Most of your parents will let you know that for all things, there is a need for some balance.

I agree with this generally. My opinion is that the stable state or the long term baseline for most people is to have some sort of balance.

However, my advice to you is to spend a period of time to go very extreme in doing a lot of things you are interested in.

What Would Some Extreme Lifestyle Experiences Be?

I wanted to find out what kind of more extreme life experiments did people do or thought of doing.

So I asked my Financial Independence Telegram group and they gave some interesting answers.

“Starving in order to scrimp every single cent, attain a freegan lifestyle to save 100% of your salary.”

“I went climbing Mount Kilimanjaro when I was bored with life. Snap decision. I booked everything and went in 2 weeks. Didn’t train for it. I reached the summit but would not recommend anyone to not train and climb!”

“I know a friend who got tired of his life, quit his job and went to Thailand to be a monk. He said he wanted to get away from office politics and find meaning in life. He does not know what else will give him meaningful purpose in life, so he packed and left.

Last I know he is still in Thailand and has been there for quite a few years. He says he does not need much in life, even after becoming a monk. Thailand is relatively cheap, so he has no plans to come back for now except once a year to see his parents and meet up with friends.”

“Artificially impose money restrictions (simulated income shock)”

“Quit job (real income shock)”

“Volunteer to help the poor (perspective changes)”

“Try to live like a King!”

“Long Hikes. Not very extreme but on my last hike (in Nepal) was a good reminder of how little it takes to make one happy. We went for days without showering (It was too cold as well), ate basic but tasty vegetarian food using ingredients that the teahouses owners grew in their gardens, re-wore the same few clothes in our backpacks and had no access to data at all (digital detox).

After I got home, I looked around my house and wondered why I ever felt like I needed to buy so much clutter.”

“Take a 10-Day Vipassana Course” (Vipassana Course is a ten days meditation retreat without technology, speaking, reading, writing, listening to music, exercising, or communicating. It is usually free.)

I also asked my friend Caveman whether he has some ideas. The monk lifestyle maybe something he identifies with.

He has some suggestions (and some that should not see the light of the day):

“Go for your round the world trip with zero budget, work an odd job to earn living expenses and fare for the ticket to the next place.”

“Try to take up a 100% comm base job such as property agent.”

Suffice to say, those who aspire to be FI, their brains can be rather unchained. They surpassed a lot of my expectations when I asked that question.

Being Extreme Allows You to Learn the Point Between What You can Accept and What You Couldn’t

What could we achieve by becoming so extreme?

In short, we learn something about ourselves.

We will often ask our friends for advice on what should be a balanced meal, how much should we save, how much cash should we hold as part of our overall wealth.

I believe for most of us, our limits are different and therefore standard markers limits us from fulfilling our true potential.

The way to find that point where you can “tahan” and “cannot tahan”, you either have to slowly ease up the spectrum, or you can immediately ramp-up to the top end of the spectrum, then slowly take it down.

What We Can Learn from Extreme Saving – Fast Feedback of Results

I was recently asked again, how much should people normally be saving. If I have my way, I would tell the person just take their saving all the way up to 70% of their disposable income.

Well, 70% sounds a bit extreme but the beauty of doing something extreme is that you would not know whether it is extreme until you tried it.

So suppose you decide to try saving 70% of your income, after 1 month, you will come up with one of these conclusions:

1. This is not so bad (as in life did not degrade as expected)
2. Most of it is quite livable, but I do feel very relief I don’t have to be so extreme anymore
3. This is bullshit. I cannot do this.

Whichever conclusion you come to, you will uncover that you are left with a lot of money at the end of the month. If your take-home income is $4,000 a month, you would see $2,800 still left in your account.

The feedback of extreme savings is relatively immediate. You see the result. You would realize “I can do this for 12 months, I would have $33,600 a year or $336,000 in 10 years.”

For a lot of us, whether we continue to stick to some routine depends on whether we see the results. Doing something extreme would most often bring out pretty immediate results.

