If you wish to retire 10 years earlier than the official retirement age of 65, how much money do you need, if you know you will be getting some CPF Life annuity income at age 65?

I think many of you would entertain the thought of retiring at age 55, especially if you think you have accumulate wealth well through the years.

55 years old is also the age wherein an equivalent amount of the CPF Full Retirement Sum (FRS), Basic Retirement Sum (BRS), or any amount if you have less than that, is transferred to your CPF Retirement Account.

Any amount greater than your FRS and BRS can be withdrawn as cash from your CPF OA and SA account if you wish. Thus, for those who have accumulated well, they would have some excess money that they can tap at age 55. Retiring between 55 to 65 years old may be a possibility.

To make things simple, and to make it conservative, I would assume my retirement income will come from our cash portfolio in the past. However, if we know that at 55 years old, we will get some cash, and at 65 years old we will get one or two annuity income stream, how much do we need from our wealth outside of CPF?

So in this article, I will present a simple flow to help you resolve how much capital you will need if you are expecting two retirement income stream (one which is from your annuity and one from your wealth accumulated)

The Retirement Planning Problem

The typical household in Singapore consists of 2 married adults. At 55, probably their children are just entering university, finishing up, or around that age.

The monthly household expense of Singaporean household could range from $4,000 a month to $9,000 a month on a pretty high end. But let us assume that the household spends $5,000 a month.

The two working adults should contribute to their CPF OA and SA after servicing their home and may eventually reach their full retirement sum. This would enable them to draw 2 CPF Life annuity streams at the age of 65 years old.

For the context of discussion, let us limit the end of retirement to 90 years old. The couple would need their money to last for 35 years. Inflation during retirement is forecast to be 2% a year.

The couple will have two income streams that come online when they turn 65 years old, but their requirement starts 10 years earlier.

For info purpose, we use a couple who was born in 1965 (I know it might be damn rare a married couple is of the same age but for the sake of this example just take that it is true), and they have accumulated at least $181,000 in their CPF SA and CPF OA each at 55 years old.

This would fund their CPF Life at age 65.

Using CPF Life’s annuity estimator, we derive an estimated income of $1,325 a month each or a combined income of $2,750 a month based on the Basic Plan. (If you are younger, and would like to try this out, the CPF Life annuity calculator may have some limitations. I would be able to calculate how much income I could get at 65 with the help of the staff at MoneyOwl, since they have a way to estimate how much income you could get.)

This CPF Life income stream is not inflation-adjusted unless you choose the Escalating Plan (which starts off with a lower income stream, but goes up over time).

The rest of the shortfall over the next 35 years will have to be shouldered by your portfolio.

There are 2 common approaches to take:

1. Plan to have an income stream that provides $5,000 a month, that is inflation-adjusted outright for the 35-year duration
2. Break up into 2 portions. The first portion is to provide predictable income for the first 10 years and the second portion to do #1 but over a 25-year duration

The first approach looks safer in that you are planning with the CPF Life annuity as a good to have. However, it feels like we may overestimate how much we need to accumulate for our retirement.

It seems that with the second approach the couple will need to accumulate less money. They will only need to plan for a flat spending of their expenses for the first 10 years, and not have a portfolio that could consistently provide for an income that would eventually be aided by the two annuity income stream.

The issue however with the second approach is that 10 years is a very short duration. If you deployed this first 10 years’ income into equities, the money might not be able to provide the exact amount in time for the couple to spend. So it is likely the rate of return for this portion is low and almost cash-like.

It would be better for us to see how much is needed based on these 2 approaches.

Planning Approach 1: Provide a Retirement income stream for 35 years

The table above shows the annual expenses of the couple that they need an income to cover. The expenses go up by 2% a year in a uniform manner. At 65 years old, $33,000 a year comes online from their CPF Life. The income from CPF Life do not adjust for inflation.

The usual way to plan for this is to prioritize the predictable income to spend first. This takes the stress away from your portfolio.

What we notice is that by having the annuity income, the growth of income that is required to come from the portfolio becomes far less. Instead of a rate of increase of 2% a year, it becomes 1% a year over the 35-year duration ( from $60k a year to $86k a year). This reduced the stress by a lot.

