I first got to know Samuel when he reached out to me because he needed some help figuring out his plan for financial independence.

He explained to me why his wife and himself are focus on accumulating for financial independence. That conversation also gave me a glimpse of the world of professional photography.

I have this insecurity after I wrote about how freelancers should manage their money. I wasn’t sure if what I wrote was realistic at all.

So I reached out and asked Samuel whether he is willing to share his story with my readers. He was very gracious to share with us some of his life and money stories, lessons learned that enable him to feel financially stable and secure.

You can check out his guide to the BEST wedding venues and planning a (kick-ass) wedding celebration as well as his creative works.

If you think you have a unique life & money story that you would like to share with us, do contact me.

I had big dreams when I first set foot on the land down under back in 2006.

I would ace my classes as a physiotherapy student. I had my sights on having my name upon the dean’s list. I planned to run my own physiotherapy practice. Perhaps even a chain of them.

I was going to buy a house, settle down with kids, and go fishing on the weekend. Life was going to be great.

It sounded like a perfect plan, until it all came crashing down.

My name is Samuel, and I take pictures for a living.

Most of my weekends are spent hanging out with couples making the biggest commitment of their lives, and then partying the night away in all sorts of manner possible.

I know, it’s a far cry from what I initially envisioned my life to be, right?

But let’s backtrack a little and start from the beginning.

My family left for Australia when I was midway through my national service, and I packed my bags and joined them soon after.

Life in Australia wasn’t what I dreamed it would be.

I’ll sum it up by saying that a combination of unrealistic expectations, a sudden change in culture, and a two-year-long bout of severe eczema led to a long drawn battle with depression and an eating disorder.

My interactions with my younger classmates also helped me realize that my sheltered upbringing in Singapore in a middle-class household resulted in many shortcomings. Whilst proficient academically and perfectly skilled at memorizing and regurgitating, my critical thinking skills and emotional intelligence were severely lacking. I couldn’t even hold a decent conversation, for crying out loud.

Although I was able to ace most of the exams, my poor communication and practical skills led to misunderstandings with patients and supervisors and poor execution of procedures that ultimately secured the demise of my hospital attachments. I had to repeat the year and the university removed me from my honors program. My appeals were rejected and no one, except for my honors supervisor, lifted a finger to help.

As simple as that, I lost everything I worked for over a period of three years and I lost all interest for physiotherapy.

I came back to Singapore and over the next six months, contemplated what to do with my life.

Coming back to Singapore was tough, because, besides despair, I also felt shame – I felt like I had let down everyone who had believed in me. I took those two months to think… a lot. I thought about life, the meaning of life, the shortness of it. I would also think about my dreams if I had any and what they were. At the end of my trip, I couldn’t figure out what I wanted, but I knew one thing, that life was far too short to be stuck doing something not worth my time.

So I made up my mind then, to pursue my passion and to become a photographer.

Prior to this, I had never held a part-time job for more than three months other than a short stint as a sports trainer at the soccer club. This meant that my work experience solely consisted of massaging grown men’s calf muscles and carrying them off the field when they got injured.

So I had to hustle and do photography work at all sorts of events. These jobs earn me a measly $10,000 after a grueling two years.

I was ready to give up, but I hung on and went into photographing weddings. The lack of work then meant I tried to survive by taking on jobs both in Singapore and Australia just to make ends meet, and business began to gradually take off.

My wife (who is also a photographer) and I have two independent brands. My wife serves mainly events in Singapore. I was able to have opportunities to work with clients in Perth, Australia.  It was not always easy being away from her and those trips can be rather intense that I was not able to find time to visit my family in Australia.

Our ability to deliver value to our clients has enabled us to gradually scale up our fees. Life became less of a struggle but it also opens up to some adult problems that we have to come to terms with.

I Needed to Manage My Money Better

I was rather ecstatic when I finally saw my savings account reach six figures for the first time.

You have no idea how much I cherish having enough financial buffers such that I do not have to worry if I have enough money for my expenses.

The nature of my projects-based work means that cash inflow tends to be uncertain. Our strategy, on a high level, is always to put a distance between our expenses and how many months of expenses our savings can last us.

At least this is for my wife and me. Throughout my life, I have been rather frugal.

When I started seeing my savings go up, I thought I better learn to manage my family’s money in the right way so that I will not lose what I have painstakingly built up.

Being more introverted, I would try to see if I can find out what I don’t know online. I came across A Singapore Stock Investor. Ak71’s blog was a wealth of information.

I greedily absorbed his sharing on

1. The right insurance policies to purchase
2. The impact of saving rates
3. Investing for passive income to supplement our lifestyles
4. The power of compound interest using CPF

I devoured more articles and came across Mr. Money Mustache. Mr. Money Mustache gave me a path to focus upon to escape the challenges of the photography business.

I have experienced the volatile industry dynamics and came to the conclusion that we might not be able to figure out the outlook of my niche in the next 5 years. Due to the physical nature of our work, I felt that it was impossible to keep up with the same level of dedication well into our 40s.

By pursuing the path to financial independence, there was something in there that may give me a sense of security and not always be subject to the whims of this creative industry.

Creatives and Money

Kyith reached out to me to see if I could share my experience in managing both my money and the money aspects of my small business.

I hope that by sharing my experience, some of my peers would recognize that they have to manage the money side of their life and business well.

