Investment Moats

It is a Better Life to Live a More Intentional Life

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“You have to make it possible for yourself. And you can do it”

If there is one takeaway from this article it would be this 2 sentence.

Tony and Margo raised their 3 kids. Then they retired in 2010.

Like many of us, they had mortgage and high health insurance payments (in the United States, the health insurance cost is much higher than in Singapore). In Margo’s words they “owe their soul” to Bank of America. They owe Bank of America so much in high-interest payments that they realize it was just not worth it.

So they decide to buy a 32-year-old 36-foot Catalina sailboat and lived in it. And they have been doing this since 2010. They also bought a used 37-year-old Volkswagon van.

One common theme we can learn from this elderly couple is that instead of giving yourself an excuse, asking yourself “is it possible for myself” and exploring the subject deeper may let you know that perhaps it is doable.

It took them 3 years to stabilized by selling off their home, paying off the mortgage on their boat, selling their vehicle. It was the first time they tried to survive without a car and it took them 6 months to figure it out. (When you are retired and have so much time, you cannot use “I have no time” as an excuse anymore.)

Nobody grew up knowing how to operate a sailboat and if there are only 2 crew members on the boat, both will have to learn how to operate the boat. Margot told us she had to learn how to operate.

To successfully retire for 10 years, we have to get the numbers correct as well.

Margo and Tony retired with enough in the bank in the event that they get sick in their older age. Their social security gave them US$2,800 a month. This is their main source of income.

Expenses work out to be US$400 a month at the Mexico marina. They budgeted US$500 a week. What is left would be meant for their boat insurance and good-to-haves.

As they live in Mexico, instead of needing to spend US$500 a week, in reality, they spent the equivalent of US$280 a week in Mexico Peso. They quit smoking to save $400 a month.

There are some aspects of life that Margo refuses to compromise.

Margo prioritized their ability to entertained people at the place they lived. They used to live in a bigger space where they entertain at least 25 people. Instead of dismissing living in a confined space entirely, she explored the possibility and found that they could still cook and entertained up to 8 people on their 36-foot sailboat.

In a way, Margo did compromise. She moved down the spectrum between entertaining a lot of people to entertaining less people. Less dualistic thinking.

“Once you realize you do not have to devote your money and your life to other people, and you can live a very peaceful and quiet life, it is pretty easy. You just have to make up your mind and do it.”

You can watch Tony and Margo’s experiences here:

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works

You would Moderate Your Spending if the World Collapsed

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One of the biggest counter-argument to the safe-withdrawal-rate way of deriving your retirement income is that most of us do not spend like this in reality.

Our real-life spending tends to go up and down and seldom stays constant. So it is quite hard to accept that if we are given $40,000 that is inflation-adjusted, we will diligently spend all.

However, you can think of this as similar to a non-guaranteed endowment, whose value will fluctuate but will give you a consistent income. It is up to you to decide whether you should spend it.

Go Curry Cracker has a good article this week that takes us through how we would spend our money if we are living in another parallel universe.

There are usually 2 methods of how people validate if a particular retirement method is robust, Monte Carlo simulation, or backtest with historical returns data.

However, they are the same.

Imagine there are 10,000 Kyith, and each Kyith lived through a 30-year period. The returns for each Kyith is random but within a particular range, based on historical returns and standard deviation.

That is what Monte Carlo is. Some Kyith will run out of money in the 10th year. Some Kyith will never run out of money. Which Kyith would you rather be?

The Safe Withdrawal Rate is also similar but instead of 10,000 Kyith, we have 60 Kyith who lived through 60 different 30-year periods.

Go Curry Cracker went back to one of these parallel universe and see how they would live differently.

For context, their current portfolio allocation is based on 90% US equities and 10% US bonds. They start off their retirement in 2013 with a US$ 1 million portfolio.

How they spend their money through their portfolio,with their blog income, as well as alternate scenario

In the 6 lines above, it shows the change in portfolio based on their current situation (2013) as well as against some tough periods in history (1929, 1965, 2000)

Go Curry Cracker showed that if they spend how they spend now, but living through 1929, 1965, 2000 time period, they will run out of money in their 60s or 20 plus years later.

The thing that will shock you is that for those 3 time periods, the 30-year average rate of return is greater than 6-7% on a nominal basis.

Sequence of return matters.

He then simulated how they would have spend differently if instead of living through a great 2012 to 2020 8-year period, they lived through 1929 to 1936.

What if the couple made some conscious decisions

The 1929 alternate scenario will look much better. The money lasted till 30 years.

You Run Out of Money If You Fail to Respect the Sequence of Return and Spend Too Much

Why did they run out of money in their simulation?

The 4% safe withdrawal rate should have factored in these challenging periods, such that they can establish 4% is the maximum you can spend that will not run out of money.

The couple updated that in the past few years, they have not spend exactly based on what the rules tell them to spend.

Here are their actual spending:

  1. 2013: $38,966
  2. 2014: $59,086
  3. 2015: $56,900
  4. 2016: $72,002
  5. 2017: $93,648
  6. 2018: $120,000
  7. 2019: $100,000
  8. 2020: $100,000 (projected)

Their spending grew at an average of 12% a year.

