Few things ran through my head currently but I will keep this post on some of the struggles and what I think about these struggles.

In the short span of three months, I have had friends dealing with grief and great struggles.

B wrote about the sudden turned of events when his dad suddenly came down with ischemic stroke while his dad is overseas. Due to that, he would have to shift his plans for financial independence. You can read about it here and here.

My friend Chris also shared a little more about his dad who has to be in and out of hospital recently. We discussed more about his dad situation, twice. Ironically these discussion was during two different funerals for a friend of ours. He had to organize 2 funerals in a short span of time.

I thank both Chris and B for their sharing and we wish both dad a speedy recovery. Their courageous sharing to me is frank. If you have read about their investing, and life experiences, you would be thinking we all got all these money & life stuff figured out.

These experiences just shows that everyone of us is trying our best to figure out the best path going forward.

In the financial independence community, we face a lot of naysayers. We were told a lot of times we didn’t factor in this, we didn’t factor in that.

In short, we either didn’t considered something that may happen or that we consistently underestimate certain things we already know.

This looks like a victory for them in a way.

I tend to think not. And I can provide some perspectives.

If you choose not to pursue Financial Independence, it does not mean you can handle Sudden Uncertainties better

Firstly, it is not that the pursuit of financial independence, will increase the chances of these events from happening. These events are likely to occur to most of us regardless whether we pursue this odd and niche lifestyle goal.

Someone could be still slogging in the corporate world, have a wife and two kids, with aging parents. While on holiday with the extended family, a similar situation befall them.

Secondly, what gets to critics is that there are so many known unknowns that could occur in you. If you do not plan for it, and you retire fully, then it is not going to work out for you.

It is the fully stopping work, and not earning anything but still got passive income coming in that gets people really riled up. In a way, we are going to live the life they wish they could live. A life that they think, they cannot have.

So the best way to solve this is by throwing known unknowns at us.

Financial Independence is a journey. Here is the typical process:

1. Try to earn more
2. Know what makes you happy in life. Spend enough to get you that
3. For the rest, mercilessly cut down on the expenses that means less to you
4. With the usually high savings rate, build wealth well with them
5. Check in once in a while to see if you are there

This looks like a more intentional, escalated and advance version of personal finance.

And I do struggle to say whether it is wrong to pursue this.

What is the alternative?

1. Try to earn more
2. Spend on things that make you happy
3. Spend on things that don’t make you happy
4. Spend on other people that, deep down inside, is not really close to you
5. Have a normal savings rate of 10% or less
6. Don’t build wealth wisely. Don’t know any other alternative method to build wealth. So you put down a down payment on a 99 year old leasehold condo and continue to service the mortgage

A catastrophic situation occurs that would require you to come up with $20,000 to $120,000.

What do you do?

1. Can you liquidate enough assets to have that amount of money that you need immediately?
2. Some medical condition requires a recurring monthly treatment cost
3. Could you be so flexible to shift your expenses to accommodate these recurring treatment costs? Bear in mind that at this point, you are of the frame of mind that all your expenses are necessary

There are certain things about the pursuit of financial independence that gets lost in the noise:

1. These folks who are on the path tend to be good performers or aspiring to be one. If you want to earn more, you are likely to want to learn from others, try to get better. You tend to be more employable
2. When you try to get better, you tend to be someone that people like to have around. Your professional network tend to be better as well. If you have started some side businesses, it is seldom likely that you have a good business but a poor network
3. If you are #1 and #2, there is little chance that at 40-50 years old, you are happy with an existence that you do not work at all. Most likely you will do some kind of work, be it volunteer or not. Often you will earn some form of compensation
4. Those who pursue, tends to develop competency in various sub life disciplines. Some even developed mastery in some of these sub life disciplines
5. As they are often trying to find the best framework to do things, trying to balance pros and cons, they also tend to be more open about possibilities
6. They tend to know the levers that they can pull when it comes to their life. They lived a more nimble life.
7. Financial Independent does not mean you quit

In a way, those who decide to be on this path, tends to be those who are trying to scale the social ladder.

Whether they managed to reach financial independence, that matters less.

The essential tools to reach financial independence includes a lot of things that would put you in a better position then if you are not on the path.

There are lots to think about…. When it comes to Uncertainties

How do we address these uncertainties that the detractors talked about in financial independence?

In financial planning, this can be solved by baking in more cash flow requirement. On a present value basis, baked in 30-40% more to what you think you need.

This is a rule of thumb.

If not, you can plan for the worse case scenario that needs the most money.

One good example can be when one of the parents got dementia, need to stay in a home. The monthly cost is $4,000 a month. On an annual basis that will be $48,000 a year. Let us estimate that the parent need to be there for 15 years.

On a discount rate/inflation rate of 4%, the present value is $533,682. Realistically, if you can be closer to financial independence 10 years from now, what you need may be, $789,980.

For every uncertainty you can come up with, we can compute a cost for it.

Then you can save towards it, with your standard savings rate.

If you feel your current retirement is hard to save towards, note that you have to factor in these uncertainties as well, so that is either $500,000 to $800,000 on top of your retirement sum.

The naysayer wishes for the perfect plan. In the absence of that, they conclude retirement is impossible.