The creative industry is an extremely competitive industry. There are consistently new players and the rules are always changing. The consistency is that you cannot rest on your laurels.

Yet many creatives failed to join the dots between the dynamics of our industry with the money aspect.

It is not uncommon to hear of stories of someone you think was doing very well suddenly fade away. It is only later that you hear that their business hit a snag they could not recover from. Cash flow problems ensued.

I would be the first to admit I have not got the money formula sorted to perfection but I hope that some of what works for me would work for you as well.

So here is the first lesson.

Lesson #1 – Calculate Your Earnings Based on Net Profit

In our industry, the money comes in a lumpy fashion. It is not uncommon to be paid a sum that you can spend for 1 or 2 months (or even more). February and August tend to be months which are relatively quiet as well.

My observation is that some of my peers cannot match the cash inflow with their cash outflow.

Our cash outflow tends to be more recurring. Resolving between lumpy and recurring can be a nightmare for creatives.

They will think that they could consistently bring in projects that pays them a lumpy cash flow. When there is a late payment, or a seasonal period where they did not get jobs, they had to dig deeper into their savings.

I find that if we account based on net profit, it allows me to see how much we are making, net of expenses much better. When customers pay me a big lumpy payout, I do not get overly ecstatic about it as I know part of it will need to pay for some business expenses in the following months. 

Lesson #2 – Plan Ahead if You are Thinking of Applying for a Housing loan as a Freelancer.

When we came back to Singapore, we stayed in rented HDB flats.

Renting was not always a great experience. The last place we rented had such a weird layout that we just could not get a good night’s sleep. That experience was the ultimate and we decided to get a place of our own.

However, when we wanted to get a place of our own, every bank rejected our application for a housing loan, even an independent financial advisor shook his head. Apparently, it seems that as a self-employed, your credit scores are much lower than if you were an employee.

In order to obtain a housing loan, you need to provide a level of certainty of being able to service the loan. That includes two years’ worth of IRAS Notice of Assessments and CPF contributions.

Financial institutions also generally assume that as a freelancer, your income is unstable, hence they will reduce your stated monthly income by 30% when calculating your Total Debt Servicing Ratio.

Therefore, ensure that the price of the house you are looking at fits within your budget based on your level of income before applying for a loan.

Lesson #3 – Separate Your Business and Personal accounts and Set up Rain Buckets

Despite the amount of time and effort we put into our business, as a wedding photographer, there are multiple factors that can impact the amount of work we end up booking.

As a result, the income we earn can drastically fluctuate every year.

We felt that it is absolutely essential to creating separate business accounts and personal accounts.

The business accounts then pay a recurring income into our personal accounts. Then we further divide our personal accounts into sub-accounts for different goals.

Our plan can be illustrated in the diagram above.

Our business account records all invoices and expenses. From this business account, we pay ourselves a consistent salary of $5000 (as an example).

We were fortunate that our business account can pay a consistent salary. This income gives us stability. We can then accurately funnel this $5,000 into 5 different “rain buckets”, each with a particular life goal. 

The rain buckets create boundaries between the money meant for different purposes so that we know if we are overspending in some areas and whether our wealth machine is getting stronger.

We use apps to create virtual rain buckets. You can check out applications such as You-Need-a-Budget (YNAB) and Wally to help you do this.

Lesson #4 – Know Where You are and Where You Want to be

As I went deeper down the financial education rabbit hole, Mr Money Mustache taught me one of the most important concepts. This was the FIRE concept or financial independence, retire early.

Reading on financial independence where the passive income I earned could potentially cover my lifestyle expenses was a great revelation for me, and I saw a practical solution to my problems.

However, we need to know where we stand (financially), before we can plan our destination and how we can get there.

I will recommend that you tally up all your assets and liabilities and creating a statement of net worth that you can update on a monthly basis.

Here is an example that worked well for us:

We use a simple tracking where we laid out all our assets (cash, equities, CPF, bonds, property), our liabilities, and net worth.

We felt more relaxed when we saw our numbers getting better. When I learn about the shockingly simple math behind early retirement, you get more motivated when you realize the math might work out in reality.

Despite earning well, our lifestyle expenditure was keeping up with our earnings and we couldn’t save much. When we start tracking these numbers, we begin noticing where the problems are. We discussed and found that some of our spendings were unnecessary and so we reduced them…

Where I learn from Kyith is to also create a separate column of essential expenses.

This allows us to have an idea if we need to really cut back (like during this Covid-19 period), we know how much we can live on, what is the quality of life, and roughly how much to cut back.

By doing this, we get a clearer picture about where we are.

We can then consider where we want to get to.

How Many Projects for Me to Reach Financial Independence?

After evaluating the formula to financial independence by Mr Money Mustache, I began to see how I can link how much we need to accumulate with our photography work.

Recently, I shared with some of my peers how I link where I want to be with my daily work:

Going through this exercise allows me to see whether my goal is realistic or not. For example, based on my past experience, can I do 40 weddings and 20 pre-weddings in a year. Can I raise my rate?

It also gives me an indicator whether I am working too hard.

Instead of always focusing on a dreamy goal, I can get to business to focus on getting X number of weddings and Y number of events.

Lesson #4 – Building a Solid Emergency fund

Most financial gurus advocate for six months of emergency fund.

However, I understood early on how financially rocky it can be as a freelancer, and I felt that I needed at least 12 – 24 months of essential expenses because when shit hits the fan, it hits hard.