If you apply this sequence of spending to the 1929, 2000, 1965 scenarios, your family are spending more, at a time when your portfolio is dropping as well. This is a double whammy.

Are they irresponsible with their spending? Not quite.

They experienced a positive sequence, and they scaled up accordingly.

They showed us that if they experienced a negative sequence what they would do:

  1. 1929: $38,966 (original: $38,966)
  2. 1930: $57,886 ($59,086)
  3. 1931: $53,300 ($56,900)
  4. 1932: $42,402 ($72,002)
  5. 1933: $51,898 ($93,648)
  6. 1934: $47,200 ($120,000)
  7. 1935: $48,700 ($100,000)
  8. 1936: ($100,000 (projected))

In this alternate reality, their spending increase by 3.2% a year.

Their alternate scenario worked out because reviewed their portfolio and adjust their lifestyle accordingly. Another interesting takeaway is the way they presented these changes.

There is not so much of not spending on something but more of replacing something with a lower grade of product and services. In this way, you can enjoy, have less quality, but your satisfaction level would not be totally deprived.

Systematic Withdrawal Plans Do Not Work So Well In Reality

Through their experiences, readers like ourselves can learn the limits of planning your retirement with a constant-inflation adjusting withdrawal income.

You can liken this kind of portfolio spending as an insurance endowment. Those so-called pseudo annuity that insurance company tried to sell you.

They give you this income. That is as much as you can spend. In the world of safe withdrawal rate, if they give you $41,400 a year, you will need to finish spending this $41,400.

You cannot save part of it.

Reality is not like that.

When we observe our portfolio going down from $1 mil to $460,000, will you still take out $50,000 a year? Most of us will be a little anxious and tries to spend less on our own.

Flexible Spending Plan is a More Sensible Framework

In their alternate scenario, Go Curry Cracker essentially is practicing a form of unstructured decision making based on certain metrics they are observing.

If you wish to systemize this, this is like the variable withdrawal strategies I have written about in the past. Various academics provided different metrics to pay attention so that we can adjust our spending up and down. There are also different ways to adjust once we hit those signals.

Vanguard’s Floor and Ceiling

The above is Vanguard’s floor and ceiling adjustment. It creates a real floor and ceiling so that spending can be systematically adjusted downwards/upwards when the portfolio returns of the previous year is worse/better.

Your wealth will last longer. The downside for these strategies is that your spending is more volatile, and you lose purchasing power.

Is it Possible for Us to Implement A More Flexible Spending?

The reality is that it is likely we do not have only one source of income. Many of us have various sources:

  1. Still working a bit
  2. Cash flow from portfolio
  3. Income from government pension

These income take place at different periods.

If you take in what I wrote for the past few years, you may be able to implement a spending plan that is sustainable.

What you need is to know whether given all these different income streams and the value of your various assets, what is the recommended amount to spend?

If you need to spend 30% more, is it sensible to spend more for the next 4 years and then reduce the spending back thereafter?

In theory, most people could, but it is likely without some professional help, most will find it difficult to implement. What Go Curry Cracker have shown is that, if you have a less informed couple, spending without a good thought process could result in a risk of ruin.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works

An “Extreme” Early Retirement Life is Not so Extreme. It looks Pretty Good

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If we wish to reminisce about how these financial independence movement started, we got to discuss a little about the history.

From what I know, this can be broken up into a few “Eras”.

  1. Paul Terhorst wrote Cashing in on the American Dream in the 1980s
  2. Then Joe Dominguez and Vicki Robin wrote Your Money or Your Life in the 1990s
  3. There was a Motley Fool subthread which eventually became a private financial independence forum
  4. Bob Clyatt introduced us to the concept of semi-retirement when he reinvented himself as a sculptor (now he is renown for that). He wrote the book Work Less, Live More
  5. Jacob Lund Fisker then started writing his thoughts on his philosophy in life at his blog Early Retirement Extreme (ERE). His site managed to influence a lot of people in his multi-disciplinary thinking
  6. Then a guy called Mr. Money Mustache came along. This was right when blogging became a real pervasive thing. And it spawns a more significant movement on the FI concept

When I first discovered Jacob Lund Fisker, he has already written his last post somewhere in Dec 2011. He felt that he has written all that he has to share about. If he were to write more, it would be a rehash of something old.

It is also because there was enough hate for his writing because people think it is too radical (back in those days. These days, these “radical” ideas are more accepted) and he became a punching bag for it. After you get slammed enough, it will get to you.

At the same time, he got propositioned with an interesting job and he decided to take it up. Jacob made it clear ERE is about financial independence and not retirement (there is probably a distinct difference).

From then, not much was heard about him.

Looking back, Jacob is rather unique in that unlike today’s bloggers, he really has a strong grounding on his life’s philosophies. When he doesn’t have anything else to share, he stopped writing.

There is no such nonsense of “adding value to the society by monetizing what I know”. In order to do something not mainstream like ERE, you have to do that in your daily life.