If you are trap in a well paying job with an overbearing boss, and you have not accumulate enough for retirement or financial independence, should you stay in the job?

The naysayer would stay in the job and be unhappy. The naysayer would probably move to another place. As luck would have it, the naysayer would feel the world is against him or her.

Those who are on this path would:

1. Re-look the numbers
2. How realistic is his or her plan to fully be financially independent
3. If it is not, what are the risks he or she is exposed to, if he or she takes the leap
4. What are the alternative lifestyle schemes to consider?

B and Chris took the plunge I think, because the job just suck too much out of them.

Too much bullshit. Too much time away from self and the family.

If we want a full proof plan before pulling the plug, then this is what they call FAT FIRE. It means you decide to retire but with a cash flow that can sustain your current lifestyle that is not bare-bones.

FAT FIRE is very comfortable. With a lot of buffers.

You can aim for that. Hope you have a nice salary because most often you would need it.

We should have done better to think about some of these uncertainties.

To make such a niche and incredulous concept looked realistic to the masses, the message must be easier to digest. When the message is more simple, a lot of deeper stuff is not discussed. These became some of the uncertainty.

Whether you can take the plunge or not depends on how risk seeking or risk adverse the person is. To address the anxiety of the risk adverse, we got to discuss this better.

There will always be Chink in One’s Armor

What I do observe is that no one has everything plan out so well.

We have folks we chat with in Telegram chats that seem to have every shit nailed down so well. And then he or she goes on to share some befuddling financial boo boo.

In the span of 3 months we are presented with a few different healthcare situations.

The insurance advisers will be using these case studies to prey on the availability bias and tell you to get this insurance, that insurance.

One common similarity with these 3 of my friends as well as myself is that the chink in the armor is the parents.

In all three cases, you realize, the kids cannot run away from this. This eventually becomes wholly your problem, or partly your problem.

Protecting parents can be hard. For some, they have enough pre-existing conditions that the insurance cost is high, or it renders them not insurable.

The cases I been through with, I have not heard many that gets a big critical illness payout. With a critical illness payout, it goes some way into help alleviate some new cancer treatments.

These new cancer treatments, most often, are not subsidized and are not cheap. To pay a 6 month out of pocket cost might set you back $100,000 to $200,000.

My stance for this has not changed:

1. Insurance covers those low probability but high cost impact situations. Do your best to get them cover within your own abilities
2. Keep your insurance cost in control
3. You do not wish to fall into these medical shit, so a lot of it comes from trying your best to live a life that reduces your changes of getting them. You cannot avoid them but you could try not to escalate it
4. Keep nimble and flexible. A rich and fixed life would give you a bigger issue when these stuff hits

Chris probably balance things up with his reflection of the medical care his dad is getting.

Conclusion

I guess the overall idea is that, you can failed in your pursuit of financial independence.

However, if you have truly learned enough on this path, it puts you in a better position.

Some of my readers did not reach there. They got some stuff thrown at them along the way. I do find that they are less lost. They would ask questions like they thought about doing this and that. They lean towards a certain path but just wanna hear what I think.

I believe that pursuit have made them fit mentally. They are also nimble because they have paid down, or could pay down their debt. Being unencumbered is a great position to be in.

However, we should absolutely discuss the things that could go wrong and considered them.

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

I have been single for a large part of my life. And if you are doing some planning for your finances going forward, some aspects that you will think about as a single will be whether there are things that I didn’t realize I need, just because I am single.

There are some things that I am concerned about, and they do not start with money. The clearest is that in the event of different degrees of disability, how would that affect my life? How much higher cost would I need to support such a change in lifestyle?

Kiplinger came up with an article titled Planning for Retirement as a Single Person that I thought is pretty good. I thought it will be those articles we can gloss over but turns out it covers different aspects.

I listed out some of those points without the flowery words. For the singles like myself, it might be good to take a look and see if you will need to cover some of your bases.

1. Build a team

Singles do not have a parent or adult children to take care of them. 

You need to build your supporting cast of:

1. Family. Find siblings, nieces, nephews or cousins
2. Trusted Friends. Long time friends that you have good relationships with
3. Paid Professionals
   1. Certified Financial Planner
   2. Estate planning attorney
   3. Accountant
   4. Geriatric care manager

They are there to:

1. Help with the finances
2. Make medical decisions if you are incapacitated 
3. Prevent isolation at old age
4. Need people to stop by, run errands and drive you to appointments

How to get started:

1. Take time to talk to them
2. Find out what they are willing to do
3. Outline your relevant plans and wishes
4. Revisit the plans often

2. Create an Income Safety Net

1. Have enough income for major illness or other calamity
2. Instead of the usual 3 to 6 months emergency fund, have 9 to 12 months of emergency funds
3. When planning for retirement, use the cash buffer strategy to mitigate sequence of return risk. Have roughly 2 years of expenses for that
4. If you are working, disability insurance is more important than if you are a couple

3. Funding your Retirement

How much you need for your retirement, sometimes is a security issue. Some folks are more risk adverse, some are more risk seeking. 38% of singles reported feeling “not at all secure”. This compares to 23% of married men and women in a 2016 Northwestern Mutual survey.

1. Save 15% of your take home pay for retirement
2. For those whose company give you an employee match, contribute enough to get that employee match
3. Even if you started late at 55 years old, putting more into building wealth will make your retirement a higher reality than not doing anything at all. 

