The department of Singapore statistics published the Household Expenditure Survey 2017/18.

The department published the results every 5 years. And so we have the figures to compare against the expenditure figures published in 2012/13. That is the data 5 years ago.

There is too much data, and we would probably not be able to finish in one seating.

As a researcher of financial independence, I was curious whether the data do show that Singaporean’s will find it challenging to reach their financial independence goal.

How to Judge whether You can easily reach Financial Independence?

In most cases, if you map out your cash inflow and cash outflow, factor in the rate of growth of your wealth, and expenses, you could figure out when a person can be financially independent.

You could however, rely on some rule of thumb to determine if this household can be financially independent much faster than the average folks.

Usually, we rely on two metric:

1. Your long term rate of return of your wealth
2. Your average savings rate through your working career

Long Term Rate of Return

For #1, your wealth are your

1. investment property
2. cash, deposits
3. unit trusts, insurance savings plans, ILP
4. stocks and bonds
5. exchange traded funds

This is net of your liabilities.

We say long term because in any given year, your rate of return can be very high or very low (short term the sample is smaller, you tend to get more extreme results). Over longer term, we are able to see your average consistent rate of return.

The higher your long term rate of return, the higher chances you will be financially independent earlier because your wealth accumulates faster.

Your savings rate

You make $70,000 a year. That can be the amount you take home or gross before deducting your CPF. If you spend $42,000 a year, your savings is $28,000 a year.

Your savings rate is ($70,000 – $42,000)/$70,000 = 40%.

Whatever you do not spend, you save. It has to go somewhere.

What you save, becomes your wealth. The more you save the more wealth you get.

How Long to Financial Independence?

If you pair savings rate with the long term rate of return, that is when you see your wealth built up.

I shown this table in the past. Each number on this grid is how long it takes for you to be financial independent.

Going back to the previous example, if your savings rate is 40%, that means you spend the other 60%. Your rate of return of your wealth can be from 1% to 20%.

It will take you between 11.74 years to 32 years to be financially independent.

So from the table, you can see that if your savings rate is 50%, it is between 10 years to 22 years. If it is 60%, it is between 8 years to 15 years.

The higher the savings rate, the less the long term rate of return matter. You realize when the savings rate is high, whether you get 4%, 6%, 8% rate of return, it does not speed up the number of years that much. (50% savings rate the difference is just 3 years)

What if your annual expenses change?

Then you recompute how long you need. This rule of thumb is easy to recompute. Many people will tell me your expenses keeps going up. There is a lot of truth to that, but for some, they can envision that if they stop working, their expenses will be lower.

Adjust accordingly.

The assumption is that you take out a constant, inflation adjusted amount from your wealth over the next 30 years. You withdraw 4% in the initial year, and adjust with inflation over time.

There are a lot of debate whether 4% is a safe initial withdrawal rate. I think let us leave that out of the equation. If you think it is not safe, because the duration in which you need the money is longer, use 3.5%, 3%, 2.5%. Come up with your own metrics. I have already say this is a rule of thumb. It is a gauge how close you are to financially independent.

To stop working, you need more thorough planning.

Once we established this we can take a look at the Singapore Statistics

The Household Income Analysis

I won’t be able to cover all demographics in one article, thus let me focus on just a few prevalent ones.

Singaporeans work a spectrum of jobs. They live in different kind of dwellings. Different age group earns a different salary.

My way to tackle this is to pick out the prevalent household types, and take a look at the prevalent jobs categories and age group.

The majority of Singaporeans lived in 4 room and 5 room HDB flats. For work purposes, let me look at the upper echelons of Singapore as well. These will be those that stayed in the Condos and Landed Property.

The statistics show the income and expenditure on a monthly basis. The income also factored in the employer’s portion of CPF. It is likely they took the annual taxable salary and divide by 12.

We could factor in our CPF portion in our analysis but most of us would like to see how much we could achieve with our take home. My struggles are that above $6,000, the income does not contribute to CPF. It is a pain but I worked out the figures.