Jacob is a trained physicist. He became financially independent when he was 30 years old. He was famous for only spending US$7,000+- a year (not month, a year). This is his portion which does not include his wife’s expenses.

Where I got to know him was really this podcast interview at Radical Personal Finance in 2014:

This podcast goes on for 3 hours.

But it was very worth listening to when you are installing 3 Windows servers and then hardening them. Jacob goes into depth about how he thinks about things.

Jacob wrote the book Early Retirement Extreme. I tried to read it, but it could not hold my attention.

But what he showed me was that the world is not dualistic. It is not done or don’t do, can or cannot, yes or no. The answer lies somewhere in the middle.

This tells me that financial independence and hence retirement can be done on incomes ranging anywhere from $10000 a year to $1,000,000 or more a year. Early retirement, therefore, is just a choice of where you want to be on this scale and how much you are willing to give up to get there. Once you have chosen your income level, you then choose your savings rate and that determines how soon you can retire. Early retirement is a combination low expense levels and high savings rates, e.g. $10,000 and 80%

– Jacob Lund Fisker

He also showed me: What will happen if you go into a subject deeper than other people?

I was alerted that Jacob had written a guest post over at Get Rich Slowly. This post updated the readers how he has been all this while.

Jacob’s post is worth your time if you want a glimpse of how he has spent his past 15 years in semi-retirement.

In this post, I would like to highlight and reflect upon some of the points he brought up. But before that, perhaps let me summarized how Jacob became financially independent.

How Jacob became Financially Independent

Jacob is famous for taking just 5 years to be financial independence and having an annual expense of less than US$7,000+- a year.

During his path to financial independence, he did not earn a six-figure income.

That in itself is quite a feat.

your savings rate matter in getting rich

The above table is taken from my article on how to get rich realistically. It shows the relationship between your savings rate, your investment rate of return and roughly how long it will take you to be financially independent.

To do this in 5 years… it will take at least a savings rate of above 75% of his after-tax income, or the rate of return needs to be above 10% a year (and even that your savings rate needs to be at least above 50%!)

You can take the $7000+- a year’s annual expense and work backward how much is his salary. If he only spends 20% of his annual income, he likely earns $7000/0.20 = $35,000 a year. (now you are starting to see the relationship of your spending to your FI number!)

You can also reverse engineer how much he became financially independent with. You can do this by applying that $7,000 a year annual expense with various initial withdrawal rates:

  • 4.0%: 7000/0.04 = $175,000
  • 3.5%: $200,000
  • 3.0%: $233,333
  • 2.5%: $280,000
  • 2.0%: $350,000

The lower the withdrawal rate, the more secure is your stream of inflation-adjusted annual cash flow. The lower the withdrawal rate, the likely it will last for a longer period of time.

We can roughly figure out how he achieved it.

either earn more, optimize your expenses, boost your rate of return to get wealthy over time realistically

Usually, to achieve financial independence, you need to do 2 out of the 3 things of earning more, optimizing your expenses and boosting your rate of return over the long run well.

Jacob optimized his expenses very well. He did pretty alright for the other 2 areas.

When Jacob started this path, he has already graduated from a PhD program without student loan debt and with a lot of net worth. By saving 60-90% of his graduate school paychecks, he already has accumulated a fair bit of net worth.

He did not deliberately plan to study in a field that will net him a high income and then moved on to an engineering field of work. This would disappoint folks like my friend from Tree of Prosperity.

How Jacob developed a Motivation to be All-in on Saving for Financial Independence

His trigger point was when he wondered: What will happen if he can step up his rate of return from 1.5% in his savings accounts to something higher?

Like myself, he came from a place where stock investing is known more as a gambling den.

Before this, he had created a program to predict his net worth. He would plug in his assets, rate of return of his assets, and his monthly contribution. This will calculate his net worth for the next 80 years (he expected to live for a long time)

In his program he put in “what-if” scenarios of various milestones /checkpoints:

  1. financial independence reached at 4% withdrawal
  2. financial independence reached at 3% withdrawal
  3. my first million
  4. my second million

The program will show which month he will reach these milestones.

He ran this program often, so he had a clear picture when he will reach these milestones if things do not change.

But he started wondering: what if his return of investment goes up from measly 1.5% to 3%, 5% or even 10%?

So from someone who was ignorant about capital markets, he consumed all the resources in a furious manner and increase his rate of investments.

If you asked me, the biggest takeaway from reading his stuff was to see the parallels of what he did and what a lot of my friends did:

  1. We were essentially rather frugal or didn’t have a poor income versus expense ratio
  2. Keep track of our income or expenses.
  3. We played around with spreadsheets a lot. It made us ask a lot of “what-ifs”. And then we model those “what-ifs”
  4. Those “what-ifs” made us searched for answers to these “what-ifs”
  5. When we find a possible solution, we learn enough of these solutions, build conviction and tested them out
  6. When we see that these investment solutions is working, it gives us motivation that what we seen in those spreadsheet could add up
Part of my net worth tracking spreadsheet

A lot “what-ifs” are generated if you track your net worth, but many, outside of spreadsheet nerds, failed to do that. (Here is my article telling you to track your net worth and don’t budget.)

