In a country like India, where there are very scarce amount of people eligible to pay taxes (or rather honestly pay taxes), early retirement is almost unheard of. Let alone early retirement, the conventional form of retirement is rather not well established. Majority of the Indian household still feel that they will depend on their children on the elderly years. This is not the best way to plan retirement. There is a lack of skill or knowledge or more importantly temperament when it comes to investment, that retiring from working for money with the returns from investment taking care of the expenses is not easy to percieve. May be the fortunate few who where able to reap the benefits from the real estate boom could afford to think about retirement.
Typical Indian household savings are 77% into real estate and 15% into gold, and a measly 5% into financial instruments like Fixed Deposits, Stocks, Bonds , etc,. There are 2 important problems with this asset allocation:
- Real estate which constitutes 77% of an average household investment isn't liquid.
- Historically, stock market returns are better than any other investment that an Indian household makes.
On the first point; it is not easy to sell real estate at a time that the owner would like to. It takes a few months to may be even a year depending on the demand at the location and the price at which the seller wants to sells. Furthermore real estate in India and also Gold for that matter are bought with a chunk of black money contributing to the buying. This means people who earn income after TDS (Tax Deducted at Source) might not find it easy to digest the fact that he/she has to make a cash transaction to a huge amount to buy a house or a piece of land. How comforting is the thoght that your hard earned after tax income goes into the pocket of a land lord as black money?
On the second point, historically stock market (market index) has given higher returns than real estate and also makes substantial gains over inflation. With the average Indian household effectively ignoring the stock market returns, they are pitted against a high value, low liquid, highly corrupted, debt intensive real estate to commit their investment.
To buy a house or a land, one has to commit a huge sum of money either saved or through financing. On the other hand one can buy a stock for even 500 rupees. If instead of waiting to save a huge sum to buy a land or using debt to buy a land and effectively spending the rest of the earning life repaying the debt, it would be effective to invest the savings in stock market untill one builds a large sum which can then be used for buying house (if it is required) or can be used to retire early since the stock marker is liquid and one can expend out of it.
On the numbers and the strategy to retire early, we will see in the next post...
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