If not, you realize that after doing this, it does not move the needle. You might need to try something else.

If 70% is not tough enough bring it up to 75%. But if you felt that you could not live with this in the long term, cut it down to 60%.

If not you can cut it down further. At some point, you will reach the point where you are more comfortable with.

So 45% maybe that comfortable savings rate.

The Opposite of Extreme – Relying on the Standard Recommendations

The opposite is to slowly jack up from what is generally advised to you.

In savings, this would mean to save 10% of your disposable income. The downside of doing this is that saving 10% will not give you a sum of money that is significant enough.

If it is not significant, the virtues of savings may not hit you.

You would carry on your life saving only 10% oblivious to the life-changing advantages that putting money away can bring you.

Why Standard Recommendations are Not Always Good

When people give standard recommendations for savings, wellness, diet, commitment, they have to give a sound yet conservative recommendation that is applicable to more people.

2 weeks ago, I chanced upon this article in the Sunday Times. The commentator Mr. Ng, recommends that to have recurring income, you should rely on a low-cost, diversified portfolio instead of dividend investing.

Mr. Ng has to risk manage the opinion and provide a solution that would fit the majority of the people. Deep down, he prefers people to give dividend investing a try.

Who knows, some of you would get the hang of it. Just like those who can do a savings rate.

Conservative and sound recommendations will help people but they are not tailor-made for your situation. It left the true potential unfulfilled.

For a lot of things, the standard guidance given to you is likely not suitable for your own situation. That is why there are personal trainers, there are personal financial adviser, there are lawyers, nutritionist to help you calibrate different aspect of your life.

Extreme Habits are Seldom Sustainable…

But you will be motivated to continue doing it if you see results. Which is the beauty of the fast feedback of extreme actions.

If you tried a carnivore diet for 2 months and did not notice any changes to your wellness, weight, you would probably shift back some of the vegetables.

But if you realize that some of your health problems went away, you will be intrigued to do more research on this, and to continue on this diet for a while.

Thus, extreme things are hard to sustain. It has to be replaced by other kinds of motivations (be it results or goals).

Before You Start, Always Ask: What is the Worst Possible Outcome?

The problem with doing extreme things is that in the wrong context, things could go seriously wrong.

But if we ask the following questions, we might be able to evaluate whether we should be so extreme:

1. What is the worst-case scenario?
2. Is it going to be life-threatening?
3. Will your family or parents dis-own you?

You might realize that things are not going to be so bad. At most, you just wasted or live a really funky life for 1 month.

However, these questions will also make us realize maybe we don’t know enough of things, and better take things one step at a time.

Summary

Most of all, doing some extreme things allows us to establish how low or high our limits are.

If you need to do something hard, these experiences have let you know that you been through something harder. Relatively, this will look much simpler.

While my friends have given some kick-ass ideas here are some:

1. Eat no meat for 1 week
2. Save greater than 50-60% of your income, if you earn above-average income (greater than $9,000 – $12,000 a month for a couple or $4,500 – $6,000 a month for single)
3. Practice a very Freegan kind of lifestyle
4. Do a No-Spend Challenge. A No-spend Challenge is a challenge where you commit to not spend on something. This could be Eating out, Beauty products or treatments, Beverages beside water, Clothing, Electronics, Hobbies, Treats disguised as groceries, cleaning products, meat, books, streaming media, Instagram. There are a few schemes:
   1. No-spend Days
   2. No-spend Week
   3. No-spend Weekend
   4. No-spend Month
   5. No-spend Year
5. Try a 100% equity or 100% bond allocation for a period of time

This article is part of my Lifestyle Re-design Series where I provide some philosophical and helpful tidbits to get through life.

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 the first meeting to understand how it works

In last week’s article, I showed readers 2 different approaches to plan for how much do you need if you wish to retire at 55 years old so that you will have an income stream till 90 years old.

We acknowledge that at some point, our CPF Life annuity income will be available for us to spend and thus will have to be factored into our planning.