My very simple FI Spreadsheet

Update: For those who wish to model some of these income vs expense, withdrawal rate, rate of return and when you can FI, I created a simple Google Spreadsheet. You can make a copy of it here.

Cells in Yellow is where you enter. Cells in blue is where there are formulas and you do not have to do anything.

Ok back to the post.

Motivation for something to me is a mixture of

  1. how close the math fits your family and your situation
  2. seeing how realistic your family and yourself can bring yourself closer to what needs to be done

For me my initial motivation was environmental having realized how much waste our consumer culture generates. It took me a couple of years to realize that with the high savings rate I had, I would be FI in just a few more years. I used to enjoy buying gadgets, a lot. This, incidentally, was what I enjoyed most about my stuff.

– Jacob Lund Fisker

Here are some interesting Jacob math quotes:

One important lesson was than if you have $100,000 and a ROI of 5%, then spending 20 hours figuring out how to increase ROI from 5% to 6% is worth $1000 or $50 an hour. I was certainly not getting paid $50/hour in my day job. This meant that dealing with investments was now more profitable than my job, economically speaking. I decided that since I had saved the assets, I should learn how to invest them.

– Jacob Lund Fisker

This is a power math:

Saving 70-80% means spending only 20-30%. If expenses can be covered by extracting 4% from savings and investments annually, one needs to save a total of 20-30%/0.04 = 500-750%. Without considering compound interest, this will take 500/80 = 6.25 years or 750/70 = 10.7 years(*) .

There are two important conclusions here. First, the 10% difference between 70% and 80% makes a big difference in the estimated time it takes to gain financial independence! Second, compound interest will play only a minor role. It would move the retirement date to 4 or 5 years instead of 6 years.

The standard recommended 15% savings rate results in 25 years. This is not a coincidence as this is also comparable to the time most people spend working before retirement. For such a long time compound interest does make a difference. Finance geeks would want to use a financial calculator and use PV=0, i = 8% (or whatever ROI you think you can get), PMT=-0.70 (or however much you’re saving), FV = (1+PMT)/0.04 = 0.30/0.04 and then solve for n. If you have no clue what I am talking about, you might want to find out 

– Jacob on the finacnial independence math

114 and 62 Years of Annual Spending Saved

After a while, I can roughly observe whether a person’s philosophy about financial independence is more risk-seeking or risk-averse by what they say and do.

Jacob updated that his wife and himself have always kept their expenses separate. This is always an interesting way to account for your finances if you felt strongly about FI but your spouse does not.

Currently, he has saved 114 years’ worth of spending. His wife has 62 years‘ worth of spending. Saving is equal to investing in this case. 114 years is more than the 4% rule for safe withdrawal rate.

His wife and himself is probably half working and half not working. Of course, he and his wife are working because financially independent just means you have a certain level of security. It doesn’t mean you choose to stop working.

For those less math inclined, to pass the 4% rule, you need 25 times your annual spending, and if it is 3%, it is 33 times.

114 and 62 years is…..

At this point, earning more money doesn’t matter anymore.

– Jacob Lund Fisker

The risk-averse will spend a lot of time verifying how much is safe enough. They probably need a lot of convincing, not by financial advisers or third party, but by themself how much is enough.

The greatest conviction you can get is when you go deep enough on the subject. Jacob showed that by having that conviction to say it does not matter anymore.

The risk-averse knows where they are in the spectrum of very risky and very risk-averse.

In my conversation with others, I will also use the number of years of expenses saved up as a quick and dirty way of showing how much security you could buy with your money. This is more so that if the person does not invest.

For example, when an ex-colleague told me what she wishes is optionality in work choices, I worked out her sums and showed her she probably have 22 years of essential expenses saved up for her not to worry about being tied to her job.

You would comment that 114 years is not inflation-adjusted. That is true, but this also shows something nuanced:

  1. What is the recent inflation rate?
  2. What is Jacob and his wife’s personal inflation rate?
  3. Would life change and would your expenses change?

There are more questions to ask then just simply “but this does not factor in inflation!” Conviction comes from being clear what you use this measurement for.

To get back to the numbers, Jacob’s spending remained around $7000 a year for 20 years. His wife’s spending has also hovered around $7000 a year. So their total spending is $14,000 a year.

Now you can sort of understand why he mentioned this X number of years metrics.

These years of expenses only make sense if you have developed an adequate understanding of FI.

Retirement is Dead. It is doing Paid or Unpaid Purpose Driven Projects

The main part of Jacob’s post was on what he has been up to since he stopped writing 8 years ago.

This will give you a glimpse of how to live 70 years of FI life.

Mr Money Mustache says that work is better when you don’t need the money. My colleague Chee Kian bring my attention to this book called a 100-Year Old Life.

If you look at Jacob’s update, you would realize what he is doing is very inline with this concept. We have no idea what is paid work and what is not paid work.

But we do know it is a less constrained, more purposeful driven life.