The first approach requires us to identify how much we need to provide

1. An initial income of $5,000 a month or $60,000 a year
2. Income needs to be inflation-adjusted at 2% a year on average
3. Last for 35 years

There are a few ways of determining this, but I would prefer to use the safe withdrawal rate method. Some United States researchers determine that if you withdraw an initial income equivalent of 4% of your initial capital, your capital can last for 25-30 years, after simulating through past periods of normal economic scenario, inflation scenario, high inflation scenario, deflation scenarios, economic prosperities. The income is inflation-adjusted.

We called the safe withdrawal rate a rule of thumb because, for actual planning, we need to be more nuanced. But in this case, if we are to estimate how much we need fast, I think it should be enough as long as we use the same methodology throughout the article.

If we need the money to last for a longer duration, we might need to withdraw a smaller initial percentage than 4%. It should be between 3% to 3.5%.

The table above shows the amount the couple will need to accumulate at different initial safe withdrawal rates to have an income of $60,000 in the first year.

The lower the withdrawal rate the more capital is needed. A safer rate that lasts for 35 years would be closer to 3.25%. This would mean the couple would need $1.85 million. The couple’s plan is made much safer due to the CPF Life annuity.

Planning Approach 2: A Cash Portion for first 10 years Plus an Income Stream from Portfolio for 25 years

The second approach breaks up your capital into a cash + bond allocation and something similar to approach 1 but with a shorter requirement.

The cash + bond allocation will provide the income from 55 to 64 years old. Due to the lower rate of return, let us assume the rate of return is 2%. Since the rate of return is equal to inflation of 2%, this basically means you need to set aside $60,000 x 10 = $600,000 for the first 10 years.

Let us go to the second portion, which is to provide the 25-years of income.

If we revisit the table, at 65 years old, the income needed after CPF Life annuity is $40,140. This will need to last till 90 years old or 25 years.

We can use a 4% initial withdrawal rate instead of 3.25%.

The table above shows the amount the couple will need to accumulate at different initial safe withdrawal rates to have an income of $40,140 in the first year.

If the initial withdrawal rate is 4%, the couple would need $1 million at the age of 65 years old. Even if you choose a safer withdrawal rate of 3.5%, the capital is 14% more or $140,000 more.

But hold on, the couple needs $1 million at 65 years old and they have 10 years to grow to that amount from 55 years old. Since they are close to retirement, we should deploy the money in a portfolio that is lower in volatility.

A sensible allocation would be a balanced allocation of 60% equities and 40% bonds.

Assuming a rate of return of 4.5% a year, at 55 years old, the couple will need $1,000,000/(1.045)^10 = $643,927. (If you want to feel safer to use a 3.5% initial withdrawal rate, then you will need $1,146,848/(1.045)^10 = $738,487)

So for Approach 2, the total amount the couple will need to provide an inflation-adjusted income of $60,000 a year is $600,000 + $643,927 = $1.24 Million.

Comparing the Two Retirement Income Planning Approaches

1. Approach 1 needs $1.85 million
2. Approach 2 needs $1.24 million

The difference is about $600,000 or 48% more.

Approach 1 is safer since after 65 years old, you may have buffer more than adequate to what you need. However, you will need to exchange a few years of working life in the office to accumulate this amount.

Approach 2 is not riskier. They are planned with conservative assumptions as well. If you are retiring at the same age, you need less money.

Those that are more savvy towards investments would tend to prefer Approach 1 but I feel if CPF Life is going to be there Approach 2 does make more sense.

Your mileage may vary and you can use this flow to estimate how much you need if you are retiring a few years earlier:

1. Just replace your income/expenses needs with your own
2. Calculate the CPF Life income that you will get at 65 with CPF Life calculator or engage the folks at MoneyOwl to help

Let me go through some nuances.

What if Your Retirement Income Requirement is Higher?

The difference between the two approaches narrow if your income requirement increases.

Remember that I mention the typical expenditures can range from $4k a month to $9k a month? Suppose that for the same couple, they need $8k a month. That will be $96,000 a year.

Their income from CPF Life annuity remains at $33,000 a year. This means that at 65 years old, they would need their portfolio to contribute the majority of it.

Let us compare the 2 approaches again.

Approach 1 at 3.25% initial withdrawal rate will mean the couple needs $2.95 million.

In Approach 2, at 65 years old, after CPF Life, the couple would need $84,000 a year still.

At an initial withdrawal rate of 4%, the couple would need $2.1 million at 65 years old. If they grow their wealth at 55 years old in a balanced portfolio, they will need $1.35 mil at 55 years old.

Between 55 to 64 years old, the couple would need $96,000 x 10 = $960,000.

