In one of the reader exchange mails, the reader talks about the possibility of her spouse and herself getting to a point of financial independence soon. I think many young folks starting out in life now have it better with more local resources like these around. Back then we didn’t and we have to figure out a lot of these on our own through book reading. But I digress.
On this topic whether it is possible, the main problem here is always making HARD CHOICES. What the reader is wanting is not going to be the norm of society and that is where they are likely to encounter much pushbacks from society.
So I explained a simulation how someone as well endowed as themselves can realistically get to where they want. A key note on financial independence is how THEY define it, and so it may differ greatly from YOU. In their case, it is to create a Wealth Fund to support 70% of their lifestyle safely so that they can think about what to do after 35 years old.
I did a quick simulation using my Wealthy Calculator based on their earnings power conservatively ( You can play with the calculator. Its free.)
How is this simulation best illustrated?
We have a pair of sweet hearts who develop their relationship in NUS and comes out to work at age 25. They decide early on to work towards financial independence, that is, have the option to choose where to work, how hard to work, or not work for an extended period of time.
They decide not to care about how relatives look at them, how their friends tease them and make hard choices in life.
Since they excel in school, they start off both with a 5000 salary. normalize they have a 2 month bonus without a thing call AWS (practically non existence now. Their income grows at a rate of 3% per annum. its rather low, considering they are high performers.
They decide to put away 70% of their combine disposable income to wealth building. This means its after CPF. This also means for each of their 3% increment, 2.1% goes to wealth building. Since they are starting out, they decide to do a mixture of stocks and bonds ETF, to grow it at 3% per annum. This is lower than a lot of my projections.
In this 10 years till age 35, they would have channel a total of $898k to wealth building. their 3% return grew their money a little bit to 1.022 mil in the 10 short years.
For top performers, at the end of their 10 years their income grew from 5k to 6.4k. typically i would think it will grow faster than that.
(click to view larger image)
If you are afraid they don’t have much to spend, at the starting they can spend 33.6k per year or 2.8k per month. At the end of 10 years their expenses can grow to 43k per year or 3.6k per month.
What can 1 million do for them. if their withdrawal rate (every year they withdrew) is 3.5%, they can withdrew 35k per year or 2.9k per month. they can choose to step back in life.
There are much holes in this simulation and because I did it quick, after some thoughts and inputs, some well versed readers should be able to see it:
- High earners should contribute less to CPF and thus it might be more
- Good performers should grow their income faster than a 3% rate
- A stock and bond equity return can be higher than 3.5%
- This will entail them not having children at their most productive period
- High performers need costs to maintain their high performer status
This simulation hopes to evoke you to think about your situation. You might not have the best of scenario, but tweaking the simulation will tell you how far off or how close you are to that stage.
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For my best articles on investing, growing money check out the resources section.
- The Dangers of Income Planning with a Fixed Inflation Rate (such as 3% p.a.) - September 25, 2023
- New 6-Month Singapore T-Bill Yield in Late-September 2023 Should Stick to 3.75% (for the Singaporean Savers) - September 21, 2023
- A Concentrated, High-Quality Fixed Income Financial Independence Income Strategy Has Enough Uncertainty - September 20, 2023