I like to go office on our Work-from-home days.
During a work week, three days at the office are mandatory, and on the other two days, you can work from anywhere, including the office.
During those two days when work is optional, fewer people are around. There is less distraction to finish what you are supposed to do, but also during lunch, there are fewer people.
And you can have more deep conversations with whoever is around because there are fewer interruptions.
You can hear what the associate advisers are struggling with and some of the client advisers’ struggles with the current work process.
I can hear what they say and allow the problem to “stew” in my brain for a while… before more and more people “complain” about it.
There is a fxxk thing I can never get used to, be it in the current workplace or previous work domain.
They give you a problem for the work year and expect a comprehensive solution by XX/YY/ZZ.
It seldom works that way. I encountered enough less well-thought-out plans which has to go back to the drawing board, where we spend don’t know how long going round in circles struggling to figure things out. These things can be cut short if we invest in more meaningful conversations over a couple of years.
Back to lunch topics.
I had early lunch with one of my colleagues.
He brings up the topic that one of the challenges many of us will face is to think on our feet, and have good answers when we talk to someone about whether they can have the life they want.
A prospect likely wants some sensing whether they can get a decent outcome but in a short conversation how do you gauge whether you can add value to give them a decent outcome?
You will need to take in the numbers, but what is important may be to ask the right questions.
What are the right questions to tease out vital information for you to make a better financial judgement?
There are certain questions that you can ask that allow you to have a good preliminary idea roughly what will be a more suitable solution.
Each type of financial goal will have a certain set of vital questions.
The questions are not meant to be comprehensive but to allow you to go down a mental decision tree. Just a couple or maybe three questions should help you go down certain mental pathways.
You will have one set if we are discussing education for your children.
You will have one set for retirement income.
You will have one set for that legacy conversation.
I will not go into it in this article for fear I get hauled into my boss’s office.
Personally, I think we can only come up with two to three vital questions if we understand a subject really, really well.
Understanding and Memorizing Some Financial Planning Rules of Thumb Can be Very Helpful
To think on your feet, understanding and memorizing some financial rules of thumb can be very helpful for the client advisers.
There is a distinct difference between how Kyith plans and how a typical Providend client adviser plans. Kyith doesn’t do reports or exact numbers.
He just tells you if you can have a good outcome, how conservative or wildly optimistic is the plan you have in mind and why.
Most likely, after that conversation, you will forget 50-80% of what Kyith says.
But a client of Providend will have a tangible report.
If you pay money… you want some output.
This is why Kyith’s model will seldom fly because you will not get a report from him. You can ask my friend Vera. She showed me this nice one-page report another adviser gave her explaining how much and how long she can be FI. All I can do is to construct a more detailed calculator for her on the fly in two hours.
I do think some of the rules of thumb can be helpful for the client advisers or the associates to think-on-their-feet.
They are simple, and easy to calculate but to be useful for the adviser and the client/prospect, you need to understand enough the body of work behind it.
Price Earnings Ratio
A good example is the price-earnings ratio in stock prospecting.
It is easy to calculate (take the price of a security divided by the current/forward earnings).
But you need the experience to tell the story based just upon a ratio. In my hey days, I would remember that consumer staples usually trade at a higher PE, cyclical business trade at a lower PE.
We cannot compare two companies in different sectors together with PE.
Is there a certain PE that always represents extremely attractive value? No!
That is important enough that the novice may not get.
PE has got almost nothing to do with financial planning. I bring it up to drive home the point that these rules of thumb can be simple, but the people using it cannot be too simple-minded.
The more simple things are, the more sophisticated the brain behind needs to be.
Let’s run through some of these financial rules-of-thumb that you might want to have around when you chit-chat with some of your friends.
1. The Doubling of FI Income Requirements and Children’s Education Needs
We need to grow our money because inflation will increase the nominal value we need for many of our financial goals.
Usually in financial planning, we can assume a 2% or 3% a year inflation growth.
A rule of thumb to remember is:
- $1 becomes $2 in 25 years.
- $1 becomes $1.8 in 20 years.
- $1 becomes $1.35 in 10 years.
Usually, we only remember the first one but if you can remember these three numbers $1.35, $1.80 and $2.00 it is quite helpful already.
If someone needs $7,000 a month at the start of her FI, 25 years later, that $7,000 will grow to $14,000.
Your newly born boy would most likely need the money in 20, 21 years so if university cost $40,000 for four years today, it will cost $72,000 when he needs it.
We can use this $1 => $1.8 for girls as well.
You don’t have to be exact because… are you sure:
- inflation will grow at 3%?
- is the tuition fee likely to change?
There is enough unknowns such that you will need to adjust along the way so this $72,000 is a ballpark figure out the “true north” where you are supposed to go, but that may not be your exact destination.