I didn’t predict this pandemic, but I guess I prepared for it all along.

Building up your emergency fund is so important in providing lifestyle stability during times like this when the entire industry is halted and there is no foreseeable work for the next 1-2 years, or if we encounter any crippling injury that stops us from being able to work.

In case of a recession, it also acts as a buffer to prevent us from selling our equities or bonds at a loss for liquidity.

Lesson #5 – High Savings Rate Matters for My Goal

The spectrum of profit that creatives can earn in the industry vary widely. There are some who despite their best efforts, could not put a distance between their expenses and what they earn. Then there are some who get huge revenue bumps once once in a while.

As we steadied each of our individual businesses, we were getting our work calendar filled and we were earning good money.

Yet I noticed we weren’t feeling like we were saving well. We realized that was because our lifestyle expenses crept up as our earnings increased.

Reading both Mr Money Moustache and ASSI  on savings rate helped me understand how important it was to keep expenses low, whilst increasing earnings so that we have a high savings rate.

I realize if I want to reach my financial goal, we have got to something.

Your savings rate is the percentage of your salary that you do not spend. According to conventional theory, a 20% savings rate will not cut it, and here’s why.

Assuming that you spend the remainder of your salary:

1. Saving 50% of your salary means that for every one year that you work, you can take one year off.
2. Saving 20% of your salary means that every five years that you work, you can take one year off.

Hence, if you want to retire for 30 years at the age of 50 and without additional wealth building tools, you will need to save for 150 years – This does not make sense to me at all, and it’s virtually impossible to retire.

However, saving 80% of your salary means that every ten years that you work, you can take forty years off.

That is why a high savings rate is so crucial for early retirement.

It’s important that we live comfortably, but at the same time minimising our expenses ensured a higher savings rate.

Early on, we made the decision to not own a car, purchase a smaller flat to reduce our mortgage payments, and to cook at home more often to build up our savings.

This worked to our advantage as we increased our wealth gap, thereby channeling the extra savings to instruments that generate more passive income.

Lesson #6 – Buy Term and Invest the Rest

Early in my career, I had an accident and broke both my wrists. I still went on to photograph a wedding the next day for twelve grueling hours with both my arms in casts – that incident solidified the importance of insurance.

Insurance doesn’t have to be expensive.

From the meager returns of my parent’s investment-linked insurance policies after ten years, I learned at a young age that those are pretty mediocre instruments for building wealth.

The purpose of insurance is to, well.. insure!

Or rather, to provide a source of income for our dependables in the unfortunate event of our passing or loss of function.

A solid term insurance plan that pays out in the event of death, critical illness or total permanent disability will solve that, and they are fairly inexpensive, especially if you start young.

A hospital shield plan is also absolutely essential in the event that we need to be hospitalised for whatever reasons. A hefty medical bill is a surefire way to diminish our savings, and it’s far better to budget a set amount to negate that unknown scary possibility.

For the above, I’ll recommend a fee-only financial planner. This ensures that they will recommend the right products for you without any reward bias in the form of commissions and kickbacks.

MoneyOwl will be a great place to start for most (this post is non-sponsored nor am I affiliated to MoneyOwl in any way).

Lesson #7 – Understanding the Benefits of CPF in an Objective Manner

As self-employed people, it is mandatory to contribute to their CPF Medisave account. However, self-employed can choose to voluntary contributions to their CPF via the voluntary top-up scheme, and retirement sum top-up scheme (RSTU).

I understand that we all have mixed sentiments regarding the CPF. Amongst the self-employed, the sentiments are even more mixed!

I do think that it is important to remain objective and educate ourselves to determine whether it can work to our benefit or not.

CPF is essentially a social security savings scheme to meet our housing, healthcare, and retirement needs.

To completely explain about CPF would take a few pages, so I wouldn’t dive into that.

However, as a freelancer who had zero knowledge about investing then, I saw CPF as a stable instrument with capital guaranteed and moderate returns. I also learned about the power of compound interest and calculated the possibility of having a lifelong annuity at 65 while being able to withdraw most of my contributions at 55, if I managed to reach the Full Retirement Sum in my Special account at a younger age.

I therefore worked on building up my CPF Special account with money that I don’t need for the next 12-24 months.

We also made the decision to pay our mortgage in cash if our situation allows us to. This allows our CPF OA and SA accounts to accumulate interest, and avoid the situation of having to pay back accrued interest if and when we sell our house.

Lesson #8 – Create Multiple Passive Income Streams

As creatives, I felt that we understand the concept of multiple streams of income better than my salaried friends.

Each of our clients, especially those on a retainer, are one stream of income. If my salaried friends lose their job, 100% of their income gets impacted. However, if some of our clients decide not to go with our services, it is not a 100% impact.

When people talked about multiple streams of passive income, I see that this is a progression from what we understand.

Instead of needing to physically work with clients, we do the work upfront to build up our investments and our investments provide a diversified stream of income without us needing to be there.

I’m not an investment guru, nor do I claim to know a lot.

However, I started by making sure that every dollar I had was working.

I parked our emergency cash fund in fixed deposits, and other multiple income streams are interest payments from Singapore Savings Bonds, CPF, and dividends from equities.

Kyith has a fantastic article on building a wealth machine HERE.