Central to my philosophy was the renaissance ideal of spending your life mastering a productive level of competence in a broad range of subjects. This arsenal of “renaissance skills” would then be combined into a mutually reinforcing web-of-goals, which made living more interesting and balanced — but also more cost- and resource-efficient and resilient in the face of the growing complexities and uncertainties of the 21st century.

– Jacob Lund Fisker

Being a theoretical physicist by training (and remaining one in spirit) compelled me to present all of this as a theory of everything, rather than the more typical format of a light non-fiction autobiography or overview.

Here is a summary of what he has done for the past 8 years since he stopped writing:

  1. Spent 3 to 4 days a week practicing Japanese sword fighting for 3 years
  2. Played more inline hockey in the local city league in the past
  3. Switched to Beachbody-type workouts such as Insanity, Max30, Asylum, Tapout (these are free) and achieved six-packed abs during his early 40s
  4. Taught himself through books and YouTube how to repair bicycles and eventually served as a mechanic for a women’s shelter
  5. Sailed in a boat 50 times a year including Alcatraz, under the Golden Gate Bridge
  6. RV from 2008 to 2011
  7. In 2011, they sold the RV and moved into a 1-bed, 1-bath apartment in Chicago and got A LOT of space when they upgraded from an RV
  8. Worked full-time in a financial firm as a quant on the buy-side from 2011 to 2015
  9. Bought a fixer-upper in 2014 to live in and fix up at the same time
  10. Taught himself woodworking using hand tools
  11. Taught himself to mess with mechanical watches
  12. Helped his friend, a professor, do numerical research on enzyme reactions that are relevant to cancer research
  13. Read more than 100 non-fiction or technical books a year

Jacob also updated how the spouse was doing. When he started working in the quant job, she could not find a job in her old field of environmental remediation so Jacob got her to do their taxes.

She eventually liked doing the numbers so much that she went back to school to study for a degree in accounting which she finish fast (She has a PhD as well). She worked in a tax preparation company, then moved up to manage day to day operations of 100 offices until she felt that it was not worth it anymore.

So she quit and now work for a non-profit in a legal field.

I find his wife’s experience to be the most interesting because of how it got started and where she got to. It makes me wonder whether such a scenario is possible in Singapore.

Spending Money is a Failure of Solving Problems Smartly & Not being a Specialist

Jacob explained something new that I have not heard of.

He explained what probably kept his inflation rate so low. The continual addition of new skills and skill-synergies has allowed them to stretch their dollar further and further in terms of what they get from spending it.

They learn to do many things (as you can see from the previous section) better than the average. When you do it with your wife, as a unit they have a lot of advantages.

Spending money serves to resolve friction from an inefficient lifestyle design.

The friction that they could not removed was:

  1. real-estate
  2. taxes
  3. insurance premiums

This became 60% of his budget.

Personally, I think they can keep their costs rather low because a lot of the expenses that tend to go up over time was not present. The biggest two costs are education and healthcare. Funny enough, if the wife goes back to school, it would be quite amazing if her annual expense can keep within the $7000 limit.

I suspect there is some compartmentalization somewhere.

Still, I realize based on observing my expenses over time, you can keep within a certain limit. My expenses fluctuate around the same range.

We do delegate enough to the maid, the school and nursing home to take care of those we could not, because we have to work (or other reasons). Delegating cost money and these costs do not keep low. If you wish to keep cost low, you would have to take upon yourself to minimize it.

If we become a manager somewhere, we could “manage” something else. In Singapore, many are either managers or technical workers.

We are also trained more as a specialist in our field. The more specialized and better we become, the more we earn. However, you do wonder that if we lose our job, what other things we could do.

To a certain extent, our identity is also tied to that specialization. If we get retrench for a long while, one thing we need to overcome is the loss of your corporate identity.

The middle ground is to be a specialist but still competent in many other fields. We see good manager climbing high in their profession but still pretty good at handling kids and volunteer work outside.

When my second-hand vacuum cleaner broke down, I could have easily throw money at the problem by getting a new second hand one. But my knowledge allowed me to fix it and now it is working.

But when my washing machine started making loud noises, this is when I need to throw money at the problem.

Jacob took things to an extreme angle, but for many of us, the clear message is that we might have spent too much throwing money at the problem.

Perhaps The Blog Should not be Called Early Retirement Extreme… and FIRE is an Incorrect Movement

You can read Jacob’s guest post on GRS here.

I had a feeling Jacob created the wrong title for his blog. His philosophy explores more of the multidisciplinary stuff in living.

But people identified with what they wish to identify: A 2 phase living of work and earn then no work and play.

People attached this identity to him and he gets bashed up. In fact, he is not the only one. The FIRE bloggers get bashed up regularly due to this.

But you cannot fault people if you keep calling yourselves FIRE. By doing that, you identified with that 2 phase living.

Towards Becoming a Multiclass Character

Ultimately, if I understand correctly, Jacob is looking for people to discuss a more optimized way of living. Of realizing your purpose and be able to pursue it.

Your wealth is supposed to support your life. Each of us has a different set of life and the way our wealth needs to support our life is different.

The nirvana would be where money matters a lot less.

