Testing the Waters Of Early Retirement — A Radical Shift In My Investing Strategy

In my most recent early retirement update, I’d published the below chart —

Image of Chart showing Potential Income vs Expected Expenses

This chart illustrates potential monthly income earned and actual expenses incurred as a function of time over the past four-quarters. I’d explained these terms further by saying —

When I say potential income, I am referring to any passive income plus the income that I could potentially generate by liquidating all of my low-liquidity and medium-liquidity investments, consolidating it into one corpus, and earning a monthly interest off this corpus at an assumed average rate of interest. My first target is to have at least two successive quarters where the income line is above the expense line. Now, that would be something!

After I wrote that article up, I began thinking could not stop thinking why “just potential income?” By now, I have saved-up a pretty decent corpus. So, what lucky star am I waiting for to fall from the skies? Why don’t I actually start earning that monthly interest right away and see how much of that “potential” is really “actual”? The interest rates are pretty high and solid right now (especially around the 24-month tenure). So, I can actually begin to test the waters of early retirement while I continue to earn a pretty good salary from work.

These incessant thoughts got my head into a high-rev mode and I began to dig deeper into options that I could explore for generating a steady monthly income (because after the what, why, and when of a financial goal the real pain lies in the how to get there). I considered —

  • Fixed Deposits with monthly interest payouts

  • The Post Office Monthly Income Scheme

  • High-interest Liquid Mutual Funds

  • Debt/Income Mutual Funds

  • Monthly Income Plans from Mutual Funds

  • [And to some extent even] Annuities from Life Insurance Companies!

Each of these options has its own idiosyncrasies — investment style, lock-ins, income tax efficiencies or lack thereof, and so on. For example, you’re not really guaranteed a monthly income by a Monthly Income Plan from a Mutual Fund, the Post Office Monthly Income Scheme guarantees a fixed monthly income but locks-up your money for five years, an Annuity from a Life Insurer guarantees a fixed monthly income for quite a long time but you don’t get to see your money ever again, and so on.

All of that brainstorming and research was frankly overwhelming — seriously, once you get into the passion of early retirement, it starts to take a life of its own! To come back on track, I started to question my real intention — was it “To test the waters of early retirement?” or was it “To build the most optimized early retirement portfolio?” And that was pretty easy to answer. I really only want to test the waters of early retirement and therefore I simply settled on a “Think BIG, Start small” strategy.

So here’s what I’m going to do (or have already started doing) in the coming days —

  • Accumulate all of my high-liquidity savings and investments into a single corpus (say X). Most of these are anyway nearing maturity and so I don’t have to prematurely close anything.

  • Keep X/2 in fixed deposits with a monthly interest payout. I’m shooting for the 24-month tenures (or approximately, because in some cases 24-months plus 1-day gets you a higher interest rate!). But, on an average, the monthly payout seems to cause a discount of 0.07% on the published interest rates. So, if the published interest rate is 9.25% you’ll end up receiving 9.18% simple interest with the monthly payout option.

  • Keep X/2 in high-interest Liquid Mutual Funds (my research suggests that the yields here are a bit higher than what you get on the 24-month fixed deposit). Then withdraw exactly the interest (or gains) earned each month and add it to the above monthly payout.

  • Try to live off this investment income plus the passive income from a couple of other sources and figure out how to make ends meet. I foresee this to be a serious challenge — given the current pretty indulgent salary-based lifestyle (and that’s also why I want to test the waters of early retirement from this aspect as well).

  • I also want to retain the flexibility to discard this strategy at any time should it not work as expected (and the above investment choices would give me the needed flexibility). I’m also currently OK with having to pay any income tax that needs to be paid on the investment income. After all, my primary objective beyond everything is to test the early retirement waters from all angles.

  • As some of my other investments mature over the next couple of quarters, I will divide the proceeds equally between the above two investment vehicles. I’m also going to add all savings from my salary in the same proportion. The intent is to keep growing the monthly payouts.

  • Finally, overarching is the support and commitment that I have from D for this experiment.

I think it’s going to be a great challenge.

What do you think? Can you spot any drawback with this strategy?

8 thoughts on “Testing the Waters Of Early Retirement — A Radical Shift In My Investing Strategy

  1. well instead of investing in Fixed Deposits, you can invest all in mutual funds with Daily dividend payout options.. & make a withdrawal on 1st of each month from the MF portfolio. this will mean better returns & less tax as your salary income is still on hence Tax will eat into your Monthly expenses, which will not happen in case you were really on a passive income as Tax bracket falls.

    Tax avoidance will have better payoff even than a good performing scheme.

  2. @Indian Thoughts —

    Thanks. :-) Will publish updates and learning regularly.

    @Siddhant —

    Hmm…interesting. Let me explore the daily dividend payout method using a theoretical investment amount.

  3. Instead of keeping X/2 corpus in single FD, you can use another approach.
    Have 12 FDs of X/2 spread over 12 months. So you will have 1FD maturing every month. Every month,take out the intresest and just renew it….What do u think abt it?

  4. @Vinaya,

    Good move, thanks for sharing your plan. I would invest more in equity, say about 70-80% of my total investment. Equity is one avenue that will generate good returns over a long period of time. 12% returns can be easily generated.

  5. @Rakesh

    I have serious issue with people blindly talking about 12% ,13% easy returns on equity , how the hell is that assured.everybody is blindly following the dictates of Television anchors & Blogs. Earning 12-15% from equity is not easy & takes lot of efforts & constant review of portfolio.

    It is not as easy as it seems, any strategy when followed blindly will lead you into abyss.

    I am personally a debt allocation person with respectable equity allocation.. but again that is my personal opinion…

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