Lesson #9 – Invest based on your Personality and goals

Investing can be one method of achieving our financial goals faster than what we can earn through our jobs. It could also negate the detrimental effects of inflation on our spending power.

There is a wealth of information on investments out there, and it’s so easy to be confused – (Investment Moats is one website I consistently utilised to educate myself; the breadth and depth of information it encompasses is astounding.)

It’s therefore crucial to understand our personalities and risk appetite before diving headlong into the investing world.

As I am extremely risk averse, I preferred instruments that could guarantee my initial capital, such as Singapore Savings Bond, CPF and fixed deposits. However, I also understood that in order to build wealth at a faster rate, I will need a higher return on my investments.

I learned from my early experiences of dabbling in active stock picking that there’s a lot of work involved in understanding the internal and external factors that could impact a company’s value and share price. Although the returns can be high, it’s also easy to get burned if I didn’t know what I was doing.

I’m therefore more inclined towards a diversified index fund with a dollar cost averaging approach based on this book by Joshua Giersch – it explains investment concepts based on a Singapore context in an easy-to-digest format. My portfolio currently consists of the Singapore index, an international index and Singapore bonds.

There are also many formulas out there calculating how many percent of your portfolio should be dedicated to equities. One such example will be 110 – your age = your percentage in equities.

However, like they say, everyone has a plan until a pandemic smacks them in the face.

Experiencing a market crash where my portfolio went from +20% to -35% in a matter of days really helped me understand the type of investor I am and the portfolio allocation I am comfortable with. As important as building our wealth is, we should never ever underestimate the power of our emotions versus rationality and the importance of a peaceful night’s sleep during times of extreme market turmoil.

In the event of a global recession, my primary source of income could stop and I will be more comfortable with a larger cash reserve to tide my family through a long period of uncertainty. Therefore, a portfolio allocation of higher bonds and cash component and a lower equities component will suit my investment personality better.

Final Lesson #10 – Adapt to the Current Situation and Prepare for the Next Crisis.

This lesson would be my last financial lesson.

If you’ve made it this far, thank you for taking the time to read what I have shared! I hope that it has at least started a conversation in your mind about the importance of managing your finances well, especially for a freelancer.

Covid-19 have really disrupted the business of many creatives including myself. The gig economy is the first to go and may be the last to open up. All the jobs from April to August have stopped and clients are cancelling their events up till the end of this year

Almost 95% inquiries have stopped.

Everything is a standstill.

I take solace that what I learn over the course of these few years have set me up well. However, I do not know when normalcy will be restored to my photography business. And how will things look like when it is restored?

As it stands, this has definitely affected the trajectory of my financial independence plan.

I try to search for the positives.

As challenging as it is, we have to adapt as best as we can by changing our mindset and utilising our skills to build side hustles and bring in other forms of income.

At the same time, there will be other crises in the future, and we could prepare for it mentally, emotionally and financially by learning the lessons from this current one.

We should always balance our drive to be financially independent with the health of our relationships. No marriage or family is worth sacrificing to be financially independent.

Buy that cake for your daughter, take one less job so that you get to spend Christmas with your wife, these are the intangible valuable moments that mean the most.

Take care and stay woke,

From your photographer and friend.
Samuel
www.samuelgoh.com

We lived in an interesting time where our normal way of life is being challenged.

To halt the progress of this Covid-19 virus, governments around the world are asking people to keep a safe distance, work from home. Certain non-essential businesses are closed down.

As an individual who is interested in financial independence, financial security and retirement, it feels like Covid-19 may have a profound impact on how people feel about certain themes within the financial independence movement.

This post hopes to give you something to think about.

Work From Home is Simulating Your Ideal Life

Many of us are forced to work from home, do split teams or go into office on alternate days.

With work from home, it gives you the opportunity to test out how life would be if you are

1. A freelancer working in a knowledge-based role
2. Semi-retirement lifestyle or a cruising retirement lifestyle
3. Working while your children and spouse are at home over a prolonged period
4. If you do not need to commute

The reason why we aspire for financial independence is maybe because we wish

1. To have optionality in life
2. Have more time
3. Be able to spend more time with family
4. Get away from toxic work culture
5. Spend time on our hobbies

We can test a few of these things to varying degrees. We discussed a bit in our Financial Independence Telegram group about this.

One individual is using this period to test out a life of working, exercising and see if this is really the ideal life. Another came to a conclusion retirement is boring.

Most are trying to adjust to working from home while in close proximity to family. A few are adjusting to doing too much compared to when there is clear segregation of personal and working life.

Reflect upon this period

1. Is this a more balanced life for you?
2. Do you miss working in the office or seeing co-workers?
3. Were you able to focus on working a certain hours, then switch your brain off and do stuff you enjoy?
4. How big of a deal is not having to commute?

Your idea about financial independence may be re-calibrated.

Identifying How Lean Your Expenses Can Be… and is Still An Acceptable Living

One of the key aspect about planning for your financial independence is answering the question of how much income you need.

That is a function of how much your family and yourself need in terms of annual expense.

I do advocate for people to look upon each expense line item as two component:

1. Essential expenses
2. Less Essential expenses

It is always a debate what are essential and what is less essential.

Spending only on essential expenses is basically close to survival mode living that is acceptable. You are not giving your family the best, just enough. You are also not going to the bare minimum.

You would realize that it is not a question of whether vacation is essential or tuition is essential. For each expenses, there are different grade to this.