Just like my stages of wealth, Early Retirement Extreme has its own version:

Source: Early Retirement Extreme

This is pretty cool. I like the Focus part of it. I also like the levels of Retirement Goal. You can see the progression from not pursuing any retirement to those who know what they want to a greater level of detail.

If you ask me I am at Level 7. The wealth is like a backup plan. I try my best to get everything down to some form of asset-liability matching.

For somethings, I try to not cover with money. If that is not possible, you identify a sinking fund for it.

The last level is hilarious.

You can no longer retire. Everybody wants your advice now!

I would contend that the last few level is seriously powerful if you master the art of meshing your social capital + developing a few complementary competencies.

It is like those gaming characters where you take on more than one job.

You become that high-level multi-class character that can fight a little, not die, heal people and picklock and fun to be around.

In each individual parts, you are mediocre and nobody wants you. But if you put everything together… you become that rare commodity.

As you developed, you are seldom not doing something. People are always propositioning things to you!

Summary

I think this article went on far enough. ERE was something that influenced not just me, but others as well.

I was pretty taken in because you were at the stage where you are figuring life out. I thought this would apply to everyone because honestly, how many of you have figured out your life at 34 years old?

Some of the things… a bit too extreme even for me. That is why a lot of spouses would have been turn off at the thought of living on $7000 a year.

However, this might be something up some young chap’s alley.

A lot of things… I don’t understand much then. As I get older it makes more sense. One example is looking at life as a progression where you get incrementally better. While you are doing that, understand roughly where you are and what being at these milestones mean.

Let me know if you were a former ERE reader and what you think about it.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works

How Ready are You to Retire?

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This week is pretty much drained. So I don’t have any bandwidth to explore things that are new. Weekends is probably to catch some breath.

One of my reader that I met up with some time ago asked me these 2 deeper question about retirement:

  1. What amount of principal will you feel comfortable to quit the job & just collect investment dividends, with a not-too-spendthrift lifestyle?
  2. How much to “reserve” for medical costs?

I thought it is easier to tackle in this week that requires some decompression.

A Framework to Think about Whether You are Ready for Retirement

Before I shared my answer to some of the questions, I would like to give a shout out to a reader (a different one from above) I met this week.

Sometimes talking to others interested who are interested in similar stuff, would make you realize a perspective that you didn’t think of in the past. So I got to thank him for that.

My reader, in a spectrum of Singapore wealth, put himself in a good position to consider retirement. I find that he has taken care of a few aspect that others would have been struggling with. So the questions are more deeper and harder to give an answer.

Both readers (this and the one asking the question above) questions all revolve around true retirement readiness.

True retirement readiness is not some 10 to 15 item article that after you go through them, you still feel something is missing. It is that if you get passed those hurdles, you should be ready to pull the plug.

It has to be said, that this is for the risk adverse. Because for the risk seeking, don’t like their job, or when the work pain gets much higher than the threshold, they just pull the plug without thinking so much.

I do not profess I have the answer, but this is what I thought about:

My Retirement Readiness Framework

This is roughly how I would explain it.

1. Your True Financial Situation

Suppose we know the true state of our financial situation, we take an important step towards retirement.

In true state, you know

  1. the exact lifestyle that you want in retirement
  2. how your expenses change over your retirement
  3. what are the unexpected expenses, or lifestyle that will occur in a few different people’s retirement
  4. the true state of your financial assets and liabilities
  5. the interest you have to pay for the debt
  6. to a high degree, you know the compounded rate of return of your wealth.

When you know the true state, if the retirement mathematics work out for you, this takes care of the mathematics side of things.

2. The Non Monetary Aspects

A lot of people consider the non monetary aspect of retirement to be easy.

The non monetary aspect could be

  1. whether you made peace with your professional identity
  2. how the society looked at you
  3. what you are going to do for the next phase of your life
  4. have you been responsible to those who helped you professionally

These items are needed to be considered. Less careful considerations may mean returning to the work force. These are not deal breaking, or life ruining.

3. Your Experience with Wealth Management

My conversation with my reader made me realize the wealth management part is rather crucial.

I realize in some of the past conversations with others, a common problem was finding out a better way to accumulate wealth, or an appropriate way of investing so that it is more conducive for retirement spending.

He has been living with his investing strategy for the past 6 to 8 years. It is one which is based on portfolio allocation and delegating the investing to fund managers.

I do find that he is more ready for this because he is comfortable living with this way of wealth accumulation. This method of investing is also more sensible in spending for retirement.

Without talking to my reader, I failed to realize that one of the reasons why I think this (financial independence) is doable is because I have been investing for years. To extend this into retirement, this looks doable still.

For others, I realize they have the net wealth. However, they are uncomfortable with the way they allocate their net wealth. It is either not high return enough, or it does not cash flow enough.

If we recommend a new investing method that meet the criteria, they will have the uncertainty whether the returns, the volatility will work as advertised.

This uncertainty will make them second guess whether they are ready.

What would retirement feel like if you have not taken care of these three aspect?

There will be different degree of comfortableness living in retirement.