So for Approach 2, they would need $1.35 mil + $0.96 mil = $2.31 million.

1. Approach 1: $2.95 million
2. Approach 2: $2.31 million

The difference is still $600,000, but this is just 26% more than Approach 1, compare to previously being 48% more.

As your needs increase, your income requirement increases. This $600,000 becomes less of a difference. But that will always mean that in a way, Approach 2 will always have a leg up over Approach 1.

Income Can Come From Excess CPF in OA and SA

Your income at 55 years old could come from drawing down the excess money above your Full Retirement Sum in your OA and SA.

For some, they have so much in their CPF OA + SA that they might be able to fully pay for the first 10 years of retirement with their CPF money.

In that case, they might just need $643k in the first example ($5000 a month income) and $1.35 mil in the second example ($8000 a month income although in reality, I think for this example, not many people have $800,000 in their OA and SA in excess of CPF FRS).

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

Would you escape one prison, only to find yourself jumping into a different prison?

One day, I stumbled upon this discussion between one of our associate adviser and a client adviser. They were discussing how much a lot of people would yearn to escape wage slavery by being financially independent.

However, in financial independence, you would be imprisoned by the anxiety in wondering how much you could spend, so that your money can last long enough before you passed away.

If you think deep enough, that conclusion is not too wrong. The prison, in this case, is to have something dear held captive against your will. If you are an office worker, you are forced to work for a paycheck which would pay for what your family needs. In financial independence, your stability will be taken away from you.

Anxiety Plagues those that have greater Financial Awareness and those whose Situation Are Borderline

I think that being trap in a prison in both cases is only true, for people that are paranoid by ensuring that they have quite a sound plan before they pull the plug to stop work, or in the case of work, jump into a job knowing full well that it is secured.

On the job spectrum, you are a self-aware terrible performer or a self-aware strong performer. The former knows that you might not be around anytime. Your situation might be volatile but you sort of accepted that and YOLO as much as you can. The strong performer knows that more or less she is safe and even if she is not, a strong performer should do well in another organization.

On the financial independence spectrum, suppose you think you need to spend $40,000 a year and you are really tired of working and wish to take a break. If your portfolio is $100,000, you know that sooner or later, you will need to look for a job. If your portfolio is $5,000,000, you know more or less you don’t have to work for a long time.

The greatest anxiety usually occurs when you are in the middle. In some scenarios, you are safe. However, in another scenario, you are not so safe. You are a self-aware average performer at work or that you know you have accumulate a sum of money that most trusted adviser cannot say for certain it will last for a long time.

There are also the blissfully unaware ones who have less anxiety (but that may not always be a good thing).

In the latest Schroders Global Investor Survey, the average percentage of retirement savings people think they can realistically take out each year and not run out of money is 10.3%. If you are a long time Investment Moats reader, you would notice that this is a very optimistic withdrawal rate. Perhaps too optimistic.

We May Need a New Way to Determine Levels of Our Wealth

I pondered on that discussion they have and wonder that perhaps whether you are rich or not is more of a state of mind.

Real wealth may be to free us from worries.

So the right measure is how rich can you be such that you do not need to worry about spending on ___________. The sign of financial independence readiness may be whether we can live a life with little anxiety.

In the past, I had introduce you to a ladder of wealth stages that you could use to track your progress when building wealth.

The idea is that you need to do things to get to a better wealth position. Each stage is an improvement over the previous one.

Each stage is also has a certain utility.

For example, as you become more motivated, you earn more, optimize your expenses and invest well, you will move up from Stage 4 to Stage 5. Having a wealth asset that is worth 5 years of annual expenses is definitely more useful than just 1 year. Imagine if you really do not like your domain at work and wish to make a career transition which can be risky.

You may need a longer runway to feel safer, and that can be provided by 5 years of annual expenses instead of 1 year.

The stages of wealth were distinguished by quantifiable amounts that is meaningful to you. If my expenses are $25,000 a year, stage 5 to me is $125,000. If your expenses are $60,000 a year, stage 5 to you is $300,000.

You may have encounter friends who have a lot of money, more than you but they seem to still suffer from the same anxieties as yourself.

In a way, quantifying your wealth might not make the person link to how to utilize this wealth. Perhaps only when you reached Stage 7, you are so far down learning about personal finance that you understood the utility of the level of wealth you have now.

Perhaps we need a better way to link our wealth to give us a feeling that money at certain levels are really useful.

