A reader of mine considered taking some sort of career break and spending some time to determine his next path.
So he decides to seek me out, to listen to my experience.
Near the end, he asked if I could give my thoughts about whether he could reach Coast FIRE or Barista FIRE. (If you are curious what is Coast FIRE or Barista FIRE, you can read this article that explains more)
I will share my thoughts about his situation in this article.
Where They Are and Where They Want to Go
We start with every planning needing to know where you are at now, what you have and where you want to go.
If you give me more details, it will make my life easier.
I am talking about not just the finances. That is only part of it.
How clear are you about where you at currently and where you wish to go?
A lot of people are not sure and so I cannot be very sure as well.
My reader is currently 44 years old, and his wife is 42 years old. They have three kids aged 14, 12 and 7 respectively.
At this point, they have accumulated $3.6 million in net assets (we will see this later). Both have parents that they care for, and mortgage that they are currently servicing and try their best to grow their money.
My reader… is pondering about what is next in his life after a long career where he is. I think I understand that feeling since both of them are quite close in age to me. The part that I may relate less in is the stress of making the wrong decision.
Both of them earn good incomes which allows them to accumulate what they have, to provide for the people they care about, but it can be seen as a handcuff as well.
If one pivot or both pivots, they are moving from a more predictable environment to a less predictable one.
Did you really accumulate enough for what you need in the future? What if I have a blind spot in my analysis that I failed to see?
The weight of the decision may be one of a reason people often seek a second opinion about their life & financial setup.
My reader and his wife may not be sure what they will be doing in the future. They said enough but in my mind, I also don’t know what they have in mind. This makes planning tougher. But there are things we know enough of to help in planning:
- Their current spending lifestyle
- Their savings rate (40-50% of their earned income)
- Their future housing preferences (they desired to stay in Queenstown to be close to their parents)
- Their kids’ education preferences.
- We know they need to prepare for a phase where they completely stop work.
- How flexible and inflexible they are with some spending.
- How flexible they are with their “stop work” and coasting milestones
What They Have Currently
Nowadays, I am slightly curious about what people will send me or what people reveal about their financial situation.
True enough, my reader sends me a breakdown of what they have.
There is always an article or a question out there asking how much you need to retire, and the number will come up to the millions currently. Well, my reader has $3.6 million and he thinks he probably cannot retire.
So what hope do the rest of you with less and cannot accumulate $3.6 million in your lifetime have?
I had to request about how much they are expecting in income, or specifically their current and desired lifestyle spending. If their spending is $2000 monthly, there is no reason they could stop working immediately. If their spending is $15,000 monthly, $3.6 million is still not there yet!
Before we go into their expenses, I think their experience with a breadth of financial markets will help them build up their experience about how investment works, what work better, what may not work better.
I always have a worry of someone having $5 million in cash, needing to retire immediately, having zero experience of how the market works. In those situation, you really need someone trusted, sophisticated to guide you (a trusted financial adviser basically).
Their Currently Spending Lifestyle and Future “Stop-Work” Traditional Retirement Spending Lifestyle
Your lifestyle today, and your desired lifestyle in the future, greatly drive how much you need during financial independence.
I requested the couple to give me an idea about their current expenses, with some idea about the degree of flexibility and they gave me the following:
I requested a set of spending of their current lifestyle and another based on the line items that they will consume when the couple is closer to 60-65.
The spending that makes up their current lifestyle allows us to gauge the capital required to F.I now that the 60-65 spending allows me to see if they have the capital to do a traditional F.I.
It also allows me to see away from kids, and work, how much do they need.
The line items of the couple tell us they don’t spend too much. You may disagree when their expenses is $8,000 a month but aside from the lottery, you cannot question them for not being prudent for a family of 5. I do content some numbers like help and groceries + meals look a tad low.
The expenses do not include the mortgage they are currently paying for both houses, which is right. If they retire, either the mortgage has to be paid off or the mortgage has to be serviced by rental income.
Flexible vs Inflexible Expenses
I also broke down their spending items into whether the item leans towards more inflexible or flexible.