For example, everyone feels that food is an essential expense.

No. There are different grade of expenses. Fine-dining is one grade. Eating at restaurants is another grade. Kopi-tiam food is another. Cooking Maggie Mee and Steaming Buns at home is another.

If you classify food into the minimally acceptable level and the extravagant one, then you may be able to split your expenses to essential and non-essential.

During this period, you may be able to figure your essential expenses out better.

Government is asking non-essential services to stop working from Tuesday onwards. You are restricted from traveling. Some of you might see your job turned temporary or might have lost your job.

Almost everyone is going into maintanenance mode.

If you pay attention to your expenses, you might be able to extrapolate and figure out your annual essential expenses. It would be best if majority of your transactions are recorded in credit cards and bank statements.

At the end of April

1. Take a look at how much you spend
2. Contrast that to how much you were spending previously
3. Reflect upon also your views about this quality of life

Some of us find that our spending does not differ much. At most, we save on transportation cost.

Some realise their expenses are lower.

Folks come into planning with some outrageous income needs. This is a time to reflect if it is outrageous.

If you need less, you are closer to your financial independence goal.

If it is a struggle for you here are a trigger list to think about:

1. Food
2. Transport
3. Home for living
4. Insurance for Protection (not investment or saving)
5. Children
6. Household (Utilities, home improvement, ancillary services like maid)

How Much Slack Do You Need in Your Life?

This COVID-19 crisis somewhat highlights how much slack we have in our way of living.

Slack means having enough room to operate, enough to sustain some margins for error.

This crisis highlights perhaps the downside of an efficient system:

1. Businesses operate without excess cash holding. If your company has too much cash, activist shareholders will question why do you need so much cash. It is not doing anything and it brings down the company’s return on equity.
2. Paycheck to paycheck. How much we earned, it is paid out or deployed through recurring payments to insurance companies, mortgage payments. Our savings are in the form of lock-in commitments that cannot be stopped.
3. Retirement Planning for the bare minimum. This probably going to contrast against what I said in the previous section. Because our retirement needs are so much, we planned for just enough. No slack. When the economic situation do not work our way, we find it hard to react.

The solution to all this is sensible saving for the rainy day and have enough buffers:

1. Save a healthy percentage of your income
2. Ensure you have an emergency amount of cash

In personal finance, we preached about it, but it took me a while to realize that not many firms can take the kind of shock where there is almost zero revenue coming in. Fixed costs like labor and premises still need to be paid despite less business. Interest payments need to be paid as well.

If your business is a low margin business, high fixed cost, it is hard to survive with not much revenues coming in.

On a personal basis, low margin means high income but end up very little free cash flow after all the expenses. High fixed cost means a lot of expenses that you cannot reduce despite no work coming in.

I think while having an emergency fund would be good, the way to visualize your cash and investments is someone like what I wrote in my article about managing the money of a freelancer.

Imagine your cash and liquid investments queueing up in a conveyor belt.

How long of an expense or income runway would you have?

In exceptional times, you might need to liquidate your investments or to frantically find cash flow. That is a hard decision to make. But it is still a pretty good thing to have that option available.

The equities and bond market can be illiquid in times like this (the individual bond market became real illiquid at certain points), but it is still more liquid than many other things. Selling a bond worth $1 previously for $0.80 is painful, but you still have $0.80 when you need. And you do not need to sell off all your bonds at one time.

Often, there are virtues for turning more of your human capital into financial assets.

The Last Word

I am not some guru who is going to tell you how the world would be like in the future.

But I think in a way, most people would feel more strongly about what they really like, and could not get access to during this time.

In a way, this retrictive period also helps you amplify what you really enjoy and are being short-changed.

I hope that some of my friends could see the light after a period where their lifestyle is re-calibrated and optimize their spending. However, experience tells me if this event is short lived, things will get back to normal.

I think many companies will start rethinking their office optimization strategy. Not in the name of productivity but in cost. A lot of times companies do things not because it is the right thing but based on herd mentality.

This might be good for you if got adjusted to work from home, working shorter hours during this restrictive period. There might be more work opportunities that opens up for you.

On the other hand, you may not enjoy this so much that you will prefer to have a 9-5 job in the office. But at the same time, this period might make you realize that despite that, it is good to build up some financial security.

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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

When the topic of financial independence and its cousin F.I.R.E (financial independence retire early) became popular in the last few years, a big question was asked:

How would the early retirees fared when the market goes down?

Since the start of the year, the market has gone down 20-30% at various points.

I did not encounter people making a U-turn in their retirement plans nor do I seek out information on FIRE.

However, I had only heard of anecdotal evidences in articles that the fall in the financial markets was so swift that led some who wish to stop work or had stopped work to question the robustness of their plans.

The market fall would have reduced our net wealth such that these folks who aspired to be financially independent have to push back the date they pull the plug on their careers.

I think it is normal to feel less assured about our plans.

However, I do not think that it is necessary for your timeline for financial independence to get derailed.

If your original plan was sound, despite this fall, you would be relatively OK. The markets have been not too bad before this. Last year and in 2017 the market went up at least 20%.

But if you listen to some blogger or investment trainer’s plan, and decide to use that as your blueprint for financial independence, you might be in for some pain.

Some of their concepts are rather not thought out well. They violate a few fundamental axioms of financial planning.

