Saturday, 30 May 2015

Am I Earning Enough

Being a salaried employee, the bulk of my dreams of an early retirement are funded by what my corporate employer chooses to pay me every year.  My fortunes are inextricably linked to my salary.  I have tried over the years to build a secondary stream of passive income, but progress has been slow on this front.  So I figured I should take a minute to get a handle on my salary progressing over my working career. It took me a while to dig up the data, since this is something I have never really separately tracked. I have always focused on my networth, and my savings rate, but never really looked at how much my income is, and more importantly, how it has been increasing/decreasing over the years.
In India we annually get the Form 16 document from our employers, which captures the total salary earned and the various components of the salary.  So I simply collected all my Form16's over the years and captured the Total Salary as reported by my employer to the IRS, per assessment year. This is the cleanest way to capture total income, since it includes all components of my salary.  Typically in India, salary packages can get quite complicated to enable tax savings, so we need a simple metric that all of us salaried folks can identify with.  This of course is my pre-tax income as reported to IRS, and my take home is actually much smaller since the government takes a huge tax bite out of it.  This approach is similar to using the total wages from the W2 form, if you are based in the US.  

Now I did refer to passive income stream earlier, something that I have been trying to build (rather unsuccessfully) over the past decade.  Ideally to get a good handle on your overall income, you need to add all sources of passive income cash flow to the salary income.  In my case, since the passive income stream is very small, I have ignored it for this analysis.  If you have a meaningful passive income stream, or you are self employed, then you can simply pick the total income number you fill in to your ITR form every year.  In my case, the total salary in my Form16, is pretty much my entire income that goes into my ITR total income line.  Remember that my financial investments currently do not generate regular annual cash flow, since I am in the accumulation phase of my career, wherein I am primarily focused on capital growth, not regular predictable cash flows.

With that background. let us look at a graphical representation of my total income over the years.

You can look at the raw numbers in the graph above.  I started earning a meaningful salary in India in AY2005-2006.  For the first 2 years, I had some special circumstances in my working career that impacted my salary, which swung wildly from low to high.  So I picked AY2007-2008 as my baseline (the brown bar in the picture above) to reference all future income.  As you can see my income has been steadily increasing over the years, though in some years there are declines as well!  I was also quite surprised to see the declines, and it took some data reviews to figure out that the variable component of my paycheck tends to swing around based on the performance of my employer, the state of the economy etc.  

AY2014-2015 was particularly nasty with a 11% drop in my overall income (primarily coming from a poor variable component that year)  I expect folks who earn a larger percentage of their salary through variable components like commissions, sales target based increments, hourly wages etc, will see a much larger variation in their annual income profiles.  Self employed businessmen and professionals should see a graph that is likely all over the place, since their business related incomes will not be stable year on year.  

Year-on-year, I have also marked the annual increment/decrement for the AY, when compared to the previous AY.  If you think of yourself as a small business, that generates annual cash flows, then this chart above is the YoY performance of your company.  So, here is my honest assessment of how my "company" (basically my annual salary) has done over the years.  If you start with my AY2007-08 baseline of 100, it has taken me about 5years to double my annual income.  KVP will double your investment in 8years 4months, so clearly I have done better than that.  However that is just a basic expectation since KVP is an extremely safe investment, and you basically have zero risk, and zero work, and your investment doubles.  I have certainly taken on more risk in my working career, and I feel I put in more work every year, so ideally I SHOULD do better than a KVP, right!

This last decade has been a high inflationary period in India (in general India being a developing country has inflation rates, which results in artificial wage increases.  A US based employee will be shocked to see such growth in annual wages) with CPI inflation peaking at ~15% in 2009.  During this same five year period CPI inflation has been at 2007 = 5.51%, 2008 = 9.70%, 2009 = 14.97%, 2010 = 9.47%, 2011 = 6.49%.  As you can see inflation takes a bite of 55% from my 5year overall salary increase of 100%.  So the real growth in my salary has been 45% over the 5years, which amounts to 7.7% real annual growth rate.  This is certainly not bad, but not spectacular either.  If you consider average inflation at 9% and GDP growth at 5% per year, would it be fair to expect your company to grow at 14% per year over the last few years?  A 14% CAGR amounts to 192% growth (almost double) in 5years, and I have been sort of keeping pace with that.  

We will have to see how things work out in the next 5 year period.  In summary I would say that in comparison to low inflation economies in developed countries, the salary increment that I have seen in my case in India is stupendous.  However if you factor in high inflation in India (or the plunging Indian Rupee in the international context) then your increments reduce significantly in terms of real purchasing value.  Also the increasing incomes make a clear case for increasing savings, and increasing investments every year.  You MUST increase your investments every year in proportion to your salary increments at a minimum!

Have you done a similar analysis for your self?  If you have been disciplined in keeping your Form 16's and ITR's filed away, it takes just a few minutes to put this data together.  It gives you a wonderful perspective of the changes in your annual income, and can guide you on how much you should be saving and investing yearly.


  1. Good Analysis! Would be great if you also calculate NetWorth as a % of annual income over the years, As and when it reaches 5-6x of your annual slary you can start planning for retirement :)

    1. Thanks JC. I prefer to think of my networth more as a multiple of annual expenses, rather than a multiple of annual income. I am shooting for networth ~40X of my annual expenses at which time, I think I will be financially independent and ready to retire. Having said that, I suspect that will be the same time as when my networth is ~5x-6x of my annual income, so you are probably right with your estimate as well.