2. How Much of Their Expenses Can Fit into $1,600 a Month If They Achieve CPF Full Retirement Sum?
My recent article explains that if you managed to hit the CPF Full Retirement Sum (FRS) today, you may have secured between $1,430 to $1,770 a month in CPF LIFE Standard retirement income in today’s dollars. So on average, that is about $1,600 a month.
- You have successfully reached CPF FRS in your CPF SA.
- CPF SA grows at 4% a year or more and CPF FRS limit grows at 2-3% a year.
- Your CPF SA will always be more than CPF FRS from now on.
- Assume the Singapore government can keep future inflation intact.
- The 65-year-old today enjoys about $1,600 a month in income. Assume #1-#4 is confirmed, you will now successfully secure a real spending equivalent of $1,600 a month. (If we are talking about CPF LIFE Standard plan)
How to use this financial rule-of-thumb?
If you hear a 40+- colleague telling you she has successfully reached FRS, her husband and she will likely have a CPF LIFE annuity income stream equivalent of $1,600 x 2 = $3,200 a month today when they turn 65. If both have enough for ERS (Enhanced retirement sum), then it is closer to $4,800 a month.
This annuity income stream is not inflation adjusted, but since we know if you need $1 at 65, that $1 will become $2 when you are at 90, if she wishes to be conservative, an income that adjusts to inflation is closer to $1,600 monthly (FRS) or $2,400 monthly (ERS).
Arm with this information, you can ask how much of their expenses can they squeeze into $3,200, $4,800, $1,600 or $2,400 monthly.
We know that the most important expense line items for Kyith adds up to be lower than $800 monthly. This means Kyith has successfully secured an income stream that pays for his most important expenses because his CPF SA have reached FRS.
If someone manage to reached ERS amount today, it is likely the couple has the spending ability (non-inflation adjusting) of $4,800 monthly which is nothing to sneeze at.
You may be able to make someone’s life brighter by telling them their future retirement spending has been secured.
3. What is the Estimated Income Potential of their Liquid Net Wealth?
We talked a little about tracking the income potential of our liquid or total net wealth in this article.
The Safe Withdrawal Rate can be a good rule-of-thumb to help you determine the income potential of your friends or a prospect.
They don’t have their wealth efficiently deployed now, but in the hands of someone more skilled, the money can be efficiently deployed to provide income, for a particular duration.
Here is a safe withdrawal rate table to use:
You can read more about safe withdrawal rate methodology here.
By finding out the prospects:
- Income requirement (whether annual or monthly)
- Net wealth or liquid net wealth
You can roughly know if your friend is closer to being financially secure or not.
Many do not know whether what they have is considered “enough”.
Saving up for retirement today or even a few years after, is considered one of the most capital-intensive financial goals we are striving to save and if someone has enough for that, chances are they may be closer to a less stressful working lifestyle.
Some need just $36,000 a year and they have miscellaneous stuff that adds up to $2 million. They may not know they are potentially financially independent without realizing it.
Many don’t get that feeling because out of that $2 million, their dividend stocks is only say $366,000 and it derives a smaller dividend income.
But if we reallocate the net wealth, their situation can be better.
Then there are some who feels that they should be able to retire with $4 million saved up, but if you find out their income requirement to be closer to $20,000 monthly (and they cannot be flexible about their spending), then they may be surprised when you tell them they might still be far from being financially independent.
Advisers can also use these rules of thumb to assess if the prospect’s goals may be very challenging but you can still add value, too far off and need a longer runway, or have too much wealth.
Adding Rules #1 to #3 Together
If you know whether:
- They are married
- They reached CPF FRS today
- Their income requirements
- Their age
- Their financial resources aside from CPF
- Outstanding residential mortgage
You can tell a lot.
If your friend says they currently spend $7,000 monthly, reached FRS, and have paid off their mortgage for their residential property, they may need financial resources of $2.1 million and above to be F.I. if their spending lifestyle in retirement follows the current.
If they said this and already have $3 million, there is a chance they are more financially secure than they realize.
If we don’t inflation adjust their CPF LIFE income, then actually the FRS can greatly reduce their income requirements. First, deduct $3,200 from $7,000, they need $3,800 monthly income from their non-government pension financial resources.
You can then apply a certain safe withdrawal rate to determine roughly how much net wealth they should have to be ready to retire immediately. If you have a good dividend rule of thumb that takes in a broad returns and inflation spectrum, you can apply that instead as well.
This may not be perfect and some prospects may have some extremely capital-intensive goals, such as buying a landed, aside from retirement income, but it should help you determine if the person is overstretching it.
Rules of thumb are simple, but a more sophisticated mind can tell enough about your financial & life position.
The actual execution may need more formal planning.
If you apply these rules of thumb well, you might be able to know if someone is either:
- Very far from F.I.
- 50/50 (depending on the number of financial goals you have)
- Too much money.
And you can pivot the conversation accordingly.
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