No other advise here

4. Dealing with Government Pension Plan

The advise here is pertaining more to USA Social Security but I think there are some useful considerations for our own government pension plan, the CPF as well.

Singles have less complications compared to married folks. For context, married folks need to consider:

1. Married seniors are encouraged to postpone claiming benefits. This will leave a larger survivor benefits to a lower earning spouse
2. This is not a concern for never-married single retirees
3. Delay claiming bad if you have health concerns and family history that you do not live past mid 80s. If your family have history of great longevity, then delaying might be worth it

5. Long term care

Nearly 70% of seniors will eventually need some form of long-term care.

Estimate 20% of seniors need this amount for more than 5 years.

Women typically need it for longer periods than men.

Long term care insurance covers the health care costs that are not covered by your standard health insurance.

They are not cheap. Premiums increase as you age

An example given in the article:

• Healthy 55 year old woman
• Premium $5,100/yr for a Genworth policy
• Benefit: $250/day for 5 years ($7,500/mth, $90,000/yr, $450,000/5yr)

In contrast, the revamped CareShield Life:

• Healthy 55 year old woman
• Premium $759/yr (but will increase over time) (without subsidies)
• Benefit: in 2020 $600/mth and increase over time and as long as you remain disabled ($7,200/yr, $36,000/5yr, $180,000/25yr)

6. Estate Planning

1. Most childless singles find friends and family to carry out their wishes
2. Find backup (called a successor) in case first person chosen is not available
3. USA lawyers charge $1,500 to $2,500 to do up the trust documents
4. Durable power of attorney. Give someone the authority to manage your wealth if you are unable to do so. Or you simply need help
   1. Springing power of attorney: does not take into effect unless you are declared incompetent
   2. Limited power of attorney: the person can only make certain decisions on your behalf, such as pay monthly bills
5. Living will or health care proxy (LPA).How you want to be treated in certain medical situations
   1. Find someone to make medical decisions for you
6. Information release.Give the doctors permission to share information with selected people you choose.
7. Will. If you passed away without a will, your assets might be distributed to relatives you do not know. Having a will allows you to have some control over how your wealth is divided. (you can read about MoneyOwl’s free digital will writing service here)

7. Housing Options

1. You might need to make structural changes to your current home to make the home safer and more accessible
2. Home sharing. Think of my favorite sitcom growing up in The Golden Girls
3. Continuing care retirement communities. Range from independent living to skilled nursing. Cost range from $100,000 to more than $1 million. Average fee about $320,000 and you have to pay a monthly fee of $3,300!
4. Naturally occurring retirement communities. A cluster of homes which cater to older folks. The people living in their home but subscribe to an annual membership fee for access to transportation, social activities and health care management servicess
5. Co-housing. Pay monthly membership dues to be part of community. Common area for meals, socializing and events 

I write other stuff on Financial Independence and Planning for Retirement below in Planning for your 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.

Here are My Topical Resources on:

1. Building Your Wealth Foundation – You know this baseline, your long term wealth should be pretty well managed
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

There are two ways of measuring wealth.

I didn’t realize this explicitly. I did note this implicitly. 

The American Method of Measuring Wealth

The first way is the American method. In United States, when they refer to wealth, you tend to hear someone say, “He has a net worth of $1,500,000.” 

What she means is that if this person in question sold her assets, settled all her debts and deposited the remainder of her money into a checking account in a particular bank.

This method of measuring wealth grew in popularity during the rise of Rockefeller and Carnegie. 

We can call this net worth or net wealth (because people find the link of wealth to worth to be uncomfortable)

And you can compute this using the personal net worth here.

The British Method of Measuring Wealth

The second way is the concept very prevalent in Great Britain a century ago. In London, the financial capital of the world back then, you tend to hear someone say, “He has a private income of $100,000 per annul.”

This is referring to the household income generated by her portfolio of investments.

This income represents the money the owner could spend without touching her principal. According to the experts, this is not similar to the sustainable maximum withdrawal rate, which is the constant inflation adjusting method of withdrawing money. 

Household Income Accentuates the Functional Utility of the Wealth Compared to the American Method of Determining Wealth

One draw back of the American method of measuring wealth is that some of the assets can be rather unproductive. 

Here are some examples:

1. Richer people can own a piece of land that is valued at a very high price but cannot be easily sold. They might not be willing to sell it as it is a family heirloom, many family members vested interest determining what they should do with the piece of land
2. A landed property in land scarce Singapore is very valuable so the landed property, if liquidated can fetch a lot of money. However, in terms of how much it could rent for, it might not perform as well, in terms of per square foot net rent, compare to other forms of property. Against other form of investments it might not provide the same level of efficiency as well
3. You could own many different assets such as an expensive motorcycle, and cars. You should be able to liquidate them. However, if you lose your high tier job, a person might be caught in a frame of mind that cannot readily liquidate these assets and turn them into cash flow. They might be unwilling as well

The British method focus on the functional utility of your wealth. It allows you to see how the wealth can change your life.

The first thing is how much of your expenses, that you pay with your work income, can this stream of cash flow replace. This stream of cash flow increases your current overall purchasing power.