Let us be realistic.
If they need income to provide for all their expenses and not a single cent less, I will use a very conservative safe withdrawal rate to come up with the capital needed.
Usually, this will come up to a large sum of money.
To buffer for a lot of different market uncertainty is not simple.
If the couple can tell me clearly where they can be more flexible and inflexible, then they may be able to F.I earlier.
Currently, their $8,000 monthly spending is broken up into $5,100 which is inflexible and $2,900 which is more flexible. When the kids have left the nest, their $5,000 monthly spending is made up of $2,700 which is inflexible and $2,300 which is flexible.
The couple is around my age, and their parents are slightly younger than my dad. I think they are of the view that when they stop working traditionally 21-23 years later, one out of two-parent will be 95 and alive.
I do think that even if that is the case, the $800 monthly income for parents may not last throughout their retirement. Logically speaking, their inflexible expenses at 60-65 can be closer to $2,300 monthly instead of $2,700 monthly.
Prospecting a Future Residential Home for Them
Before we move on, this probably two areas of their finances we need to get clearer on: Their future home option and how much their kids need for their future education.
These two items may put a constrain over how much of their resources can be set aside to generate the income they need.
My reader and his spouse see their current two properties more as investments. They are okay to stay in HDB but the preference is to be close to their in-laws.
At some point in their timeline, they would have to sell one or both properties and move into an HDB.
When to do it is a good question.
Moving to an HDB allows them to free up the spread between HDB and Condo prices in the Queenstown area. If the prices of housing fall, their future residential cost fall but so will the returns they make unless there are frictions or inefficiencies in the private and public markets.
Selling the property allows the couple to purchase their future residential without debt which is the ideal retirement recommendation.
The main reason is you are less encumbered with very inflexible and large spending (the mortgage).
I took a look at the current transacted prices for Queenstown.
The younger spouse is 42 years old, meaning the couple will need a home that will last them till at least 95 years old. The home will need at least 53 years of lease left but if they wish to be more conservative, they should look for a home with at least 58 years of lease left.
Here are the recent Queenstown 5-room HDB transactions:
It is pretty futile for me to tell you which is the ideal location for them to move to. I have never stayed in Queenstown and won’t be able to tell which from which, but there is a mixture of flats transacted with 50-year lease left as well as those with 92 years lease left.
The sweet spot will be those HDB flats with 70-80 year leases left.
At 110 sqm or 1184 sqft, it should offer a decent size for five family members to be more comfortable.
I think they are really looking at $1 million dollars at least before cash above valuations, renovation & furnishings.
Here are the recent Queenstown 4-room HDB transactions:
I wonder if five people will have problems with a smaller four-room HDB flat. The bigger four-room HDB are about 93 sqm or exactly 1000 sqft.
Those that are big enough will set the couple back between $900,000 to $1 million before cashing above valuations, renovation & furnishings.
They will have longer lease flats if they choose a 4-room but smaller. The 4-room flat would be ideal for their retirement after their children move out. A 5-room flat is more feasible but also shorter lease but the properties on the market have enough leases left to last the couple till 100 years old.
On Children’s Education
The couple have three boys age 14, 12 and 7. The couple purchased endowment plans that will give them around $40,000 to $60,000 each when they turn 18 years old. They think that this should be enough for their local university education.
If the boys would like to study abroad, then they would need to take a local scholarship or take a bank loan.
From the description, the couple do not have a strong wish for a higher grade in education.
I think they might need more.
The cost of local non-medicine university education today should average $11,800 a year so for a four-year degree that will cost about $47,200. Our internal living cost figures are higher but since they live in a relatively central location (Queenstown), I reckon they may not always need the full hostel experience so I cut the cost by half.
If I understand correctly that the endowments mature with $40,000 to $60,000 future value, then they might not have factored in inflation. The total cost of $70,800 today will come up to $87k, $92k and $103k respectively for the children.
There is about $133,425 of shortfall if the money is not invested.
If they wish to make up for it today, then they need to make sure that the money matures with return captured. The eldest son needs the money pretty soon so the money cannot invest in risky portfolio but the youngest son has a longer time horizon.
