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Your Mastery Over How You Frame Your Lifestyle Will Drive Your Retirement Capital Needs

A reader of mine left a job to take a break.

I met up with my reader not too long ago, and we went through a few topics. Mostly about my investing thoughts. Enough about CPF tactics.

Less about personal finance.

As I speak with more people, I find that more of us think that the solution to a lot of our financial dilemmas is a sound investment strategy, a product or a solution that produces a good return.

My strong view is that people can get more peace of mind, reduce their anxiety, and not worry about hitting an adequate return if they are more in touch with their lifestyle and how much that lifestyle really costs.

The topics people wish to dive into would typically focus on whether they should shield or not shield their CPF SA, and fulfil CPF to their Enhanced Retirement Sum.

But seldom do we immediately share what our current lifestyle or desired retirement lifestyle looks like.

And how much it cost.

The lifestyle tends to drive a large portion of what you need because of how long you need it and the recurring amount.

Let’s go through the following example:

To find out how much capital you need to accumulate, we can use the 4% rule or in this case the 4% initial withdrawal rate.

What is the thinking behind the 4% rule? That is less important. The rule can be 8% for all I care because we can just assume the percentage is reasonable.

If your annual income is $60,000 a year, you would need $1.5 million in capital to generate that income.

But if your annual income is $12,000 a year, you would just need $300,000.

That is a big difference.

Is it reasonable to live on $12,000 a year? I don’t know but the important thing to realize is your mastery over how you frame your lifestyle drives whether you end up chasing after a unicorn or having a greater peace of mind.

My reader eventually makes a comment: “With my private annuity and CPF LIFE annuity income, I have enough in the future.”

I asked: “Why do you think you have enough?”

“They combined together for $2,000 a month in the future. That is more than enough!”

Most likely, my reader’s lifestyle is lower than that. But I learn that the value is not in the income but in connecting the income to what he or she will experience regularly.

“How much would the cost of your food, whether you prepared at home or take-out cost?”

“$1,000 a month.”

No, that can’t be right. If my reader says that he or she has simple tastes, how can each meal cost at least $10?

So I went through:

  1. What my reader had the week before
  2. What is considered a satisfactory meal schedule for my reader in a typical month

By doing that, we can identify a viable, satisfactory food schedule and then how much it will cost that schedule today.

The revised cost?

$210 a month for my reader (excluding the spouse).

I had to expand my reader’s food cost to be more reasonable because what my reader ate last week might not be the most balanced meal.

A more reasonable cost today could be $240 a month.

But the important thing is that this was so far from what my reader initially estimated.

We went through that exercise by trying to factor in what would be a desired lifestyle, without thinking about the daughter’s expenses, spouse’s expenses, future medical costs, higher grade discretionary costs, but to factor in a lot of the cost paid by the spouse currently, that should be conservatively borne by my reader.

That monthly amount came up to something closer to $550 a month.

This estimation is conservative because its based on a lifestyle that is expanded from what my reader is living currently, conservatively estimated.

If we factor in inflation, $550 in 10 years time would be $740 a month by the time my reader is 65 years old, which is far less than the $2,000 in combined annuity income.

While CPF LIFE income does not adjust for inflation (for the Basic and Standard plan), because the income needs is less than half the nominal income of $2,000, it means my reader’s annuity income stands a good chance to keep up with inflation after 25 years.

There are other financial planning considerations such as the daughter’s polytechnic education, medical sinking fund, and other financial goals, but that can be taken care of by the cash resources built up.

If what is important to my reader is securing an income to pay for a satisfactory lifestyle, then how important is chasing after the investment strategy that gives the highest return?

Less important now.

I think that many of us might not have reflected well and connect with what we are most concerned with well.

And because of that, we end up chasing after an investment unicorn when may be less of a need.

Your asset allocation is still important.

Using a fundamentally sound investment strategy is also still important.

But this form of right-sizing shows you that you may have more margin of safety in life to buffer for not having good lucky or investment mistakes along the way.

You may ask:

“Kyith, isn’t it obvious your lifestyle drives how much you need?”

My experience tells me that it is not very obvious all the time.

Just a few days ago, I saw this post of someone trying to find blindspot in his or her FI plan:

We all want to have the assurance that we are making sound financial decisions, not making grave financial mistakes that we cannot recover from.

This is why we have prospects or eventual clients connecting with us to validate their situation despite them thinking “they have figured it out.”

In this example, the person leads with the assets they own, the income they have.

But unfortunately, the person left out the desired lifestyle.

There is really not much we can work with. While it is clear this person has a lot of assets, it will just need a line where they say.”I need an income of $360,000 a year to maintain my lifestyle.” for the person to go from a family with ample resources to a family with more constrained resources.

I told my reader that I can only help him or her this much, and that he or she needs to work out some of this financial math better. If not my reader will over or undershoot how much is needed.

Again, your mastery over how you frame your lifestyle may be the difference between needing a lot of resources, needing high returns, versus a greater peace of mind in retirement.

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Lao Kok kok

Saturday 1st of April 2023

Would also add to do a thorough medical checkup before quitting and buy Critical illness and Shield insurance at least 1 year before the Med check.


Sunday 2nd of April 2023

I think my friend bought some policies before quitting. but that is a good suggestion.


Saturday 1st of April 2023

It is accurate to say that many want to retire but not many willing to put in the effort to understand what they need to retire. I keep spreadsheet of my monthly expenditures by category for the past 10 years before I am comfortable enough to pull the trigger and leave the work force, when I shared that with my friends, they laughed and said I am too detailed and yet they will continue to chase the answer to "How much I need to retire?"


Sunday 2nd of April 2023

Hi Pete! Too right there. Some would say that is too OCD and they can never do that. But if you don't do that, you don't understand your very own reality and if you fail to understand your very own reality, you don't even have a yardstick.

Lao Kok kok

Saturday 1st of April 2023

Best way is to track monthly expenses for a few years prior to retirement, 4 buckets (fixed recurring, one-off big ticket spend, emergency medical and discretionary splurge).

When kids are off your payroll and leave the nest, there would be substantial savings. Don’t feel obliged to pay the down payment on your kids house, send them for masters program or fund their coffee house/restaurant dream. At best, pay for family meals and family vacations.


Sunday 2nd of April 2023

Hi Kok kok, people usually frame things differently. Some the right way and some less correct. I think I can agree with yours. But I tend to have one as the inflexible recurring spend and flexible recurring spend and this is why. we wont know well the fixed recurring and one off big ticket spend is must have or good to have and often when we are planning out the retirement needs, we may want to know which part of the expense we have flexibility and no compromise. based on that I think planning around flexibility and inflexibility is a better framing.

Usually, we would account the one time spend that is inflexible in our recurring budget as well. for some it may be a car and its split into yearly spend. but I agree it may make sense to look at it as a one time item because at 80 years old and above you might not want to cost it in.

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