It allows you to:

1. wear nicer clothes
2. donate more to charity
3. expand your investment holdings
4. send your grand children to university
5. have better food

The savvy people would know what to do with a lump sum of wealth. Unfortunately, not many are that savvy.  But if you have an inexhaustible stream of cash flow, it is easier to think how you could spend this money to help the people around you and yourself.

Most importantly, it limits you from making poor decisions with your money. 

Based on sunk cost theory, if you wake up, you could always say “I do not care about what I do with the cash flow in the past, let me plan what I would do with the cash flow going forward”. If you have a lump sum and you erroneously spend it in an inappropriate way, it is not going to come back.

Majority of the People are Incapable of Effectively Managing Large Sums of Money

I do wonder the interest for your local lottery if they say that instead of $10 million, they say they will pay you $20,000 a month for the rest of your life. 

That is basically a lottery winning as an annuity that pays you 2.5% a year. 

I think the interest will be there, but there will be less allure, as people are more likely to be taken in by how life changing if they won $10 million dollars. 

The reality is that if you win a lump sum, it usually would not last long. 

Most people did not spend part of their lives learning effective wealth management, how to deploy wealth in a fundamentally sound manner.

Given a large sum without competency it is likely they will:

1. Deploy the money very inefficiently, based on their limited views of money
2. Spend more than they should (judged by their future self)
3. Engage some one they trusted (who usually tends to be less competent than they think)

This is why there are so much research that shows a lot of lottery winners go bankrupt.

Given an annuity of income, they could make a lot of mistakes, but if they wake up, they can re-optimize how they spend the $20,000 a month to improve their lives and move forward.

The British Method is more conducive to becoming Successful and achieved Financial Independence

If you are in the pursuit of financial independence, or financial security, one way to know whether you are ready or not, how much you need to accumulate and your quality of life in financial independence is to know the amount of cash flow per year you could generate. 

Compare that to the annual expense that you have. 

Thus there are some assets that has low growth but possibly can give you 8% a year in cash flow. There are assets that gives a lower 3-4% a year in cash flow, but they tend to be inflation adjusting and are more consistent over time. 

But the overall idea is that in order for you to pursue some schemes of financial independence, you need to know the functional utility of your wealth very well:

1. Asset A generates 8% a year but likely this 8% will fluctuates and over the long run it earns 5% only
2. Asset B generates 3% a year but it is likely conservative and go up over time

A combination of 1 and 2 might allow you to be financial independent for the duration you require. If you are going for a sabbatical, perhaps more of #1 for example and less of #2. 

If you are not looking to use the asset but it is meant for financial security, then you should care less about #1 and #2  but focus on the American way of looking at wealth to grow the absolute size of your wealth. However, always be a student of the kind of asset that allows you to generate cash flow like #1 and #2.

If you are in a high income job, and thinking of retiring tomorrow and you don’t wish to work ever again, you probably need to make up your portfolio of #2. 

You cannot relate if you use the American method of thinking about wealth. You would have to think how much income could I generate with that lump sum. When you venture into that, you are venturing into the British way.

How do we Generate Maximum Private Income that Last for a Long Time?

What will be on our mind is how do we generate that income that last for a long time. The kind of income that I described? 

In a lot of cases,, these income were generated due to guarantees by particular organization:

1. In the case of lottery, it is some agreement to pay you a recurring cash flow as long as they are under contractual obligations to provide
2. In the case of annuities, it is also a contractual obligation to provide the recurring cash flow, according to the permutations that was written into the contract. CPF Life is one example.

How long these perpetual cash flow would last often are determined by the financial standing of the organization. You can have an annuity that has high return, relative to its competitors, but if the insurance company cannot last so long, then what is the use of an attractive high payout if it will be cut one of those days?

In the exact definition, that private income favored by rich people have the following characteristics:

1. provides a recurring cash flow
2. hopefully the cash flow adjust for inflation
3. the capital is protected
4. the whole portfolio of assets are insulated from unsystematic risk (capital impairment from events pertaining to the company, sector events, concentrated geographical events)

I think this is the holy grail and often the solution is a diversified portfolio of different assets that provides returns in different ways.

Usually, the portfolio is made up of particular assets that have capital appreciation and cash flow yield. The range of returns for each will vary from asset to asset. These assets have different volatility and different events affect the volatility of these assets in different way.

When you put assets of long term positive expected total returns with differing volatility together, you have a portfolio that hopefully is smoothed, that is not so volatile. 

In retirement we called this the initial withdrawal rate. And the most common is the 4% initial withdrawal rate. However, the 4% is derived for a 25 to 30 year retirement horizon. 

If you wish for it to last longer, or to perpetuity, your initial withdrawal rate needs to be lower. So researchers are always trying to find the maximum lowest withdrawal rate that we can spend based on the retirement horizon.

If you want the money to last till perpetuity, the safest I will say is to spend an initial 1% of your wealth (which is put in a portfolio of different long term positive expected return assets). For example, if you have $1 mil, you will spend an initial $10,000 a year. For subsequent years, you adjust this $10,000 according to inflation. 

Your money is going to last. But you might question whether is that all that you can spend after spending all my life building it up?