The 2 approaches were:

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 the first approach but over a 25-year duration

We deduce that approach 1 is definitely safer but you will need to set aside more money, which may mean you working longer for that security. The second approach is more optimized because we can compute conservatively which portion of your expenses is funded by which portion of your wealth.

The second approach utilizes less money.

The difference between the two approaches narrows if your income needs are higher. This is because if you require such a high income, the proportion of the income from CPF Life is lesser and therefore matters less.

What If We Topped Up CPF Retirement Account to Enhanced Retirement Sum (ERS)?

Those with CPF have the opportunity to top-up their CPF to not just their Full Retirement Sum (FRS) at age 55, but to the Enhanced Retirement Sum (ERS). We can top-up 50% of the FRS to the ERS limit.

For example, suppose you were born in 1960 and your FRS is $161,000 at age 55 in 2015. If you wish to you can top up $161,000/2 = $80,500 more so that you will have a total of $241,500 in your CPF Retirement Account.

A greater amount in our CPF Retirement Account would allow us to have a greater CPF Life Income Stream.

Slight Digress: While we are on the topic of CPF Retirement, do note that if you were born in 1960, if you wish to you can top-up to the prevailing BRS, FRS, ERS so that your income stream is larger.

For example, the current 2020 FRS is $181,000. The couple born in 1960 would just be 60 years old. They can top-up his CPF Retirement Account to $181,000 or $271,500 if they wish to get a greater income stream. There are no CAP there. (The hard FRS sum of $161,000 at 55 years old is there to help you identify the amount in your CPF OA and SA that you can freely take out at 55 years old. I think CPF would welcome you to top-up more into your CPF Retirement Account for a stronger retirement income stream.)

Ok, let us get back to the main topic again.

If we revisit the two approaches again:

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 the first approach but over a 25-year duration

The first approach does not benefit much from topping up the ERS. This is because your portfolio at 55 years old have to provide the cash flow to give an inflation-adjusted $5,000 a month income from the very start.

In approach 1, the CPF is a good-to-have.

The second approach may benefit from the CPF Top-up to ERS because the CPF Life income is an integral part of the plan.

I think that having higher CPF Life Annuity may mean we need to set aside less in our cash portfolio because, in Singapore, there are not a lot of financial assets that have almost a 6% initial cash flow yield, backed by a strong entity, that continues as long as you are alive.

Approach 1: Provide a Retirement income stream for 35 years

In the previous post, under approach 1, we estimate based on a 3.25% initial safe withdrawal rate, the retiree needs to set aside $1.85 million.

Their combined CPF Life Income Stream at 65 years old if they choose the CPF Life Basic Plan is $2750 a month assuming they have $181,000 each in their CPF RA at 55 years old.

The couple can choose to top-up to ERS in their CPF Retirement Account any time from 55 years old onwards (if I am right). However, the CPF Life calculator is not so flexible to give us an estimated monthly income if you top-up after 55, so I will assume the couple top-up $90,500 each at 55 years old.

The couple topped up $181,000 more at 55 years old. The CPF Life Calculator estimates that based on this additional funding, and if CPF Life Basic Plan was chosen, the income would be bumped up by $1,212 a month.

In approach 1, this bump up does not matter so much because the couple could not spend the income until they get it at 65 years old. By spending $181,000 more, it does make their overall plan safer.

In total, the couple would need $1.85 mil + $181,000 = $2.03 million based on approach 1. Honestly, I cannot bring myself to tell people to fork out an additional $181,000 just to make their plan safer.

I am just not so sure if it is worth it.

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

My opinion is that topping-up your CPF Retirement Account to the ERS may matter more to Approach 2.

Let us take a look at the annual expenses of the couple that they need an income to cover, after factoring this new CPF Life Income of $3,962 a month versus $2,750 a month previously:

Wow ok.

At 65 years old, our cash portfolio will just have to cover $25,596 a year in expenses, compared to $40,140 a year previously.