Distinguishing Levels of Wealth Based on Mental Freedoms

Stewart Butterfield and his team tried to get a multiplayer game off the ground. The game didn’t get off the ground. However, they found that they really like this messaging component they built into the game very well.

So Stewart’s team decided to pivot and focus on turning the messaging component into an app.

This app is Slack, which is a messaging application that many teams use today to communicate. Slack got listed in Jun 2019 and this made Stewart Butterfield a very rich man.

In an NPR | How I built this with Guy Raz episode, Stewart told the host that wealth beyond a certain point does not make your life better.

That is very cliche. However, Stewart did list what he considers as his three levels of wealth:

• Level 1. I’m not stressed out about debt: People who no longer have to worry about their credit card debt or student loans.
• Level 2. I don’t care what stuff costs in restaurants: How much you spend on a particular meal isn’t impacted by your finances.
• Level 3. I don’t care what a vacation costs: People who don’t care how expensive the hotel is or which flight they go on

Compared to my stages of wealth, Stewart’s levels of wealth does not quantify the wealth but focus on quantifying the financial freedom that it provides.

Nick Maggiulli from Of Dollars and Data expanded on this beautifully by re-engineering Stewart’s three levels with something we often can relate to:

• Level 1.  Paycheck-to-paycheck: A $0-$0.99 per decision. You are conscious of every dollar you spend.  This includes people with crippling debt.
• Level 2.  Grocery freedom: A $1-$9 per decision. How much specific grocery items cost don’t impact your finances.
• Level 3.  Restaurant freedom:  You eat what you want at restaurants regardless of the cost. A $10-$99 per decision
• Level 4.  Travel freedom: A $100-$999 per decision. You travel when you want, how you want, and stay where you want.
• Level 5.  House freedom: A $1,000-$9,999 per decision. You can afford your dream home.
• Level 6.  Philanthropic Freedom: A $10,000+ per decision. You can give away money that has a profound impact on others.

The beauty of Nick’s ladder lies in that he help us quantify how much wealth we need to have so that we will not spend and be anxious about it. Nick determines that if a spending decision is varying just 0.01% of your liquid net wealth, it doesn’t matter much whether you choose something more expensive or cheaper.

Let us take Level 2 as an example. What would make your choice of grocery be inconsequential? Take $10 divide by 0.0001 and you have $100,000.

Whichever grade of celery, chicken that you choose, it will make very little impact on your net wealth at $100,000.

This gauge I feel is pretty good. For example, when it comes to eating out, I really care less about the prices now. Whether a meal is $5, $10, $40, it really matters less to me. In comparison, my portfolio gyration in a day is the difference of 1 or 2 MacBook. My choice of food would impact my finances less than what happens to my portfolio.

When you attain a certain level of wealth, you should feel rich enough. It should free you up from something that you were constrained to.

Does Nick’s Solution Alleviate Anxiety Well?

If Nick and Stewart’s levels of wealth worked on me, then it is truly remarkable.

Unfortunately, money anxiety is a state of mind.

Long-time readers will probably know my rough liquid net wealth. My level would probably be Restaurant Freedom on Nick’s level of wealth.

We eat 90 meals a month. If each of my meals cost $100, that is $9000 a month. In 1 year, this moves 10% of my liquid net wealth.

Going crazy on one or two meals do not matter. Going crazy with the frequency matters. Perhaps the real Restaurant Freedom is when you have $10 million.

Despite this, I got to give props to Nick for creating a better framework for us to think about this.

You Should Try to Spend Well According to Your Level

Another beauty of what Nick created was that it allows you to see what kind of spending decision you can loosen and what you cannot loosen.

If your liquid net wealth is $100,000, you could loosen on eating out and groceries because the impact is less. You should control how much you spend on vacations and home choices. They still impact your wealth.

If your net wealth is less than that, then in order to progress up, you cannot ignore control of your groceries and restaurant stuff.

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

4 years into my working career, I knew very well that I would stay in that line for a long time.

Not just that, I could see myself staying in the company for a long time. There were also other aspects of life that I believed in strongly.

I believe it is ridiculous my pull-up count will fall below 25 and my 2.4 KM run timing would be below 11.

15 years on, only 1 of them is true. I shall leave the guessing of which one is true to you.

The experiences that I have learned in the past 15 years have tainted that original perspective. What I learn does strengthen some philosophies but you learn that at 39, you didn’t know a lot of things in life at 24.

