In last week’s post, we explore the math and the possibilities in using a privileged higher than above starting income, together with you and your spouse’s most productive earning years to put more into building wealth first, so that you have the option to put less into it to focus on other areas in life. (you can read it here)
One of my readers was gracious enough to share his experience.
I am sure all of us are juggling between ensuring we save enough, have enough to spend, bring up our kids and living a good life. So does my reader.
This is not an account of some above average income guy or gal with not much dependents who can sock away a huge amount of their income to reach financial independence.
This is an example of a family struggling to make tough choices, trying to fulfil many life goals in Singapore like many in their position. I am sure we want to reach a state of financial independence but also raise 2 children and have one spouse stay at home.
How does one family attempts to plan for it?
Where they are now and where they would like to get to
My reader and his wife is 36 years old, which is not far from my age. He currently works as an business analyst in the finance sector. They have 2 kids who are 6 and 4 years old respectively. So this would mean the wife gave birth to the first child at 30 years old and 32 years old.
They separate their wealth building just like a lot of couples do, she doing her own saving and he does his own investing.
He starting being serious about financial planning at the age of 30 years old when his first child was about to be born.
His current portfolio is $200,000 and his wife’s $220,000. His wealth building style is more income yield focused, with a target of 5% return per annum.
The target for both portfolio at age 40 is to hit $300,000 in value each.
This does not sound very unachievable until you realize that their plan is for the wife to quit working next year.
So this would mean that the portfolios will have to grow by 5% dividend contributions alone.
The eventual goal is to reach $1,000,000 EACH at age 65 years old, which is 29 years away.
How much they put into wealth building
Rather than the example that I provided of above average middle income earners, my reader and the wife started off with the income of typical university graduates. However, they climbed well along the way to achieve above middle income wages.
It is useless if you earn more but cannot put them away as wealth.
His savings rate is around 30% of earned income and for her 20%.
Planning considerations for wife to stop working
My reader and his wife’s decision to allow one spouse to stop working do not come lightly.
They felt that a stay at home spouse can provide better care, education and attention to the children. They hope that this will push a better education for their kids, in the hope that they are good at their studies and have a better local university education.
In his mail he have articulate the following considerations, together with the wife’s plan to stop working:
- His own salary have to cover all their expenses except traveling
- Building a bigger emergency fund
- Increase death insurance for himself, and critical illness for the spouse
- Ensure hospitalization insurance for all
- Taking care of education savings
Their planning struggles and coming to terms with life choices
They didn’t get to this point without conflicts.
I felt he is lucky in that his wife’s views on money, in a large part, is in alignment with his. So she is able to save on her own. Why this is big is that, research seem to have shown that, for some reason, couples with differing money values attract to each other.
His initial plan was to lean towards a age 50 semi-retirement. Then he would take a lower income.
That plan was conflicted when his wife brought up the idea of staying at home 2 years ago.
He was quite against this idea because that would mean all the burden will fall on his shoulders.
A bigger worry would be that they might not be able to retire comfortably.
At this stage, he felt that the wife did not consider fully the ramifications of one spouse staying at home.
Her wife would also have to overcome her insecurities of changing from an above average income earner to one taking an allowance.
Submitting the ‘Proposal’ to the Wife
At this point, I was rather impressed by my readers planning. That wasn’t in question. However, turning his planning into a form of persuasion to make tweaks to their spending and lifestyle leaves me dumbfounded.
Even before at the early stage of planning, he has already plan for his family and parents in the event of his demised. The death cover and his investments should be able to last his family of 3 until they graduate from university.
For the parents, it will be an allowance to them for the rest of their income with other siblings contribution in mind.
Amongst his proposal to the wife:
- Increased her death coverage and provided early critical illness of 200k for her
- Calculate all spendings that he will take over and project new expenses in the next 10 years after she stop working
- Run projections of how much longer they both need to work if one partner stop working to reach their eventual retirement target
- Increase their emergency fund (6 months) based on a sole provider expenses (from $20,000 to $32,000)
- Try to reduce ways of doing household chores for her like buying a dryer. This is so that she is not treated as a stay at home maid.