We presented the following Take Home Income data:

I found that the most common home types are the 4 room and 5 room. I found that the education level most prevalent are the university and diploma.

I would also like to see the take home income of different age group. I did not list all age group. My focus tend to be on the 30 to 54 year old that are accumulating towards financial freedom. They are the group that are not able to access their CPF currently.

I would also like to see the take home income of those above 65 years old.

Some observations:

1. There are those who have diploma qualification but lived in landed property
2. University take home income higher than diploma
3. Those who stayed in landed has higher take home income than those in condo, and 5 room and 4 room
4. Those older than 65 years old and staying in 4-5 room HDB and landed take 60% less income than when they are working before age 54
5. Those older than 65 years old and staying in condo, saw their income cut by 50%

Let us see the income progression for different age group:

You would notice those living in 4 room and 5 room showed stagnating or declining income. They peak at 30 to 34 years old, before stagnating and declining.

In contrast, there is a reason why those staying in condo and landed was able to stay there. Those staying in condo and landed saw their income go up.

The condo ones peaked earnings at 45-49 years old. They either get retrench here, or manage to retire here.

If a lot of us are staying in 5 room, then many household have an annual take home income of $120,000 to work with. Those living in condo have $200,000 a year to work with.

The Monthly Expenses Analysis

The Singapore statistics provides many angles to household expenses. I have picked out some which are more relevant.

I think that for expenses, we have to look at various angles.

So I looked at:

1. The expenses of the 61-80 decile and 81-100 decile. These tend to be those above average income
2. The expenses based on household size
3. The expenses of the PMETs and managers

Here are some observations:

1. Overall, there is a big monthly expense gap between condo and 5 room HDB
2. The expense differences between 61 to 100 decile for 4 rm, 5 rm, Condo is small. The difference is bigger for landed properties
3. The expenses for a single is almost the same, despite living in 4 room or 5 room
4. The expenses for a single is almost the same, despite living in condo or landed
5. In fact, the expenses difference between 2 ,3, 4 person household for condo and landed are almost the same
6. There are synergies when the household moves up from 1 person to 2, 3, 4 person. Expenses do not double, triple or quadruple just because the household has more people
7. Managers earn more than PMET
8. The average expenses seem to match those with a 4 person household

We can then take the average expense for the following expenses:

1. 61-80 income decile
2. 81-100 income decile
3. 3 person household
4. 4 person household
5. PMET
6. Senior officials and managers

We get an average expense of

• 4 rm HDB: $4,711
• 5 rm HDB: $6,176
• Condo: $8,418
• Landed: $10,973

Let us look at the expenses based on age group:

Here are some observations:

1. Expenses for 4 room, 5 room, landed dwellers stayed largely consistent
2. Expenses for condo dwellers rose over time
3. Expenses for those older than 65 dropped by 50% for 4 room, 5 room and landed property. Condo dwellers went down by 30%

The previous average monthly expenses coincide with those in the age group 45 to 49 years old.

Analyzing Singaporean’s Savings Rate

With these figures, we can work out the spectrum of savings rate. This would enable us to see whether Singaporeans have any chance to be financially independent.

We can compute the savings rate based on the different monthly expenses. We compute based on the average take home pay for the various housing categories.

A clear observation is how high the savings rate we get!

The single household should be looking to be financially independent in 5 to 8 years due to the 75-80% savings rate!

A 70% savings rate means their years to financial independence takes between 6 years to 10 years. If the rate of return of your wealth is at least 6%, it will take 8.5 years for you to reach it. If your rate of return is less it will take you a long time.

Those with the larger household have a lower savings rate. But even the 4 person household have a 40% savings rate. PMET have at least a 40% savings rate.

This is based on take home pay.

A 40% savings rate means their years to financial independence takes between 11 years to 32 years. If the rate of return of your wealth is at least 6%, it will take 20 years for you to reach it. If your rate of return is less it will take you a long time.