In retirement planning, you have to prioritize:

1. an income that is able to cover my real annual expenses
2. last a duration of retirement
3. get the maximum income, taking into consideration #1 and #2, and a volatile portfolio
4. you are not going to do lifestyle adjustments, wealth portfolio adjustments under any circumstances

Your priority is to balance between these factors. 

When it comes to private income for a long time, your priorities are:

1. last a duration of perpetuity
2. get the maximum income, taking into consideration 1, and a volatile portfolio
3. you are not going to do lifestyle adjustments, wealth portfolio adjustments under any circumstances

Your priorities is not so much to satisfy the expenses, but to ensure that you extract the maximum income and making the wealth last. 

Both retirement and private income is a systematic withdrawal plan, that is, whose aim is to ensure the money last for the duration they specify. 

If you are very risk adverse, you want your money to last, so you withdraw less. This means you either need more money, or that the cash flow your portfolio generated is going to very low. 

This is just math. 

For most that are risk adverse, they can never retire because the amount they need is so great due to them not willing to spend down their capital. At the same time they are unwilling to cut their expenses.

There are not much solution to this. 

So how do we get the maximum income that last till perpetuity? We cannot be sure, but based on the research there are a few ways to derive how much you can spend till perpetuity.

I will list out the brief research here (some of this may not make sense and I would probably explain more next time)

1. 2%-2.5% of your Initial Wealth Portfolio. One of the blogs I read recently is Rivershedge. He was a management consultant who has been semi retired since 2010 and comes to this discussion from the scientific and math angle. In a recent article, he summarizes some of his work and make a short comment on his thoughts after spending much time doing all sorts of modelling and reading. 

He listed 2% as more or less guarantees perpetuity. 

In some of my readings and experimenting, I also came to this conclusion. 

In my posts on variable withdrawal strategies and making $500,000 last for 60 years, I tried out different ways of spending flexibly. This is what people say what they will do.

The reality is that you could spend flexibly but you lose purchasing power. 

The purchasing power you lost is often 50% of the initial withdrawal rate. So if you start at 4% to 5% of your initial wealth, often your real spending for a long duration is HALF the initial rate. That worked out to 2% to 2.5% most often. Flexible spending does work, that is make your money last, but in reality you are essentially you are spending a real amount of  around 2% to 2.5% to perpetuity.  

2. 3% to 3.25% of your initial Wealth Portfolio if it is 50 to 60 years. Karsten at Early Retirement Now have did extensive data crunching with regards to the robustness of the safe withdrawal rate. 

Since he is also early retired, earn a good income, would not want to work again, and want to leave his money to the next generation, his focus is on finding the maximum withdrawal rate that can make his money last for a long time. 

One of the best illustration about this is the following:

There are 5 different tables. In each of the tables, Karsten tested that for each initial withdrawal rate of the initial portfolio value (3% to 5%), against 2 different time horizon (30 and 60 years) and different stocks bond allocation (0% stocks to 100% stocks). 

The 5 tables differ in terms of the final asset value he wishes to preserve with the last one meaning preserve 100% of the initial wealth portfolio.

Here are some things you might not notice:

1. there are many who talked about increasing the stock allocations relative to bonds so that you can have a higher withdrawal rates. The figures do seem to say, yes higher stock allocations is better, but in terms of success rates, there is not much difference between 80% and 100% stocks. If you have less than 40% stocks, the success of your money lasting is very weak. All things equal, you cannot have too little stocks, but too much makes less of a difference. The sweet spot is usually between 40% and 80% stocks. 
2. if you wish to preserve your wealth (the lowest table), you need enough stocks and your withdrawal rate needs to be low enough
3. it is easier for your money to last 30 years. 60 years or more that is another question all together.

The data do show between 3% to 3.25%.

3. Spend between the long term dividend yield and earnings yield. There is a very strong correlation to how much you can safely spend in the initial year with the valuation of the market. 

If the market valuation is high, it is likely you cannot safely spend too much. If the valuation is low or normal, you can spend the most. Usually, the measure of valuation is the 10 year cyclical adjusted price earnings or CAPE for short. 

I always have a problem resolving this until I read this 2004 article by James Garland called The Fecundity of Endowments and Long Duration Trusts (hat tip Rivers Hedge).

In the article, Garland explains that the role of these endowment funds and long duration trust is to provide spendable cash for their owners and beneficiaries for a long time. 

This makes it very suitable for those folks who wish to preserve their money for a long time. I have written about how the flexible spending strategies these endowments used to ensure their money last for a long time, yet provide enough for their university’s spending budget. 

Garland explains that the traditional method of spending used by endowments, which is to spend 5% of the current wealth portfolio value is not good because this would mean the spending budget fluctuates a lot. 

Garland also explains that thinking in terms of capital preservation is tough as well because we have to think about what we are explaining in terms of. Is it real or nominal? A good example is that you may have $1 mil in 1982 and in 2018, you have preserved $1 mil, the spending power of the $1 mil 36 years ago is very different from now. Even if you preserve the purchasing power of $1 mil, the problem is that the wealth portfolio average earnings yield now can be rather different from in the past. 

Garland believes that if you want the money to last for a long time, the figure is between the dividend yield and the earnings yield. The earnings yield can be computed by inverting the price earnings ratio. 

So if the current dividend yield of the S&P 500 is 1.91%. The current Shiller PE Ratio is 29.58 times. If we invert this the earnings yield is 3.34%.