We can determine how much capital we need at 65 years old to fund this $25,596 a year, by going back to our safe initial withdrawal rate table:

In the last article, for approach 2, I used a 4% initial withdrawal rate so in this article I will stick with this.

This couple will need $639,892. (To be more safe, you could choose to accumulate $731,305 at a 3.5% initial withdrawal rate as well).

For comparison, here is how much capital you need based on the last article, if the annual income requirement is $40,140:

The capital difference between having a higher CPF Life and not is about $400,000! What this emphasizes more is that if your expenses are higher, your capital needs are higher.

How much capital do we need at 55 years old so that we can have $639,892 at 65 years old?

We need to see how much in our cash portfolio we need at 55 years to grow it to $639,892 at age 65.

Assuming a rate of return of 4.5% a year, at 55 years old, the couple will need $639,892/(1.045)^10 = $412,044. (If 3.5% initial withdrawal rate, then you will need $731,305/(1.045)^10 = $470,907)

Remember, we have to factor in a capital of $600,000 to fund 10 years of $60,000 a year spending before the CPF Life annuity income comes online.

Thus, the total capital needed equals to:

1. First 10 years capital: $600,000
2. Cash portfolio at 55 years old: $412,044
3. Capital to top-up CPF RA to ERS at 55 years old: $181,000

The total comes up to $1.19 million.

Compare this to $1.24 million in my previous article.

Not a lot of difference apparently!

Ok, this is a surprise. I thought the difference by channeling more to CPF life might be greater. Turns out not a lot of difference!

Comparing the Two Retirement Income Planning Approaches

Again, if we compare the two approaches it will be $1.85 million versus $1.19 million.

Approach 2 requires less capital at age 55. If you are cash-strapped this one will be more worth it.

I cannot bring myself to include the CPF top-up for approach 1 since it didn’t really help the approach concept-wise.

What if Your Retirement Income Requirement is Higher?

In my previous article, I tried to work out the scenario if the couple needs $8,000 a month in the first year at 55 years old instead of $5,000 a month.

I shall not bore you with the calculations, so here is the total capital needed for Approach 2 if its $8,000 a month:

1. First 10 years capital: $960,000
2. Cash portfolio at 55 years old: $1,353,977
3. Capital to top-up CPF RA to ERS at 55 years old: $181,000

The total comes up to $2.49 million. In the previous article, if we did not top-up to ERS, we would need $2.31 million.

Topping up to ERS seem to not work so well as the retirement income requirement goes up.

I was not expecting this. I think I better compute the difference between topping-up your CPF Retirement Account to ERS versus not topping up for different income requirements:

As you go up the income, the difference is almost the same. However, the same $53,132 in lump sum capital does not make much difference when your income requirement and subsequently capital gets rather large.

That said, suppose your additional income needs are $500 to $1000 a month. If you choose to top-up to ERS, your situation is better off than investing outside in terms of percentage (for example the capital you need is 10% less which is significant).

We can judge how significant is a $53k difference. For some couples, saving $53,132 more can be really tough thus topping-up ERS makes more sense.

Summary

It feels to me that we can conclude topping up versus not topping up your CPF Retirement account to Enhanced Retirement Sum does not make so much difference.

However, I would like to point out the difference:

1. CPF Life is an annuity. It is backed by a government entity and is designed to hedge your longevity risk (outliving your income)
2. Your cash portfolio is a probability-based income stream. While you can control how much income as a percentage of total capital you wish to spend a year, the robustness of the income stream depends on the markets giving you a set of returns similar to the past

These 2 features mean there is a role for both in your portfolio. For some retirees, they would rather base their income stream on the safety of a government-sponsored annuity scheme.

However, if your income requirement is so large, then you best get comfortable investing in an equity and bond portfolio because you are not going to find an instrument that gives you such a good annuity income yield.

CPF is a scheme that sought to help the second quartile of Singaporeans. If your needs are greater than that, then you need greater solutions.

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 the first meeting to understand how it works

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 the 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 the first meeting to understand how it works