Now let us look at the savings rate, for different age group:

The Savings Rate are as high. But we observe for those living in 4 and 5 room HDB flats, and from age 45 to 54, the savings rate are going down.

For those that are above 65 years old, the savings rate is low but this may be understandable.

With such a high savings rate, financial independence seem to be within reach for Singaporeans.

So why do we have so many articles explaining that retirement is not possible in Singapore?

I think the savings rate is high enough for most Singaporeans to have a chance to be financially independent. Based on the data. Being financially independent early or later demands a high enough savings rate. The singles will have an easier time. The DINKs will also have an easier time. It is a choice. Those with a good job can achieve it.

The formula is to have an income in a higher decile and spending in a lower decile.

How I Think Expenses was Collated

The first thing is to study how the expenses is formed. What was omitted. There were two areas that I noticed not included:

1. Their insurance figures only factor in term insurance not cash value insurance
2. They did not factor in mortgage

This savings rate will look incredulous to you but you got to think if have cash value life insurance policy. If you have then those are considered as savings.

The rate of return in the past are usually around 2.5% to 3.5%. You can read my article here on some historical return rate.

I have noticed that aside from the monthly expense, there is an imputed rental for owner-occupied accommodation. This seem to be simulating the additional expenses should they be renting a similar properties. I thought some of the figures look low.

But if you factored in this “rent”, the expenses will be higher.

Some observations:

1. The Singles still have high savings rate
2. So does the Dual Income No Kids (DINKs)
3. You start seeing the savings rate for the 4 to 5 room, 3 and 4 person household come down
4. For some reason the managers living in 4 to 5 room look to be really struggling
5. The 45 to 54 year old living in 4 room and 5 room flat drop off over time while those in Condo and Landed Properties stayed well

Despite this, for a large part, we still have a savings rate of 30% at least for those living in 4 to 5 room flats.

A 30% savings rate means their years to financial independence takes between 14 years to 46 years. If the rate of return of your wealth is at least 6%, it will take 26 years for you to reach it. If your rate of return is less it will take you a long time.

I do not think we should factor in the Imputed Rental from Owner Occupied Accommodation. This is because most of household own a property. The way our mortgage finance rules are set up is such that we are deterred from using our CPF after retirement age. So majority will have owned their property after retirement age.

Furthermore, the mortgage were usually funded with CPF. So this cost is not part of your take home pay.

The above expenditure data shows the monthly expenses spent on other transport services. These data were broken down by full fledged air fares to different parts of the world. The way the data is group together do not feel natural to me.

I felt the only way this data could exist, is that the expenses were take from some Airline database, NTUC Fair Price database. These data are than correlate back to the different demographics.

In the table above, we are able to see the top categories of expenses. I have sorted based on 5 room and executive flats.

The first thing to note is that this is average cost. And this is likely to make things…. weird.

We have those living in 1 or 2 bedroom flats owning cars. Generally, we should not expect a lot of them to. So why are there vehicle owning costs? This is because if you have a retiree downgrading to a 2 bedroom but still able to afford a vehicle, this cost is spread among all the 1 or 2 bedroom household.

It may be right that the costs for this group is low. For other expense categories, the expenses might be pulled up due to the average spending amount.

The top 5 category for 5 room flat accounts for 65% of the costs:

1. Transport entails purchase of vehicles and what comes with it. It also includes your public transport costs. For the 4 to 5 room HDB, this is the highest
2. Food serving typically takes the data collated from restaurants, pubs, fast food restaurants, hawker centers, food delivery
3. Miscellaneous goods and services includes personal care (hair dressing, grooming, electrical appliances for personal care), insurance (no whole life type insurance, those expense only)
4. Food and Alcoholic beverages should be the data taken from the supermarkets. It is your groceries
5. Recreational and culture includes your holidays, reading, pets and photography

The way to use this is your mileage may vary. This might be less applicable to you. If you are the frugal sort, your expenses could be 10 to 20% less than this average amount.

