group that has taken a hit is the FIRE community, or those who intend to become financially independent or retire early. FIRE is a global trend, which has been picking up momentum for some time. The idea is to take care of all your liabilities like home loans, and provision for long-term goals like your child’s education, so that you are free to stop working if you so wish.
The way most people achieve this is by curtailing expenses and aggressively investing in equity to build wealth, a strategy that has backfired on many investors. “The correction in stock markets across the world has been very sharp. By some measures, this could be the steepest correction for Indian markets. Compared to normal retirees, FIRE aspirants take on more equity in the portfolio and the equity portion has been affected significantly. There have been some strong reactions among the people in the community, but this could just be in response to the steep fall," said S.R. Srinivasan, a fee-only financial planner and founder, SriNivesh Advisors.
So how is the FIRE community in India coping with the covid-19 impact on their wealth?
Staying the course
While Ghosh has suffered a major setback, many FIRE veterans don’t share his plight. Pattabiraman Murari, 45, became financially independent at 42. To do so, the associate professor at IIT Madras cut down his expenses even as his income grew, invested two to three times of his monthly expenses, and made sure not to take additional debt. Close to 60% of his assets are in equity mutual funds, while the remaining is in the National Pension System (NPS) and the Public Provident Fund (PPF).
“Those who focused only on the corpus as a multiple of living expenses with excessive equity will have to delay early retirement by five to seven years. But those with a good balance of debt and equity are able to manage. Between end-January and 23 March 2020, the equivalent of 5.7 times of my current annual expenses was lost due to the equity market crash. Thanks to the subsequent recovery and investment, the loss stands at about 2.7 times now. Sufficient debt reserves saved the day. I have not altered my plans," said Murari.
Murari’s equity portfolio return (the internal rate of return or IRR) has declined to 2.75%, but since he had factored in the possibility of a market crash into his financial plan, his long-term plans haven’t changed much. “An early retiree must tend towards a debt-heavy portfolio well before they stop gainful employment," he said.
Srinivasan gives the analogy of a house to explain the importance of this. “It is made up of debt and equity rooms, which are built together, during the accumulation phase. In a well-executed FIRE plan, 80-90% of the corpus designated for a goal should already be in debt assets as you near the goal. In such plans, the impact of equity corrections is lower," he said.
Investors advocate having a strong debt investment cushion to absorb the impact of a crisis like this one. Sriram Jayaraman, a fee-only Sebi-registered investment advisor and founder, Arthagyan Advisory, spoke from personal experience, “I decided to go the FIRE way two years ago. I had a sum equivalent to 50 times my annual expenses invested, 40% in equity and 60% in debt. I had made two buckets, one for the expenses in the first 10 years, and the other for the rest of my life. Bucket 1 was invested 100% in debt and bucket 2 was invested in 50% equity and 50% debt. So, has the covid-related fall in equity affected my financial independence? No. My equity allocation is now down to 40%, but I am comfortable with it," he said.
For some, the impact of covid-19 has called for realigning their goals. Desai, who did not want to reveal his first name, opted for early retirement in October 2019, the outcome of a four-year financial plan that he and his wife put together with their adviser. The 44-year-old engineer and his wife had early in their married life decided that working till age 60 years was not their life goal. They consciously agreed to not plan any children, and focused on building their savings over the next decade.
At the age of 40, Desai was advised to nearly double his investments in the space of four years, which meant some hard decisions about spending and saving. “I gave up on a lot of unnecessary expenditures like eating out frequently . I did not invest in depreciating assets like cars and followed my financial planner’s advice with full conviction," said Desai. In June 2019, he shifted a large part of his corpus from equity to debt, leaving him with a 90:10 debt-equity split. “This was done because I was retiring, rather than taking a market call, but it worked out well for me," said Desai.
However, not all has been smooth sailing. Around 10% of Desai’s allocation has been hit by the winding down of six Franklin Templeton Mutual Fund schemes and his small equity portfolio has taken a beating. However, Desai is confident that these issues will get ironed out over the long term. He has strategically increased the equity mutual fund portion up to 25% of the portfolio, taking the view that equity is now more competitively priced. As he waits for his portfolio to recover, Desai is focusing on putting together his plan of moving to his native village with his wife, to live a farmer’s life on family-owned land.
While all is not lost for Ghosh, he is not particularly hopeful about being able to bring his early retirement plans back on track. “What I was planning to accumulate over 10 years will take significantly longer now. So I will probably have to keep working well past 40," he said. But Srinivasan doesn’t think that this setback means their plans will need to be pushed back. “I have heard statements about the goal being pushed back by a few years, and in some cases even asking if FIRE is possible at all. This is primarily due to the ‘single number’ that FIRE aspirants have in mind. They often mention a target corpus of 40 or 50 times their expenses. This corpus has both equity and debt. But focusing on a single number instead of the asset allocation can show a more pessimistic picture during sharp equity corrections," he said.
According to Rajaraman Kumbeswaran, a Chennai-based financial adviser, taking a short-term view is not a viable option for those looking to go the FIRE way. “The market has seen setbacks before, and there will be more in the future. The key is to have enough of your savings in debt instruments so that your goals don’t get impacted, and your equity investments get time to recover." he said. While debt instruments too had shown signs of taking a hit, Kumbeswaran assures that this was just a temporary phenomenon.
The key to building a workable corpus to become financially independent is to have the right asset mix to shield you from setbacks. The ones who have been part of the FIRE community for some time seem to have cracked it. While the concept of FIRE might have lost its sheen for the time being, if you were in the middle of making such plans, consult your advisers to stay on the right course.