In the context of this market fall, I can highlight 2 areas:

1. A large part of the issue is that I think many are myopic in how they assess their returns, this drawdown versus the returns projection in their financial plan.
2. Another issue is that their plan might not be very sound in the first place.

Let me give an example of the second point.

When You Speculate with a Short Time Horizon

Here is one very simple financial planning violation:

You are a high-income earner. You wish to stop work, get income in less than 5 years.

Is it a good idea to put 100% of your investable assets in a 100% equity portfolio?

We know that equities are volatile (this includes REITs and dividend stocks in case you do not realize they are equities as well) and it may take 5 to 10 years to capture the returns required.

This is pushing your money to take more risk when you do not have the time horizon for it. It is speculation that this would work out for you. Now, maybe you have to pay the price to push back the date of retirement to capture the returns.

A balanced approach would have fared better. The time horizon while boring, most often needs to be respected.

Now let us move on to the problem of not understanding investment returns.

Could You Be Financially Independent When a Bear Market Cut Your Portfolio by 40%?

In the end of 1992, you walked into your financial planner’s office.

You explain to her that your wife and yourself would like to see both of you have enough resources to retire when you are 50 years old (you are probably 39 years old at that point).

The financial planner works with you to find out how much income do you need in today’s dollars in the future. The financial planner asked how you would live your life if you are not working. What are the way of life you can accept, what are good-to-haves and what are absolutely-must-haves.

So both of you firmed up:

You can have a pretty satisfied living on $3000 a month. There are some things that both you will enjoy but you do not always need to have it. This should come up to $1,500 a month.

In total, that would be $54,000 a year. In 10 years time, at an inflation rate of 2.5%, they would need $69,125 a year.

To generate $69,125 a year for 40-50 years, it would be better to have a capital of $2.3 million at 50 years old.

With $2.3 million, your first year spending would be 3% of your capital. That is a pretty conservative initial withdrawal rate.

The planner explains that you need to deploy your wealth into riskier allocation with 100% weightage in low-cost global equities portfolio that tracks the MSCI World index. These are investments that can earn a rate of return typically of 6-7% a year.

But she thinks the write planning should be conservative. Instead of using a historical average rate of return of 6-7% a year, she used 4.5% a year.

If your wife and yourself can put in $50,000 a year for 10 years, at a conservative rate of 4.5% a year, you will need $1.09 million today (in end 1992)

You buy into the plan and decide to put $1.1 million into their portfolio, and contribute $50,000 a year for 10 years.

The 10-year period of 1993 to 2002 would probably be considered a period that is tough in terms of accumulating for financial independence.

In accumulation, you want a period of poor returns followed by a period of good returns. In this 10 year period, the returns were great for the first 7 years follow by 3 years where they cut your wealth in half.

The annualized rate of return for the 10-year period of 1993 to 2002 was 6.3% a year.

6.3% returns is rather decent.

However, investors are fixated on 6.3% that they may not understand that the actual returns have some serious ups and serious downs.

Here is a chart showing your actual portfolio value versus the projected portfolio value:

You need $2.3 million.

Eventually, you end up with $2.4 million.

In the last 3 years, your portfolio got shaved 40%. However, your plan is still intact.

You would probably be cursing and swearing at your adviser because at one point, your portfolio ended up with $4 million and she didn’t de-risk your portfolio.

I think that is the call of the adviser. There is no right or wrong answer. I would lean towards shifting part of the wealth to bonds if the financial independence amount is reached.

Here are the data:

They are less important than the chart I feel, but you would probably be able to appreciate how the actual portfolio value stacks up versus the projection.

Could You Retire at the Start of 1998?

You may have accumulated the $2.3 million in the fifth year. You could have sped up your financial independence.

But then in hindsight, knowing that your wealth is going to be shaved by 50% between 2000 to 2002 if you retire at the start of 1998, would you have a sustainable retirement?

Here are some things we know:

1. At the start of 1998, the portfolio value is $2.5 million
2. Based on the projected inflation rate of 2.5%, if you were to retire in 1998, you would need an income of $61,000 a year (lesser than $69k since you start off 5 years earlier)
3. You need 5 more years of income, so you need your wealth to last 45-55 years instead of 40-50 years

We can work out your initial withdrawal rate: $61,000 / $2,500,000 = 2%

A withdrawal rate of 2%, by all standards, is pretty low.

Based on my studies, to last 60 years, if you want to take care of the worst-case scenarios, better to have an initial withdrawal rate of less than 2.8% or 2.5%.

This includes:

1. Great Depression
2. The Spanish Flu and Depression of 1921
3. High Inflation 1960s to 1980s
4. 1987

Your portfolio can be more balanced if you shift your wealth to more bonds instead of 100% equities.

The Last Word

What worked is not just about the returns in the market. It is sensible planning.

Here are some factors:

1. Rationalize how much you need when you retire. If you wish for a safe plan, you need enough money. What is enough money is another matter altogether
2. Have a realistic inflation rate
3. Use a conservative yet realistic growth rate in your accumulation planning. If the portfolio do well, that is a bonus
4. When things turned out better, know what we should do
5. When things turned out not so good, know how to course-correct so that the goal is still intact

These are just some of the things I can think of.

You should also be aware that when people tell you the growth rate is 6-7%, also ask what is the time period. Think whether it went through some challenging periods.

Your annualized returns factor in good years and the poor years.