For some, they might eventually become comfortable with this way of investing and getting their retirement cash flow this way. For some, they might just felt that what they have chosen is not sustainable.

If your financial situation is not the true situation, you might suddenly realize there are too much things you have not factored in, your spending is too much and you will need to go back to work soon.

We have briefly went through the non monetary aspects and I think that is enough.

Of course, it may turned out that your true financial situation and investing strategy are really sound, then your retirement would be better than you have anticipated.

Would a Financial Planner Helped?

The financial planner would take care of helping you assess your financial situation. Whether the assessment tells a person the true state of their retirement readiness, I feel, is a matter of competency.

My personal opinion is that non of us can find this true financial situation. If we can consider a lot of realistic scenarios and our numbers looked OK, then it is good to go.

The world is constantly changing, your life is always evolving, so all these parameters will keep changing. Someone sophisticated enough will considered enough and explain to you that you should be ready or not.

My belief is that not many will give a good view of your financial situation.

You could delegate the investments portion away to a professional. However, you will have to learn to live with such an arrangement. Delegating away solves the investing stuff, but you may not know how to live with investing this way.

When your adviser reports this fund and that fund dropped 20% and 30% respectively, what do you do? Those who learn to live with it, gain competency, would be able to make a decision to switch or to stay with the fund. Those who have not learn enough would get really edgy with their retirement.

Some advisers who have enough experience would be able to make you appreciate the non monetary aspect of things. However, I think for that portion it is best for you to figure out yourself.

What amount of principal will you feel comfortable to quit the job & just collect investment dividends, with a not-too-spendthrift lifestyle?

My answer to this question is unique for myself and might not work for others because my:

  1. the way of investing is different from you
  2. financial situation is different
  3. the non-monetary aspect is different

I went from being very spreadsheet based to just figuring out with withdrawal rates.

It is very simple. Every month, if the portfolio value change, I can just look at the withdrawal rate and know this is OK, this is not OK.

Very simple. Don’t need complex spreadsheet. I can do that because… let me just say I looked at enough Monte Carlo simulations, withdrawal rates arguments, historical simulations that it affected me this way.

No professional will tell you with a single ratio, you are financially ready. So it only works for me.

So here is a rough fast walk through of how I do it:

1. Appreciate your Lifestyle and Expenses

To even begin this you need to know your expenses and lifestyle well. You can take a look at my past annual expense reports.

If you don’t know your expenses or lifestyle, think don’t bother to continue to read this.

2. Categorize your expenses into 4 categories

Your expenses can be broken up into the following categories:

  1. Non-Recurring Essential Expenses
  2. Non-Recurring Non Essential Expenses
  3. Recurring Essential Expenses
  4. Recurring Non Essential Expenses

The Non-essential expenses, they are good to have. If your portfolio is not doing well, cut them by 25%, 50%, 75%. If it does well, boost them or take harvest of this so that you can spend it when times are not good.

The essential expenses, you have to make sure that they are there.

The non-recurring expenses are not going to take place every year. In other countries, roof needs to be replaced. Locally, your home needs a 15 year once renovation for example. These are essential but non-recurring.

Even healthcare can be considered non-recurring.

For the non-recurring expenses, figure out the present value of these non-recurring expenses. I will go through this later with the medical sinking fund question.

3. Create a few Lifestyle Schemes

Once you figure this out, create a few lifestyle schemes for the expenses.

I created the following:

  1. Survival: Recurring essential expenses only
  2. Baseline: Recurring essential expenses + 25% of recurring non-essential expenses
  3. Current: Recurring essential expenses + recurring non-essential expenses

Survival is for me to figure out in the worst of the worst case, whether I can survive as a human being. Baseline is a lifestyle that I feel comfortable in living for a long time. Current is how I am living now.

If you need to live like what it is like currently in retirement then #3 will be the most important for you.

You can create a few other schemes, depend on what you prefer.

From what I read, and my observation, a lot of us think we will live the same way as when we are working. That might not be true.

To come up with a scheme, remove the money part. Take yourself through what you will do 30 days in retirement. Then come up with the cost for it. This may be a scheme that you can use to estimate how much you need for retirement.

4. Deduct the liabilities from your portfolio

When you go through the expenses and find the non-recurring essential and non-essential expenses, these are the contingent liabilities that you need to set aside money for.

This will come from your net wealth, or from insurance.

For example, you can compute the present value of all your vacations. They are likely non-essential and non-recurring. Then you can get the present value.

If you are adverse to dementia and would like to prepare for it, estimate when you will get it and for how long. Get the present value for this.

Take your net wealth, deduct these 2 present value (vacation and dementia) from it.

5.Calculate the initial withdrawal rate from the net wealth

For those 3 schemes (Survival, Baseline, Current), you can take the annual expenses / net wealth left after deducting the liabilities.

If your withdrawal rate is low enough for you, congratulations, you are ready numbers wise.

To circle back to my original framework, you probably have to take care of the wealth management and non-monetary aspects.

This table below shows the decision tree whether you are ready to retire or not, and if not, what is the recommendation:

Click to see Bigger Decision Tree

My Withdrawal Numbers:

The Survival Withdrawal Rate is probably 1%.