One of the massive ones was how the body could deteriorate and affect your capacity for work and life. You think that whatever you are weak at, you can outwork your competition every time. You cannot out OT a 25-year-old competitor now if you have to take care of 2 children, in a reduced cognitive state, weakened by insomnia.

The scary thing is that this is the same 18 to 20-year old that is supposed to have everything sorted out early. You need to choose a field of study and that could determine your future employment trajectory.

And make sure you do not fxxk up in life.

I would not trust that 24-year-old Kyith with everything.

Now I wonder can 60-year-old Kyith trust 39-year-old Kyith’s financial planning?

The End of History Illusion

The end of history illusion assumes that a person has come to the end of his or her history. In this state, they would change very little.

Daniel Gilbert, a professor at Harvard, comments that we will usually look back at our past and chuckle at how different we were back then.

Yet, we will believe that we will not change much from this point forward.

This is not restricted to one aspect of our life. They looked into our personality traits, preferences (what they like and dislike). For example, our favorite foods, hobbies, bands, vacations. They also look at their core values (their philosophy and what they believe in).

Researchers like Mr. Gilbert asks groups of people about these traits in the past. They were then asked to make their predictions of these 3 groups of traits in the future.

They recruited 7519 volunteers to a French science show. The experiment breaks them up into age groups. For each age group, they break them up into 2 groups. One group will report on their personality, preference and core values change in the past 10 years. Another group will predict their change in the next 10 years.

In this way, the researchers can match the predictions to what is reported. To be fair, this is not the same person, but here are the results:

There are a few things that you will notice:

1. The change that they reported is always greater than the change predicted. While this is done by different people, we see consistency in the whole cohort underestimating their change in preferences, values, and personality.
2. When you are younger, there is a greater gap between what is reported and what is predicted. This is particularly so for core values. You have greatly underestimated your philosophies and what you believe in to stick for a long time
3. Older folks tend to stay the same more. It is not because we get better at predicting ourselves, but because… we really changed less

What is not observed in the charts is that an 18-year-old anticipate their rate of change in these 3 groups of traits to be similar to a 50+-year-old.

In another survey, a group of people were asked how much they would pay to see their favorite band from 10 years ago, and how much they would pay their favorite band now, 10 years from now.

The average result is that people are willing to pay US$121 for their current favorite band 10 years from now, and US$80 for their favorite band 10 years ago.

By right, if your taste does not change, you will pay equal equivalent amounts for the current band and the band 10 years ago.

This survey emphasizes how much we can trust our taste.

Your Future Self May Not Like What You Plan for Him/Her

Here are some conclusions from these behavioral studies:

1. People have a fundamental misconception about their future selves
2. They expect they will not change much in the future, despite seeing large changes in themselves in the past
3. We might make decisions because we like something in the past. Our future self will chide us for making such an absurd decision
4. We overpay for what we think we will like in the future because we think we will continue to like them
5. We have no idea how we will change in the future. But that does not mean we will not change.

In other words, we cannot trust ourselves today to plan for our future self.

There is something more absurd than this:

We delegate to our financial adviser to help us plan. If you think about it, after this research, you don’t know yourself in the future that well, would your financial adviser be able to know better?

I think the chances are slim.

Unexpected Changes in Life Compounds to the Problem

Your personality, values, and preferences may change due to the environment.

Or they could change resulting in you needing to change your environment.

This compounds the financial planning problem.

My friend told me his friend migrated to Australia. A child was never on the cards. In their 40s, a child suddenly pops out.

Now they have to come back to Singapore.

I have a friend whose wife took some time off (no pay leave) to stay at home to take care of the kids. The plan is to rejoin the company when the children are older. The workplace is known to be relatively more accommodating to these things.

When she wanted to go back, they gave her a position that she felt vastly underutilized her capability.

That was totally not expected.

Finally, for some their careers have been going on very well. The salary is good, they have managed to achieve certain work-life balance.

But it took one moment of pure stupidity (or perhaps a constant amount of stupidity) for you to be doxxed by Hardwarezone folks, get on social media.

You lose your job as a result of that. To make it worse, your profile is all over, and it will be challenging for you to find another job that pays as well (unless the industry is in demand)

The Financial Planning Implications

Some financial implications:

1. Your Goals are at best Guesses. These are not my words but Carl Richards. It means if this is planned by your past self, they might not be very accurate.

You might not even like your current lifestyle in the future.