While I use a 5% planning return, which is a good planning return for a 60/40 balanced portfolio, the money for the eldest son may need to be more conservative.
But roughly, they might need to set aside $85,000 more today to make up for the university education shortfall.
Or they could take loans when the time comes if required.
Parents can try their best to provide the best education experience but if money is tight, they either take from their retirement fund, accept a lower-grade experience and make do with a lower budget, work part-time or take loans.
But let us err on the safe side and take it they will find $85,000 more today to try and make sure there is no shortfall.
They Are in Coast Financial Independence Mode. Here is what it looks like.
In Coast FI, we need to know:
- Your current lifestyle spending.
- Your lifestyle spending when both of you completely stop work in the future at a later date.
- When you wish to completely stop work.
- How much financial resources you have.
- How much of your financial resources can be use to generate income and how much that cannot.
We need to figure out a plausible date for the couple to completely stop work.
I think one plausible date is for the couple to stop work closer to 62/60 years old completely:
I suspect that the couple don’t have to save additional money, except to service the two mortgages in the meantime.
There are a few positives to a plan with a stop-work milestone like this:
- If they believe enough in the appreciation of both properties, this plan gives them ample time to capture the return.
- All three kids become productive and likely 2 of the kids may be married. This means they can downgrade to a smaller home.
- They can still live in the current home, which they are rather comfortable with.
- There is also an opportunity to move away from the Queenstown area to a smaller three-room or four-room HDB
- Their income needs edge closer to CPF LIFE Annuity matching, which may make their resources more manageable.
There are downsides to the plan:
- The mortgage commitment is still extensive, which will affect their lifestyle choice. If they desire a more balanced life, having two mortgages hinders things.
How much resources do the couple need today for this plan to work?
We want to figure out with their $3.6 million today, how much they need in today’s money do they need to Coast FI.
Here are their spending needs today for their retirement spending at 62/60 years old:
- Inflexible income needs: Approximately $2,400 monthly
- More flexible income needs: Approximately $2,300 monthly
Now, in my article on the value of my CPF LIFE Annuity if I were a 65-year old retiring today, I sort of deduce that the present value of my CPF LIFE Annuity should hold purchasing power equivalent to $1,430 to $1,770 a month. Suppose we take the average of $1,600 a month here.
Since both spouses reached CPF FRS in their CPF SA, their CPF SA has the equivalent purchasing power of $3,200 a month. This covers their $2,400 monthly inflexible income needs from 65 onwards.
But since CPF LIFE Standard is not inflation-adjusting, we might need a larger CPF LIFE stream to ensure that by the end of 90-95 years old, the CPF LIFE Standard Income would still be enough to cover their inflexible spending needs.
The couple could top up to the Enhanced Retirement Sum or ERS for short. Today, they will need an equivalent of $198,800 more in cash set aside for that.
The fortunate thing is that they have $160,000 in their CPF OA which is pretty close to that ERS need.
Boosting their CPF LIFE would give them the purchasing power equivalent of $4,800 monthly, which is double their inflexible income needs. During the early years where inflation has not pick up, the excess income can be saved and invested for the future.
Now, because CPF LIFE only starts at 65, there is a five-year period where the couple can’t get access to the income. They would need to set aside a lump sum sinking fund to pay for the inflexible spending during that period.
Here is how it looks like:
How much in lump sum do we need for those five years?
Approximately $153,000 today.
Ok, what about their more flexible expenses of $2,300 monthly?
We can design a portfolio where they spend 5% of the prevailing portfolio value. In today’s value, the couple will need ($2,300 x 12)/5% = $552,000.
Now let us re-arrange what the couple have today to see if they have enough:
I re-arrange what they own and match them to a future goal they wish to achieve. What they have today should serve to achieve something.
There are a few observations:
- All the future goals mentioned in this post can be adequately funded with their current resources.
- They have an excess of $1 million that is not designated to any goal. What this means is also…
- They don’t need property number 2. They may have a view over the appreciation and that is fine, but if they felt that they prefer to live a more unencumbered life, they can always sell it off.