So what we can safely withdraw for the money to last lies between 1.91% and 3.34%. 

This is because market valuations are high.

Suppose the Shiller PE ratio is closer to the recent mean of 20 times (5% earnings yield) and the dividend yield is 2.5%, you can afford to withdraw more (between 2.5% and 5%)

If you have accumulated a sum of money, and would like to find out if you are ready to press the button to leave your job, viewing it from the earnings yield perspective, I feel, makes the most sense. If you are in a market where valuation is high, you might have to plan with less spending and more wealth. 

However, if you are pressing the button when the market is more attractive in value, then your sum and what you can spend can be more optimistic. 

We use the market dividend yield and earnings yield because the most passive approach to having a perpetual wealth machine is to have a broad based equity, bond, real estate, cash portfolio. If you tilt your portfolio, concentrate your portfolio, you might improve the dividend yield and earnings yield.

Your equation will be better. But you will also expose your wealth machine to more concentrated sector, concentrated asset class, concentrated geographical region failure.

As a summary, I took notice of the spending ranges that we can afford:

There are 6 methods with F being the popular 4% initial withdrawal rate and D & E being what is written in James Garland’s article with all equity or a 50/50 portfolio.

There are no firm answers. We can only work on a few angles of looking at this problem. 

But I think it is safe to say if you want money to last a long time the answer is usually between this 2 to 3% range. It can be higher if you are lucky to reduce your wealth portfolio volatility, and start your spending down during a much more lower valuation period.

Summary

It will be a strange world, if most of us remarked how wealthy others are by the extend of their annuity. So instead of your friend able to afford this condo and that car, we remarked that he does not have any residual cash flow. His cash flow only comes from his work.

In contrast, this this other friend of ours do not have a condo. Yet his wealth allows him to have a residual cash flow of $50,000 a year. 

The danger of comparing a stream of cash flow is that, people would chase for yield, and they will be saddled with assets that tends to be overvalued. 

The solution to this is to revert to the American method of viewing wealth, by looking at the net wealth. Look at the net wealth during accumulation and when you are in the wealth preservation stage, closer to when you need the money then look upon the British way.

While you are accumulating, always measure your wealth’s yield potential. This will enable you to determine if you are ready to retire. 

The savvy folks reading this would observe that there is no better way among the two methods. It is usually the not so savvy ones that needs to distinguish the difference and learn to appreciate the British methods more. 

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.

Here are My Topical Resources on:

1. Building Your Wealth Foundation – You know this baseline, your long term wealth should be pretty well managed
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

A week ago, a team of researchers from Lee Kuan Yew School of Public Policy released their research on working with a few focus group to determine the household budgets necessary for older people to meet their living needs.

This was developed based on their Minimum Income Standards (MIS) methodology.

So we see this share out a lot. But I wonder actually how many read what the report entails. For sure, the headline sounds good and it makes us wonder how that is derived.

The report is not a secret and if you Google it at LKYSPP you should be able to find it. (Ok you can find it somewhere in here)

I read the report and I thought the whole report is rather useful. I will go through later why this is. 

The whole report explains why they decide to go down this rabbit hole, and how did they do the research. As a person with limited resources, I wanted to know something like this, yet I do not have the resources to conduct it myself, so I am rather appreciative about it.

Identifying the Basic Annual Household Budget that Older Singaporeans can Identify with 

How much do an older couple spend in retirement? How much for a single person?

That will depend a lot on your personal situation. However, if you are a policy planner, how do you know whether the resources we have now is adequate to support older couple and older single people?

You need a basis of comparison. 

As a person interested in the planning for financial independence, it is also a struggle to have a basis of comparison to advise clients with.

I been through the CPF Focus group back after Roy Ngerng wrote about the inadequacy and the lack of transparency in the system. The way they conducted the focus group was to lead us to estimate the kind of monthly expenses we will spend in our retirement. 

And to show how a sum of $1,200/mth is enough. 

People still question whether $1,200/mth is adequate. 

More so, they question how do you justify $1,200/mth is enough. What goes into that basket of expenses.

People have the idea that the planners only consider the bare minimum expenses that is required for survival. Essentially they are thinking the expenses is like my definition of survival expenses. 

This report tries to somewhat build on that. 

Each of us have a different definition of what is basic. So the research team use their Minimum Income Standards methodology to derive that. 

They iterate through the following stages:

1. Orientation. Meaning of basic standard of living
2. Task groups. Make lists of things and services
3. Consult experts. Healthcare and food
4. Pricing. Tabulate prices and calculate budgets
5. Check-back groups. Reconcile lists and revise budgets
6. Final group. Resolve any differences and finalize budgets

They try to define the basic living standards for 4 types of households:

1. Male, 65 years old and older, living alone
2. Female, 65 years old and older, living alone
3. Couple, 65 years old and older, living together
4. Male or Female, 55 to 64 years old, living alone

This allows us to see the annual expense of healthy singles and couples, contrasting them to singles before they retire from work.

They rounded up 103 people in this group that are of different ages but mainly 55 to 64 and 65 years and above, different ethnicity, different education level and different housing type.