- Allocating more money to investing
- Thinking of ways to make use of emergency and opportunity funds to grow more funds, such as the opening of a 360 account
- For all necessities, make sure that they are getting the best rebates for their credit card
- Make sure that his income can cover the housing loan on his own. They have around 6.5 years left because they paid off using a fair bit of their CPF Ordinary Account
- Cutting discretionary spending such as restaurants, yet still have joyful experience with children art and craft and DIY stuff
- Trying to find a better job, even if it means working his ass off
- Constantly trying to improve his investment skills
After all this, I present them to my wife. I figured we need to have the same mind-set and set the objectives for this plan. We are doing this so that she can raise the kids, educate them and ensure their study foundation years are strong. I also got to tell her the sacrifices that we will make. While running through all the projections, she can feedback if anything is missed out.
We will work for another 15 years longer and cannot take a breather to change to a less demanding job. She can only take a break of 10 years after which she has to re-join the workforce. She has to plan for the kind of work she can take on after that. We can’t travel as frequently as we do now. We have 1 short and 1 long vacation every year, this has to go. We should be grateful if I can cough up a long vacation every other year.
My reader mentions that when they are able to see that taking these possible steps can match up to their immediate values better, she is more participative in the financial planning.
My advice to them
After the planning work that my reader has done, there really isn’t much I can value add. For sure there is a question of whether $1 million each is enough, whether 5% per annum is a conservative estimate, those are up in the air.
As long as he chose to continue to home his competency in his wealth building method, making good decisions, financial independence knowledge, insurance protection, sustainable living, I am sure he would find his own answers.
If it is easier to ease in, perhaps taking one year simulating living on one person’s income, while the wife is still working would be good. This will be like an adjustment year to see if financially it does work out like the actual plan.
The benefits is that money wise, you get 2 times the boost. The wife is not living off the husband’s income for one year, while she is contributing for one more year.
This amount will add on to the emergency fund or wealth building fund to enhance their goals and safety.
Good Lessons to be Learnt
I wish I get more accounts like this but in reality these are the rare few examples showing really competent DIY Life Planning.
I felt that if I were to deconstruct, these are the key take away:
- It helps to be equipped with knowledge, reflect upon them and be innovative in planning various scenarios. When plans do not work or change, adjust accordingly
- Don’t have too much excuses. If you don’t think and reflect and write them out, the dream will remain a dream.
- If you love your spouse, perhaps the geeky love is to show them that you have plan for them even when you are no longer around
- The most important aspect of my reader here is his ability to build a system of continual learning, reflecting and creating sound systems
- Communication between spouses is important, and sometimes what works in the office can be a good tool to be use at home for communication as well
- While DIY Wealth Building, Management and Insurance Protection is challenging, my reader’s example shows that they can pick up the skills to execute competently in a relatively sound manner
- In wealth building, conservatively work out the average rate of return achievable, how much you can put into your wealth machine and set various milestones at various age. The more small wins you achieve at various milestones makes you stick to the system, and enhance your confidence in your wealth building strategy
- Couples usually get doubly more serious about financial planning when they have a child
- Its rare to find folks that pool their money together and allocate accordingly. Most chose to separate your money and her money
I have to thank my reader for allowing me to share, so that every one can learn from his family’s experience. Let me know what you think.
If you have unique financial independence or lifestyle planning questions that you would love to hear what I think, you can write to me at [email protected].
Here are some of the through-provoking, financial planning questions or case studies readers have asked me and I have done a deeper dive on. They may trigger some reflections about your own financial situations and help you live a better life:
- The best strategy to save up $80,000 in 4 years to pay for the downpayment on a home
- A mid-35-year-old couple planning to have $2 million for retirement and getting one of them to stay-at-home
- Having a $550,000 portfolio, reaching Coast FI and thinking about making a risky career switch
- 3 years later, we relook the case of that $550,000 Coast FI situation
- Early retire with a $2.5 million dividend-focused portfolio due to health and stress at work
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