• The annualized return for 1993 to 2002 is 6.26%. That factors in a 49% plunge.
• The annualized return for 2004 to 2013 is 6.98%. That factors in a 40% plunge.

The challenge comes when the annualized growth rates are lower than your planning growth rate. That can happen. You just need to pivot accordingly. Usually, it involves choosing to live with less income or delaying retirement.

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

Well obviously not me since most readers know I am still working. I am not going to be that financial influencer who touts the virtues of retiring early, only to buffer their anxiety with blog income on the side.

One of the key risks that I bring up frequently (in my Retirement Planning Series) when it comes to planning for financial independence, is the challenge of the sequence of return risks.

In a previous article, I explained the problem of sequence of return risk and what are some of the common approaches to tackle this problem.

This post is more of a retirement, financial thought experiment now that we entered challenging market conditions. This March has been one of the longest March. A few markets are down -30%. The last few days we have a +20% bull rally.

This is probably a nasty sequence a retiree would experience. And I am interested to see how things unfold, in retirement numbers.

The year is not over yet, but since many commentators said the speed of the volatility, is similar to either the 1987 crash or 1929 Great Depression, I thought let’s do a simple thought experiment.

Let us look at your retirement experience if you have accumulated $1 million and decide to start your retirement end of last year (2019).

You have a choice of:

1. Withdrawing $40,000 a year at the end of 2019 to spend for this year
2. Withdrawing $3333 at the start of every month to spend for this year

How would your experience be like?

Would your portfolio be able to sustain that spending?

Would withdrawing monthly be better or withdrawing annually be better?

How did a Balanced portfolio (60/40 allocation) do versus a 100% Equity portfolio?

Our Base Case

Since I am at home, I do not have all the data with me, but I do have the rough returns of the Vanguard portfolio for the last 2 months and the returns up till the 26th of February.

This would allow us to do some simulation.

Let me explain how you will retire.

You put your $1 million in either a balanced fund or a 100% equity fund. Then, you will spend $40,000 in the first year. In subsequent years, you will adjust last year’s spending by last year’s inflation.

In this example, you will spend $40,000 a year in the first year. Since inflation last year averages 0.58%, if this continues, next year you will spend $40,232.

In this way, you will have an inflation-adjusted income for your expenses.

I want to see

1. How the portfolio looks like around end March (like now)
2. The current withdrawal rate now. I will explain why this data point is interesting later.

You Withdraw in 1 Lump sum Before 2020 and Slowly Spend

The table above shows how the portfolio value changes if you have invested in a balanced or equity portfolio.

The YTD return for the balanced portfolio is -12.35% and the equity portfolio is -20.41%.

It is not rocket science that the balanced portfolio ends up with more money than the equity portfolio.

It does not feel good seeing how much is left

We all do not like to see our portfolios go down and for this retiree that is what they are seeing. If you invest in a portfolio whose net asset value is updated frequently, you are going to experience this.

If you invest in private equity, angel investing, properties, you have less of this problem because the net asset value of the companies and properties do not get revalued frequently.

Viewing Your Portfolio in Absolute Amount Hurts More

The two portfolios are just 10% in return apart, but if you look at the absolute amount, you would feel more pain if you choose to invest in a 100% equity portfolio.

It looks like you lost 25% of your wealth, while for the balanced portfolio, it still looks “manageable”

High returns often come with higher volatility.

I came to believe this over time. This morning, I chat with someone who dabbles in these portfolio strategies on his own. He works in the finance field in his day job. He bang this into me that whatever strategies that lower the downside, it also curtail the upside.

I think the only way out of this was through rules that are more active in nature.

A 100% equity portfolio exposes you to higher returns, but you better be able to take that negative sequence risk where your portfolio gets cut 35% and you are compounding the fall by spending more through the income taken out.

Returns may not keep your portfolio alive.

The Weakness of Solely Using the Safe Withdrawal Rule as a Spending Plan

I have tabulated the current withdrawal rate so that readers can see that, if you retire today, in March this month, instead of the start of the year, your withdrawal rate will look very different.

The safe withdrawal rate of 4% has often been popularized as a way to determine how much you need to save for your retirement, and how much you can spend so that your money will last.

In this example, you withdrew 4% at the start of the year, so we can say that you are selecting to spend your income this way.

You believe that once you accumulate wealth that allows you to spend 4% of it in the first year, your plan should be safe.

However, if you are in a 100% equity portfolio but choose to retire in April 2020 instead of the start of the year, your current spending is 5.2% of your portfolio instead of 4.0%.

It begs the question: Do you think your money will still last 25 to 30 years now versus 3 months ago?

The issue with the withdrawal rate methodology is that it places a lot of trust that your retirement will not be worse than in the past. There will be years where your current withdrawal rate is more than 4%. You have to trust that the money will last for 25-30 years.

In reality, we don’t know what the future will hold.

My conclusion is that people tend to be flexible with their spending. When they see their portfolio value go down, they will review what was recommended by the safe withdrawal rate, but they will tighten up themselves. (This is as far as I will explain on this in this article, if you have questions do comment below)

What if You Withdraw $3,333 Every Month Instead

I was curious whether instead of withdrawing a lump sum, would withdrawing every month be gentler on your portfolio.

So here are the results:

In an absolute amount sense, withdrawing month by month is definitely gentler on the portfolio. Instead of having only $764k left, monthly withdrawal will leave you with $786k left.