They are rather focus on the costs of housing and healthcare. These two are what most would hypothesize as the larger costs, so they watched over how they can control these two category 

They did not include the medical costs. This result do not include the cost to alleviate chronic health problems. Since they are assuming the people just retire, their health condition should be quite healthy. Also, medical cost is very very subjective. This is due to the different level of subsidy, due to means testing, and the frequency of the subsidy.

So they took this part out. I can understand this and for you to make use of it in your planning, this might be good because you could research up the medical cost estimation as a separate subject by itself.

They assume that the singles and couples can purchase a two-room flat.  Both singles and  couples can purchase a two room flat under Flexi scheme as long as their monthly household income is below $6,000 for singles or $12,000 for couple. The retiree are likely not going to breach this monthly income (if they did, it is a good situation to be in, so it is not part of this discussion). Based on median income and monthly household income of couple of $1,735/mth.

They sought expert’s take on healthcare costs and the right diets. This is so that the result would be realistic.

They compute the food costs based on ingredient costs. I like that they really spend some effort asking in detail what do the participants eat, the frequency of eating out to lower grade, higher grade places and what do they cook at home. This allows them to go to the supermarkets and construct the average costs to prepare those home cook meals.

How do we Define Basic Standard of Living

The team tried to see if they can get the groups of people to derive what they mean by their basic needs. They tried to take reference from MIS research in UK on what is considered a minimum standard of living in the UK today. The UK definition includes more than just food, clothes and shelter. It is whether you have opportunities and choices.

They also sought to take reference from UN Convention of the Rights of the Child. This recognize that the right of every child to have a standard of living adequate for the child’s physical, mental, spiritual, moral and social development.

What happens is that the groups of Singaporeans said a lot of different things, but they are somewhat similar in particular ways. 

So after some analysis of the data, the research team crafted the following:

A basic standard of living in Singapore is about, but more than just, housing, food, and clothing. It is about having opportunities to education, employment, and work-life balance, as well as access to healthcare. It enables a sense of belonging, respect, security, and independence. It also includes choices to participate in social activities, and the freedom to engage in one’s cultural and religious practices.

I guess that definition covers a lot of different things, and I do not think you could go wrong there. It covers a lot of things.

These points were emphasize:

1. basic needs must go beyond subsistence and should enable “quality of life”
2. importance of independence and autonomy. Not burden to love ones, and to have your own choices
3. social participation and connection to others

Some examples of more than basic needs include:

1. able to furnish their home as they please
2. able to invite friends over and gather
3. must be able to balance eating at home and eating out (a big one for women according to survey)
4. the research team realize there is a consensus here: an annual holiday is a basic need
5. there is a need of money to give religious groups
6. mobile phones is necessary for communications. It also acts as their “walking partner”. They still need landline as a backup

To live independently entails:

1. having infrastructures that protects older folks from age related safety issues such as ceramic bowls and plates that are light, lower chair height, lighting features
2. they are conflicted about asking younger neighbors to help fix things because that would mean it is not independent
3. taking steps to prevent chronic illnesses. This should happen before even being on medications
4. a raging debate was on whether to have a sofa bed or a bigger sofa. The consensus is that guests are welcome but should not overstay

How Much do They Need on a Basic Level?

The researchers compiled the results for an elderly single, an elderly couple and a single that is 55 to 64 years old. 

Strangely, they decide to use weekly expenses which is kind of odd since usually we talk in terms of monthly.

Nevertheless, I compiled the data into weekly, monthly and annual.

click to see larger table

They tabulated the results for

1. total
2. without housing purchase
3. without one-off health treatment
4. and without both

I guess they wanted to see the costs if you already own your home and you do not wish to get one. Or that you are able to fully pay down your two room Flexi flat. 

Without the two costs, you can reduce the annual expenses for a single elderly from $16.5k to $14.1k, and for a couple from $28.1k to $25.4k. The difference is not so significant because the two room flats are rather affordable in the first place. 

There are some difference between before retiring and after retiring. The expenses go down from $20k to $16.5k. This looked more significant. 

The data, presented this way might be harder to see, so here is only the annual expenses:

Most of the expenses are OK but some notable ones:

1. This is not just survival leaving but to the participants, it gives them expenses to engage in social gatherings, go on holiday, contribute religiously, have physical security and some form of independence
2. I guess they are using term life insurance. After 65 years old, you do not purchase any more. Hence the insurance expenses go down
3. A total of $4700/yr spending on food for a single elderly is damn low! (even by Kyith’s standards)

How you plan out your retirement can result in a difference in how much you need. 

For example, if we take the comparison of the pre-retirement spending and after retirement spending, you can pay off your home and step down your expenses from $20.6k to $14.6k. 

Notice also that it does not mean that a couple will spend twice as much as a single.

The researchers presented the ratio of couple’s expenses to single expenses. We can see that for Food, restaurant, clothing, footwear, public transport, health care, communication, holiday expenses, personal care and effects, the cost go up proportionately as you add one more person.

But the cost for the rest stays the same. Due to this, a couple is able to achieve some synergy.

In the second column, the researchers show the difference between pre-retirement and post.

We observe some drastic reduction in cost for:

1. Hawker food
2. Footwear
3. Public Transport
4. Housing Maintenance
5. Household services and supplies
6. Medical products
7. Personal effects
8. Insurance

I have attached a summary of what goes into each category, based on what we can gather from the report:

Click to see larger table. Refer to the comments in the last column

By providing more details for each category, it allows you to compare the grade of lifestyle you need to this baseline case.  