2. Asset and Liability matching is tough. You have goals such as children education, financial independence in the future. You have a mortgage as well. Asset-liability matching means funding the goals and liabilities today with your income from work.

If your goals are at best guesses, then you are matching something that you may not need in the future.

This is especially tough when you have specific likes and you plan for them. For example, a lot likes to go for vacations. They envision that when they got out of the rat race, they will replace that working time with very frequent vacations.

When you really live that life, you realize you like to do it at the start. But soon, other projects seemed more meaningful and overtaken your life. Thus, you spend less time on it.

Why did we assign so much of our asset to vacations then?

3. Your Future Expenses is Going to be Volatile. The lifestyle we envision in the past might not be accurate. We think we won’t change and plan accordingly, but eventually, we will change.

Even after 65, wellness might bring about changes to your expenses.

20 years ago, would you imagine you have a device that costs just $200 that can take a photo, plan your calendar, take notes, make calls, and entertain you all at the same time?

4. Standard Retirement Projection will be Out of Wack. If #1 to #3 is true, then how do we work out the retirement sum? Traditionally if you need $60,000 a year, your financial planner will work out that you need $3 million in 20 years time.

The consequence is that you may be over saving or under-saving.

Add to the fact that returns are also uncertain, and you have an uncertain retirement. Past return performance is a good gauge but our future results could vary wildly from 2% to 10%. And that would impact our goals.

Over-saving at least means that you are not running out of money. You have a fair bit of buffers, but it also means you exchanged more of your life energy for something that you eventually do not want.

How We Can Plan Things Better

With all that said it does make planning rather challenging. So here are some help planning perspectives:

1. Aim to Accumulate Based on Broader Goals instead of Being Very Specific

This will go against all the S.M.A.R.T goals that we were told to set. SMART stands for specific, measurable, actionable, realistic and timely.

If you can articulate them easily, you connect with them better and thus will act on them. If we are unsure whether what we want in the future, then a lot of the times we are just “broadly saving”.

So for example, this could be: Your adviser and yourself work together to work out how much you need next year, in order that you could stop work.

For example, if you spend $48,000 next year, based on a reasonable rule of 4% safe withdrawal rate, you will need $48,000/0.04 = $1.2 million.

To an extent, you may be over-saving but the idea is… what you do not need, set aside for tomorrow’s dreams and aspirations.

2. Critical Evaluate What to Spend Today and Accumulate the Rest

If you abide by #1, you may fall into the trap of funneling so much of your income for tomorrow.

And you leave little for yourself today.

That may not be the most balanced form of living. At the same time, people self rationalize a lot of their spending, explaining that they deserve to spend on these things, they need to spend on these things.

You need to spend enough on your life today.

For the rest, aggressively save for tomorrow through investing.

But what is “spend enough on your life today”? To know what is enough, and not too much, you need a good critical brain, adequate personal finance competency to make good decisions here.

If not, you need to surround yourself with people that you can depend upon to make these decisions.

3. Treat Things as a Journey

We fixed a very broad goal at the start, and we do our best to invest towards it.

The cross over point brought up in the book Your Money or Your Life illustrates how we should go about this.

If you do #1 and #2 well, at some point your annual cash flow from your portfolio will be more than your current annual expenses.

Your life may change but if your cash flow from portfolio crosses over, it at least means that your wealth might have become functional.

This whole wealth building is a journey. There are days when expenses go out of wack and months where you may save very well. But if you do the three stuff in the image (build up your income, invest well, and force down your expenses), you might realize it crosses over in less than 20 years.

4. As Your Wealth Grows, Re-evaluate the Opportunities In Life That Your Wealth Can Buy

At some point, you have to narrow down and think about the specifics.

What do you want in life at that point? Do you still wish to do this kind of work or you wish to explore another domain. Do you stay in this company or go.

What are the aspects of life that you think was necessary but now it is not so?

Do you wish for one spouse to stay at home while one work? Would you take the risk and start your own software-as-a-service company?

How much would they cost? How many risks are we taking on? If they don’t work out, what are the opportunity cost?

Like last week’s post, if you know what you want, someone can help you assign how much it costs. And you can accumulate for it.

We often dream about what we want to do but in reality that might not what we truly wish for, and not something we eventually want.

Here are some things that you could do early in life to see if you feel strongly about it:

1. Take a 1-year break from work and do the retirement life. If you feel strongly about traveling do it
2. Experiencing as a couple of both not working so much and being around each other and the kids
3. See if you can volunteer as you wish for

Basically, you need to test out your life goals.

