I subscribed to former 1M65 Telegram group member Patrick Teo’s channel CPF Wealth Tree. If you are interested in his thoughts about life and money, you can subscribe to it as well.
Patrick views how life should be lived as we near retirement as that we should be open to working longer. I have no problems with that but the more he explained, I became disconnected from some of the reasons brought up.
I am too tired from work to reason about what I disconnect with (and my views are probably not strong enough).
But when I read two of the points Patrick brought up to correct inaccuracies in Mr Loo’s video about Working Till You Die and had stronger thoughts. They are highlighted in yellow:
I cannot understand what it means to say we have reached F.I. status, but we still need to augment our money in FI. If we are already “financially independent”, doesn’t that mean we are independent financially already? So why do we need to augment further?
How much longer do I need to augment my F.I.??? When can I stop augmenting it???
I think in the first place, some of the definitions of what is considered F.I. are not very numbers-driven and that is why we have this need to augment it further.
Think about it.
Suppose Kyith tells you that if you need $120,000 a year in income, and you have a capital that is equivalent to generating 1% in the first year (that’s $12 million), you are financially independent.
And you tell Kyith: “I have $14 million, what does that mean?”
I am going to tell you that you are financially independent.
“Then, Kyith, do I need to continue working to save 100% of my income?”
Of course not!
That $12 mil x 1% = $120,000 plan is…. flawed.
Accumulating all those financial assets is not the be-all-end-all to financial independence.
To be able to retire, I believe you have to reach a certain state of mental and financial independence, that mentally you know you are REALLY financially okay.
Many aren’t mentally ready because they might not trust that their income model is well-thought-out, or that they cannot connect with the income model that they have chosen, not able to understand certain nuances of the plan that would have given them mental peace of mind.
I have enough people ask me: “Kyith, I am able to have $XXXX annual dividend income that covers my expenses of $YYYY; what do you think?”
We often have to deal with the uncertainty of the markets, and market uncertainty makes people wonder if their plan is robust enough or whether they are missing something that they have not considered. So they look for others for validation, hoping that those who asked would give them good news.
If you need to augment your F.I. numbers further, mentally, you are not F.I. yet, whether its a plan problem or some other problem.
I wish we could be a little more numbers-based when defining F.I. status
Even if you tell me that you need 1.3 times in dividend income compared to your need, or 2 times, or 3 times, at least:
- There is an end to the accumulation.
- We can debate about the robustness.
A lack of robustness in the plan, or understanding of why your plan is safe enough, is what makes your salary so addictive and so hard to wean off.
I have this philosophy:
People over-complicate things.
The richer people have mental peace of mind in their passive income stream because their passive income stream is generated with a vastly larger asset base such that their income stream does not depend on the asset returns at all.
This means the income-to-capital ratio is the most important above anything.
If I need $120,000 and I have $12 million, even if my $12 million gets cut in half (which in their plans should not happen at all due to proper diversification). that income is still 2% of their capital after what the market shaved off, which is still very conservative.
If inflation brings their total income requirement up 50% suddenly (think the rest of us will suffer greatly in that scenario), their income is just 1.5% of their portfolio.
If you respect that ratio, you will get a lot of peace of mind, but you need… more capital.
Different people have different definitions of F.I., which is based on different income model robustness.
I would like to contend that… being financially independent is more than just having a reliable income stream.
There are other areas to take care of such as:
- Sinking fund for your medical goals
- Sinking fund for XXXXX which you held dearly
- The non-financial side of things
If you have not save for those, then it make sense to continue but there should be different numerical degrees to how much you need.
On the second point, if we keep thinking about the opportunity cost lost of good earnings, we will never pull the plug to retire.
But everything links to a quiet problem that Patrick didn’t address clearly: Give me an F.I. number to aim for. Give me a model. 3 times the dividend income I can generate? 4 times? If I reach this number, I can stop accumulating for that goal.
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