For a single elderly, the recreation, hawker food, home cooked food, housing purchase are some of the larger expenses.

For a couple, largely the same!

I tried to assign some of these expenses into categories and draw a Sankey chart:

You can choose to agree or disagree with my categorization. Based on this, this retiree seem to be spending a sizable chunk of the $16.5k/yr on living a fulfilling life. Again food is a big part of the cost.

The team also contrast this to the standard household expenditure that were compiled in 2014. They are not looking at the absolute spending figures but the make up of the household expenditure. 

Observe the Retired column and the household budgets done this time by this team. Some notable difference is that the health costs is much lower this time. This is due to the assumption that at age 65, the couple or single are rather healthy still.

The second difference is the more generous spending for recreation and culture. 

What the Researchers Conclude

I think when you put out a piece like this, the media might provide their perspective of how they interpret the results. The researchers themselves, would want to let you know something.

They largely think that to achieve the basic standard of living, as defined by ourselves as a cohort, it is very challenging.

For the majority of older people, they depend very much on their adult children to support them (From Teo You Yann’s research).

Some break down in order of precedence:

1. Income from Adult Children – 78% of elderly people report this in 2011
2. Income from work – 21%
3. CPF and other annuities – 13%
4. Private Pensions – 4%
5. Public assistance – 2%

I am not sure why the percentages do not add up to 100%.

The high dependence on adult children raise the following concerns:

1. Main problem is the speed of socioeconomic development resulting in skill set of older adults not kept up. When they cannot have a job majority of the income fall to their children
2. With Income inequality, or the lack of it, their income varies. This means that the wealth built up for retirement varies as well
3. The younger cohort find it difficult to to work due to health conditions and care-giving responsibilities
4. The estimated CPF Basic retirement payment of less than $800 is about half of the household budget. This is not enough
5. Majority of the assistance are means tested. They do not give a lot. And they also do not last. This creates so much uncertainty in people’s lives that people do not feel secure at all
6. As the number of children in a family reduces, it becomes unsustainable for the adult children to support the parents, together with their responsibility to their own children and own family. Something will have to be sacrificed

The things that participants said were fundamentally important — quality of life, independence and participation—offer a direction for future policies. They also closely align with the Singapore government’s “Action Plan for Successful Ageing” (Ministry of Health, 2016), which envisions opportunities for growth, ageing with confidence, and inter-generational harmony within a cohesive community.

This research on household budgets provides a benchmark of older people’s needs and makes explicit the material resources that members of the public consider necessary for a basic standard of living in Singapore today. Future research will be extended to other household types, so that we can better understand needs for people at different stages of the life course.

How this Report Helped Me

As a writer on the topic of money in Singapore, I often faced the problem of not knowing whether the stuff I write about leans closer to unrealistic or realistic. 

The team have taken the trouble to brainstorm about how to look at this basic standard of living problem, gather and work with participants so that I can have data like this.

I would like to thank them for that. 

There are few things in the report that would help me in the future to shape my writing.

1. Let the participants describe what they do in retirement and before that. I think this is how it should be done. Many a time, we didn’t take up this “job” called retirement, and so we have no idea how different it is from our current employed job. We tried to extrapolate how we will spend in this job into that other job. It is not going to be the most accurate. 

I cannot remember which article but there was this article that I read. An experience financial planner shared that the clients often have the worst idea about their expenses in retirement. They assume that their lifestyle in retirement would be similar to their lifestyle now. What worked for him was to get the clients to not talk about money, but describe the activities they would do in their daily lives in retirement.

Then they plug in the money for that kind of lifestyle.

This is probably pretty similar to what they are doing.

2. Have a glimpse of the priorities of those folks in retirement. As a person with an elderly parent, the report shared a lot of what the participants are concerned about, if we put the topic of money away. There are a lot of consensus that I gloss over such as the need for non-slip tiles and holidays. 

To them, it is really important!

This provide a list of questions that you can ask your elderly loved ones whether these areas are adequately taken care of.

3. Provide a good trigger list for advisers to go through with their clients. Not everyone does budgeting and if you want to have a conversation about how much you need for retirement that can be rather difficult. Your spending when you are older, and now are rather different. This report helps financial planner in that it explains these categories in good detail.

This is a good trigger list to go through with your client the grade of lifestyle for each category they need. They may need more than $1,379/mth if they want a higher grade of lifestyle. But likely their spending will fall within these categories. 

I would also explicitly spell out the following:

1. Having a difficulty to reach consensus showed us that a standard template would usually not work for everyone when it comes to planning
2. Your expenses do not stay constant over time
3. We estimate how much we need in retirement (65 years old) by basing on our spending at 30 years old. The figure you need is going to be, at best a wild estimate. It needs to be constantly adjusted
4. Majority of the people need their rich life or non-essential
5. We plan our lives with the priorities, the maturity, the cognitive ability, the physical energy at age 30 and 40. That is not going to be our mentality at age 65

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.

Here are My Topical Resources on:

1. Building Your Wealth Foundation – You know this baseline, your long term wealth should be pretty well managed
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