This gives you a reality check. The study says our preferences do change over time, but I don’t think you will fall out of love with rock music or certain interest.

The frequency and magnitude of how you engage in your interest will change.

5. Re-calibrate the Financial Numbers and See if You Have Enough

By doing more of #4, you hope that you have tried to question what you preferred more so that you connect with what the future self wants more.

These asset-liability matching can then be re-calculated such that you see if you needed more money or you actually need less.

This might bring some good news and all.

6. Build-in More Flexibility Into Your Life and Plan

Ultimately, expect the unexpected. Read extensively to know what are some of the surprises along the way.

When you know them you could cost them. Then you can plan adequate buffers in and give your financial independence enough wriggle room.

However, there is a limit to what we can do with these kinds of planning.

Change is the only constant in life.

Planning for a fixed future is ridiculous. And for people that have been living a corporate life where they get a fixed salary, this is one aspect that they find it difficult to accept.

Build up a flexibility and adjusting mindset before financial independence. Or have so much money that whatever life throws at you, it is not a problem.

The money is only part of the solution. You can be money independent for a while but permanently imprisoned mentally by not feeling secure. Thus, in my post about financial security, I shared that a key to feeling secure is adjusting to volatility.

Summary

With the end of history illusion, it is rather challenging not just on planning your money but also other things.

The posture is to treat enough distrust of your family and your perspective. They will change over time. The idea is just to live a life based on mostly sound financial decision.

Whatever is leftover, invest aggressively.

Over time, learn to understand the future you want better. You cannot guess what you will feel, think like 30 years later, but you can try doing it 5 to 10 years later.

You will know what may come along your way. If you do not know, find an adviser that is competent and you trust enough to help you with those “I am thinking of sending my son to Australia to study in 11 years. How should I think about it?”

When you consistently evaluate, you will one day find out if you are ready for what you want in life.

I can see how we are addicted to our work income. It is like an insurance policy against uncertainty.

But know this: The alternative to my plan or even the general retirement planning is… your life will still change.

If you do not plan, you are left in an even worse position.

You can read the rest of my financial independence and retirement planning stuff below.

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

On some occasions, I feel the need to write some articles over at Providend.

If they benefit Investment Moat’s readers, management is OK for me to share them over here.

We observe certain misconceptions that are rather pervasive when it comes to funds our clients held, what we recommend to them, and what they are considering to purchase.

The really popular produces are the First State Dividend Advantage kind of distributing unit trusts. This is pretty similar to a Lion-Phillip S-REIT ETF, which is a distributing ETF.

What is common among the unit trust and the ETF is that both provides a dividend income. For investors that are nearing retirement, they have this idea that their portfolio would need to be filled with stocks, bonds, unit trust, ETF that distributes income.

That is why endowment/whole life that provides a cash flow is massively popular as well. Such as this and this.

In my post this week, I have laid out my argument of using a dividend only income strategy.

This post explains to readers how an accumulating fund can also provide regular income that you need in your financial independence days. An accumulating fund is a fund that does not pay out an income. The dividend income or interest income the underlying shares earned are reinvested back into the fund.

The way to do it is to sell the units when you need them.

Suppose we have a $1 million portfolio, and we spend an initial amount of $35,000 in the first year. For subsequent years, the previous year’s spending is adjusted to prevailing inflation rates.

We invest this portfolio in a 100% DFA Global Core Equity Index with a total annual all-in cost of 1%.

We start off with 1,000,000 units valued at $1 each.

Every year, we sell the equivalent of the annual expense worth of units.

The following illustrates how this portfolio will live through the 29-year period of 1989 to 2018:

This period has 3 bear markets. The average compounded returns is 5.68% net of cost. Average inflation is 2.5%.

The portfolio ends up back with $1.1 million.

The investor enjoys inflation-adjusted income from $35,000 to $71,634 at the end of 2018.

I doubt its easy for you to find a low-cost product that gives you inflation-adjusted income over such a long period.

We can see that the 1 mil units held gradually fell to 237k units but the price rose from $1 to $4.96.

The point I wish to drive across is: Separate the financial planning function from the investing function.

The fund does not know you so why should it carry out the financial planning part of figuring out how much income should it give out to you be sensible?

It should focus on the execution of the strategy, keep costs low, rebalance in the most efficient manner.

Read the Rest of the Article 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