- They don’t have to save additional money.
- If they sell off all their properties, both spouses can choose a less stressful job or one spouse can stay at home.
What are Their Options with the Undesignated $1 million?
The couple is not financially independent but does have ample resources beyond their coasting plan.
That ample resources provide them with a few choices.
All of these choices improve their current lifestyle.
1. Throw a large chunk into their $1.4 million mortgage.
The family may currently enjoy staying at their condo.
Throwing a chunk of this $1 million (less money for emergency) would alleviate their immediate cash flow situation and reduces their dependency on high income.
Since current interest rates are high, throwing this at the mortgage immediately earns a good return and provides greater peace of mind.
2. Commit more capital to their Income fund for Flexible Spending.
Currently, the income plan for more flexible spending can be quite volatile. To make the income less volatile, the couple can choose to commit $250,000 to $500,000 more.
Doing this will buffer for more challenging market conditions and allow the spending to be more stable.
This is something that you only get to enjoy next time but not today.
3. Prepay some of your current expenses to become less encumbered.
The couple can also throw part of this $1 million to “prepay” some of the spending.
If they sell off both properties and remove their mortgage, being less encumbered may give them more peace of mind and less stress.
About $3,800 monthly expenses may only last for 18 years or less. We can make use of the 1 million to greatly alleviate the stress there.
Take children’s enrichment:
Setting aside $150,000 should be enough to provide for the cost of children’s enrichment.
If we do not factor in inflation, here is the total capital needed for the other goals:
- Groceries + Meals: $64,800
- Helper: $151,200
- Parents: $345,600
These will come up to $711,600 in today’s money. If we factor in inflation, that will be $880,530.
What this does is that it:
- Eliminates both mortgages (if they sell off both properties today)
- Reduces their current expenses from $8,000 monthly to $4,200 monthly.
- Don’t have to save for future big-ticket items.
- Allows both spouses to explore other kinds of employment because they are much less encumbered
They will still need to think about a long-term Asset Allocation
What I have done up to now is calculate what they can buy, with what they have.
And what they have may be able to give them quite a desirable current and future lifestyle.
There is still a long-term allocation to consider.
If they decide to sell both properties today, they would have $550,000 more to invest, and they have to invest. Currently, both are invested in a portfolio of US growth & tech, Singapore REITs & blue chips. They have to think about whether they should increase their allocation with the extra money.
I have not given much thought about this, and most likely, I won’t say much publically mainly because the asset allocation drives returns but it is a more complex domain to talk about.
A mixture of financial prudence, a good career and financial execution have set the couple up for a desirable lifestyle.
They may not be able to totally stop working today, but they can live a life with more optionality.
I explain privately to them that whether to sell off their properties today, compared to later on is not an easy decision. The recent change in the fifteen-month waiting period to get HDB further complicates things which means there is a need for further planning.
While having assets may give you the possibility of being financially independent, your lifestyle today, your desired lifestyle in the future and how introspective, and flexible you can be with your spending determine a lot.
Having enough in CPF helps as well!
I think my reader will do okay because through their finances I can see that they are willing to provide me with clear financial details, and in our short conversations, I detect enough prudence and flexibility.
What kills a lot of financial plans are people insistent on a highly inflexible lifestyle.
If your lifestyle is so inflexible, I am going to tell you a very conservative figure, with enough buffers.
It will mean that you are not going to like what I say: You are not going to have your desired lifestyle.
That is the reality.
You go to any financial adviser, and you might eventually find you one that promise you great income to pay for your expenses, but what governs the income stream they promise is no different from the models that I use to determine what my reader here needs.
Market returns, inflation and interest rates are uncertain.
An inflexible lifestyle means that if the environment is so challenging, the portfolio that promised great income, may not do very well as well, which means that you cannot have the income for that inflexible lifestyle.
That good planning, introspection and flexibility would likely allow my reader to find his second career as well.
(Let me know if you have interesting case studies like this, and are comfortable to share publically.)
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