The Baseline Withdrawal Rate is probably 1.3%.

The Current Withdrawal Rate is probably 1.7%.

Do note that I have not deduct much non-recurring expenses. I treat most of the expenses as recurring. What this means is that the numbers might look a little different.

You can look up that decision tree chart above to see what are the recommendation for myself.

Typically, the recommendation is to ensure you are able to guarantee to have a cash flow for your survival expenses. This will mean you have a withdrawal rate of 3% or less. If you are conservative, the baseline withdrawal rate can aim to be less than 4% if your essential expenses are covered well below 3% ( this will mean you spent nearly 1% on 25% of your non-essential recurring expenses)

Medical Sinking Fund

The question of medical sinking fund is damn tough.

Medical budgeting is so tough that even Lee Kuan Yew School of Public Policy took it out of their paper. (Read this)

As a planner, you have no choice but to try and model this, if you feel that you need to factor this in.

I would break up the expenses into:

  • Recurring essentials: The medicine you have to take daily in order for your condition not to become bad, insurance premiums
  • Recurring non-essentials: The supplements that are good to have
  • Non-recurring essentials: The medical sinking fund for conditions that are likely to happen in the future.
  • Non-recurring non-essentials: if there is any

The recurring portions will go into the expense schemes I have explained previously.

Determining the Non-Recurring Essentials

I thought about this at work and it can be rather tough to determine. Do you just keep adding so many contingent liabilities?

An adviser shared with me that if you get disabled, a lot of the other expenses might come down. If you keep adding these contingent liabilities together, think you can continue to work in an unhappy job for a long time.

Dementia Case Study

Likely we cannot find out the true costs. But if you have medical professional as friends, you can find out the probabilities, frequency of occurrences, and how much it costs.

Then you can get the present value, figure out the rough amount you need today.

For example, you are 41 years old. Suppose someone similar tomorrow gets dementia and needs to be admitted to a nursing home.

This form of estimation is probably the most extreme. The idea is that, if you managed to provide for this scenario, you should be able to take care of the smaller ones.

Typical cost of nursing home comes up to $4,000 a month (if there are vacancies). That will be $48,000 a year. Suppose you are worried about inflation. Use 7% inflation. We invest the rest of the money in a portfolio that compounds at 4.5% a year. We estimate that this dementia patient survives for 60 years.

I found this awesome spreadsheet calculator and it gives the following result:

A 60 year surviving dementia patient

The awesome thing about this calculator is that it computes the payment at a different rate of growth from the investment rate of return, and when the payment is differed for a number of years.

The formula for present value is this:

=p*IF(i=k,(1/(1+i))^t*n,(1/(1+i))^t*((1-((1+k)/(1+i))^n) / (1-(1+k)/(1+i))))

In our base case, you will need a sinking fund of $6.3 mil.

Suppose you buy some disability insurance which hopefully covers this when you are before 65 years old. We differ the need for this payout by 25 years and we need the money for 35 years.

The present value is lower at $860,000.

If we estimate that onset of dementia happens after 65 and last for 10 years, the figures work out like this:

The sum becomes more manageable.

I feel it is better to figure out roughly how much you need. Like what my adviser friend said, your expenses may be cut down when you are this disabled. The net wealth can go to fund for this scenario.

Hospitalization Case Study

We do not know when we will be hospitalized. Each of us have different genetic profile. Some of us have pre-existing illnesses and so the frequency of future hospitalization are also different.

My suggestion is to plan out a few scenarios and see what is the sinking fund amount you can get to. Then you set aside this amount as a sinking fund.

Suppose we estimate that within a 60 year period, you will have 3 different levels of hospitalization:

  1. Small: $3000 per visit
  2. Medium: $30,000 per visit
  3. Large: $300,000 per visit

This is before your hospitalization and surgical plan, or your shield plan. You will need to pay a deductible and a 10% co-payment at the minimum. Let us assume the deductible to be $3,000.

If we assume medical cost go up by 7%, you can come up with the following:

First Part of my Medical Cost Spreadsheet
Second part

We can see the year, age, deductible paid, the size of the actual bill for small, medium and large problems, adjusted for inflation. Then, we can work out the total deductible plus co-payment required.

Approximate the value back to present value in the last column.

This figure comes up to $289,000 in present value. Readers let me know if you have such a frequency of medical hospitalization. Every 15 years, there is a major surgery. Every few years there is a big one.

If you have $52,000 in your CPF Medisave, it means you need $237,000 more.

You can vary the frequency. What I can share with you is that, the small problem don’t move the needle.

Removing the major illnesses costing $2 mil and $6 mil cuts the present value needed to $124,000. Removing all the medium problems cut the amount to $66,000.

Play around enough, and you would have an appreciation how many major and medium problems you need to cater for.

Conclusion

This took longer than expected. However, I felt it was a nice exercise to go through trying to find out how much does our future medical cost will be in today’s dollars.

I will probably expand on the medical sinking fund idea, either here or in a work article of mine.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works