However, it should be noted that we just taken out 3 months of expenses. There is still $30,000 to be spent.

I think we will only know the true difference at the end of this. (Or if Kyith is less lazy and he decides to use some historical data that has 12 months instead).

What if You Spent a Greater Starting Amount ($60,000) Instead?

I wanted to see the scenario where you believe that spending $60,000 out of your $1 million portfolio is prudent.

We all have a lot of weird theories about what is prudent and what is not.

Looks pretty OK. About $16,000 difference in portfolio value between spending $40k and $60k.

The danger to the sustainability of your portfolio are repeated spending. So this short exercise won’t show much.

If you spend too much, your portfolio has less units to recover if the next 3 months are the months where the market recovers. This will cause your wealth to last not as long.

The Beauty of Spending Less than 4% of Your Portfolio in the First Year

In the following table, I tabulated the current withdrawal rate in March 2020 if you spend a different percentage of your portfolio for the first year:

Observe the column name Annual. This shows us that with the drop in portfolio value, what is the current withdrawal rate.

You can imagine that if you didn’t choose to retire in Dec 2019 but Apr 2020, what is your withdrawal rate and whether you think your financial independence plan is safe or not.

It is a given with a fall in portfolio value, that the withdrawal rate will go up. That is just math.

But if your withdrawal rate is high, you will realize that you would be placing quite a bit of stress on your portfolio.

Conversely, if you spend between 2% to 4% of your portfolio in the first year, even with the lower portfolio value, your spending would just reach a withdrawal rate that many think is still relatively safe.

My Last Word

At Investment Moats, I always shared that if there is a less effort way of accumulating wealth or spending down in retirement, it is by way of funds.

What kind of funds you choose is another matter.

The popular ones are the exchange-traded funds, the funds via a Robo-adviser platform, the unit trust, and ILPs that you can purchase from banks and other distributors. There are also the boutique funds, hedge funds and the scams that masquerade as a legitimate fund.

Whichever fund you choose, in a period like this, you have to endure the pain that your portfolio value will go down. Some of us are confident that despite the fall in portfolio value, our portfolio will still last for the duration we need.

For others, they grow anxious about it. You could find an expert opinion to validate if your plan is sound enough. But sometimes, if you are anxious, despite what we tell you, you are not going to be assured.

If you are near retirement and planning for it, you should think about 2 main aspects:

1. Your portfolio structure
2. How much wealth versus your income needed

Portfolio Structure is Important

There are going to be funds that going to tout great returns, but a lot of the times, they are going to come with some greater volatility. I think funds can give great returns, but I do wonder how many investors can base the majority of their portfolio in high volatile funds.

An MSCI World Small Cap fund at one point was down 40% year to date. If you belong to the camp where smallcap can give you above-average return and decide to put 100% of your allocation into it, thinking you can endure the volatility, you would see your $1 million become $600k at this point.

And next year you need to spend $40,000 more on that $600,000.

The current result of the balanced fund shows the right posture going into retirement. If you have accumulated well the past 5 years and needed the money in the next 3 to 5 years, it might be great that you de-risk the portfolio.

Had you done that, instead of still chasing performance, you might not have so many sleepless nights over whether you are doing the right thing now.

Knowing How Much You Can Spend is Important as Well

Just as important to the portfolio structure is knowing whether your portfolio value is enough going into financial independence.

If do not have enough, spending what you think is modest, is also spending too much.

If you have enough, spending a lot is also modest spending.

A good situation is one where you decide to start withdrawing from your portfolio at the end of 2019 and after experiencing this market fall, your current withdrawal rate hits at most 4% to 4.5%.

Why is that?

A negative sequence of returns may result in your portfolio running out faster than you plan for.

However, after your portfolio has been ravaged, and your current withdrawal rate is still around 4% to 4.5%, that means your original portfolio value versus your expenses is conservative enough.

Going forward after this point of portfolio ravage, the expected return of your portfolio should be much better than when you start your retirement.

I came to this conclusion over time that you should base the withdrawal rate at your retirement based on the valuation of the equity market (assuming you are investing in a diversified global diversified portfolio):

• If the market value based on CAPE (cyclical adjusted price-earnings) is below 20 times, a higher withdrawal rate is fine (perhaps 4-5%). The expected returns going forward should be higher than average
• If the market value based on CAPE is above 30 times, you should plan with a lower withdrawal rate (perhaps 3.3% or less). The odds of near term volatility is high. You may have accumulated well for the past few years, but a bear might be on the horizon and your portfolio is going to be cut. The alternative is that you have built your wealth, control your portfolio allocation by de-risking
• If the market value based on CAPE is between 20 to 30 times, your withdrawal rate should be average

The above serves more as a rule of thumb. The short summary is that if you retire in a bear, you can use a higher withdrawal rate (which means you need less money). If you retire after a good bull run, use a lower withdrawal rate (which means you need to accumulate more).

We are 3 months into this, and I am not sure whether we will end the year positive or worse than this. I intend to revisit this exercise probably at the end of the year.

Two articles that I read on the money math in financial independence during this period that I would like to recommend:

1. Coronavirus Course Correction by Go Curry Cracker.
2. Dealing with a Bear Market in Retirement – SWR Series Part 37 by Early Retirement Now

My retirement section is 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 the first meeting to understand how it works