Analyzing the Expenses of those 65 years old and Older

It is likely the 65 years and older cohort makes up of those that are semi-retired, retired and working. Their expenses should reflect that of a retirement lifestyle.

The average expenses are:

• 4 rm HDB: $1,989
• 5 rm HDB: $2,992
• Condo: $6,334
• Landed: $6,730

In June 2019, 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.

I have written about the interesting takeaway from this report here.

This public policy school study is based upon a focus group and what the people think constitute a budget that is meaningful enough.

So how far are these figures from the stats in general?

• Single monthly without housing: $1,223
• Couple monthly without housing: $2,162

The LKYSPP survey’s budget look lower than the 4 to 5 room actual spend. Probably at the lower bound of the Singapore statistics.

I can see that $2000/mth for a 4 room HDB flat be a good spending rate for retirement.

If a couple has CPF Full Retirement Sum (FRS), they should be able to provide that amount. But not everyone has the FRS. They have used their CPF to purchase their HDB.

That would mean they need a retirement fund. Since their retirement is not in an annuity (unless they top up their CPF to be ready for CPF Life), they might be looking for at least $600,000 in wealth based on the 4% withdrawal rate.

Of course, if they meet the CPF Basic Retirement Sum (BRS) which is half of the FRS) they may be able to offset this.

If a couple have $75,000 each in their CPF Life, and they chose the CPF Basic option, each of them would have $450 a month. This would offset 45% of the $2,000 per month expenses. This would approximately reduce the wealth they need to $330,000 at least. Alternatively, they can top up their CPF so that it is fully funded. Instead of needing $330,000 at 65, at age 55 they would just need $150,000.

Some Conclusions

The way the data is pieced together makes me question whether I could conclude our take home savings rate is at least 30% of our take home pay.

Yet the way it works is that those frugal folks will buffer those spendthrifts. So perhaps the data is about right.

Let me summarize some big observations for myself.

The savings rate of 30% to 40% looks better than a lot of other countries. But because we do not have a government supported system in Singapore, we have to come up with lot of the costs (above the bare minimum) ourselves.

This means Singaporeans take between 11 to 46 years roughly to be financially independent. A lot will depend on your rate of return:

1. Rate of return of 2%: 28 to 39 years
2. Rate of return of 4%: 23 to 30 years
3. Rate of return of 6%: 20 to 25 years

Most will need to start building wealth at least at age 35 to 40 years for it. This is so they can retire at age 65. If the rate of return of your wealth is low (1% versus 5%), you probably need to work 10 to 15 years more.

There seem to be a wealth divide. This wealth divide is based on income. Those that seem to do better in their career, their careers continue to flourish.

In contrast, those whose career seem to stagnate, their income does not allow them to upgrade their comes. It seems to be meritocracy at work. Those who do well get rewarded with a higher social economic standing.

Those living in 4 to 5 room HDB, their income peaked around 30 to 34 years old. Those living in Condo peak much later at 45 to 49 years old. Those in Landed seemed to drop off after 55 years old.

There is a big expense gap between the 5 room HDB dwellers and the Condo dwellers.

The expenses for single household largely stayed the same despite some upward mobility.

We can make use of some average expenses in our planning:

• 4 rm HDB: $4,711
• 5 rm HDB: $6,176
• Condo: $8,418
• Landed: $10,973

Your mileage may vary.

Other than condo dwellers, expenses do stay the same over certain age groups from 30 years to 54 years.

When you are 65 and below, your expenses go down by 30-50% (leaning closer to 50% instead of 30%).

The average expenses are:

• 4 rm HDB: $1,989
• 5 rm HDB: $2,992
• Condo: $6,334
• Landed: $6,730

For those with CPF Life, you might be able to offset a large part of your retirement expenses.

I think that based on the figures, it seems financial independence for most would coincide with the defacto retirement age. The problem it seems, is the rate of return for wealth for most.

I write more about financial independence and retirement in the retirement section below:

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
5. Free Stock Portfolio Tracking Google Sheets that many love
6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

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