Quit Like a Millionaire - The FIRE Strategy

Have you read the book "Quit Like a Millionaire" by Kristy Shen and Bryce Leong yet?  They offer a pretty compelling approach to achieve FIRE.

Their broad FIRE strategy is as follows:

1. Have a global medical insurance policy in place.
2. Determine investment portfolio needed - i.e. Annual_Expenses x 25.
3. Invest in low-expense Exchange Traded Funds (ETF) that track indices for a balanced equity-bond portfolio.  
4. Weigh it more heavily with higher-yielding ETFs for the initial 5 years to reduce the negative impact of retiring in a downturn market - i.e. mitigate against sequence-of-return risk.
5. Perpetually withdraw at a 4% rate per year during retirement.
6. Income yielding portfolio provides a Yield Shield - i.e. even if the market tanks, there is still distribution.
7. Create a Cash Cushion to cover the shortfall in those bad years. Bad years typically did not last beyond two years before the market recovers to previous levels. 5 years is however assumed as a margin of safety. Cash_Cushion = (Annual_Expenses - Annual_Yield) x 5.  In good years, use any surplus to top up the Cash Cushion.

Steps 5 (Yield Shield) and 6 (Cash Cushion) are part of the mitigation strategies against bear markets. Additional options include:

• Geographical Arbitrage. Live in lower cost-of-living countries till market recovers!
• Side Hustle. Create alternate streams of income. 
• Part-Time Work. This needs no explanation.

There's a fair bit of treatment on dealing with taxes due to Canadian and US laws. But taxation in Singapore is much easier without the capital gains tax to worry about. And prevailing tax avoidance means of SRS and CPF schemes are much simpler to understand.

--
Based on this strategy, they retired with a $1,000,000 portfolio for a lifestyle that requires $40,000 a year.  It turns out they were able to travel around the world, living more months in low-cost countries, yet they still managed to keep their expenses within $40,000 a year.  In the meantime, their portfolio has actually grown to $1,300,000.

I must say their very low annual expenses may seem extreme (minimalistic) as it probably involves not having a house that is a home (perhaps a StoreHub will do?), and being prepared to lead a fairly nomadic lifestyle.

It's also easier for them as they do not have children. In their book, they did address those situations involving children though. Nor are they tied down by having to look after their parents - a trait that is perhaps less common for western cultures.

There are various other strategies to optimise expenses that they described in their book. Have a read. I enjoyed it.

Related:
Quit Like a Millionaire - By Millennial Revolution

How are the excess CPF funds withdrawn after meeting the Full Retirement Sum?

Presuming that at age 55, you have the necessary CPF Retirement Account (RA) funded, what happens to the rest of the 'excess' money in the Ordinary Account (OA) and Special Account (SA)?  Can we withdraw freely, and how in what order will it be withdrawn from the respective accounts?

Here goes the responses from CPF Board ...

--

Question: If there is still balance in my SA after deducting the sum for RA, will it remain in the SA, or will the balance be transferred to OA?
It will remain in the SA.

Question: And thereafter, is it correct that any time after age 55, I can withdraw any balance left in both OA and SA?
Yes, your understanding is correct.

Question: Which gets deducted first if I choose to withdraw? Must it be from SA first, before OA? Or do I have a choice?
The Board processes your withdrawal in the following deduction sequence:


Question: Is it true that I can then withdraw as often as I want after age 55? For instance, can I withdraw a monthly sum of my choosing till the balance in OA and SA are depleted?
Yes, you can withdraw all the savings in your SA and OA at any time from age 55 (i.e. multiple times in a year), provided you have set aside the FRS in your RA.
--

Related:
What happens to my CPF savings when I turn 55?
How much CPF savings can I withdraw from age 55?
How much CPF LIFE monthly payouts will I receive?

How will the CPF Retirement Sums be formed upon age 55?

So we have heard about the various CPF retirement sums, i.e. Basic (BRS), Full (FRS) and Enhanced (ERS), which gets committed upon reaching age 55, and for which these will generate lifetime of payout from age 65 onwards (or deferred till age 70 if so decided).

Here's an interesting response that a friend of mine obtained from CPF Board on his queries. It provided details on how the FRS and ERS will actually be formed.

--
[edited extract]

Question 1: Instead of FRS or ERS, can I choose any amount that is in between, even though I have enough for ERS at age 55?


Allow us to share with you how Retirement Account (RA) will be created for you when you turn 55.

By default, the Board will create your RA when you turn 55, by setting aside the applicable Full Retirement Sum (FRS) in the RA.

The transfers of CPF accounts to make up the FRS will be made in the following accounts and sequence:
(i) funds in the Special Account (SA); and
(ii) if (i) is insufficient to set aside the FRS in full, funds in the Ordinary Account (OA) will also be transferred to your RA to make up the FRS.

The process of setting aside the FRS is automatic and applies uniformly to all members turning 55.

After the RA is created (with FRS) at 55, you can then transfer the remaining savings in your SA and/or OA of any amount and at any time to your RA, as long as it is within your topping-up limit. The topping-up limit is the maximum amount you can top up to RA.

Topping-up limit in RA is computed as follows:


Hence, if you wish to transfer an amount lesser than the topping-up limit in RA (i.e. setting aside a retirement sum between FRS and ERS), you can do so as well.

Question 2: If there is still balance in my SA after deducting the sum for RA, will it remain in the SA, or will the balance be transferred to OA?


It will remain in the SA.
--

For more information:
What happens to my CPF savings when I turn 55?
How much CPF savings can I withdraw from age 55?

Related:
Maximising CPF Post-55

Maximising CPF Post-55

It's really great to hear from the post-55ers on their interesting ideas and experience in maximising retirement benefits.  Here's one from 'Adam' that cropped up in a previous conversation which I found especially interesting ... (re-posted with edits):

--
OA: Ordinary Account
SA: Special Account
RA: Retirement Account
FRS: Full Retirement Sum
ERS: Enhanced Retirement Sum
--

How do you protect your SA money from being taken to form the RA upon reaching 55 years old?

As it stands now, money in the SA earns 4% pa of interest. Likewise money in the RA also earns 4% per annum of interest. For those 55 years old and above, CPF also gives 6% per annum to the first $30,000 in your RA, and 5% per annum to the second $30,000 in your RA, while the rest of the money in your RA earns 4%.

So for example, I have $176,000 in my RA, the interest my RA money would earn in a year is: $176,000 x 0.04 + $900 = $7,940. The $900 is derived from the 6% and 5% interest for the first $30,000 and second $30,000 respectively.

Now, the issue is, how to "prevent" the CPF from taking money from your SA to form the FRS in your RA when you turn 55?

Supposing I am now 54 years and 11 months old, and I have $230,000 in my SA. Next month, when I turn 55, CPF would automatically take $176,000 from my SA to form the FRS in my RA, leaving me with only $54,000 in my SA. I would rather that CPF take the $176,000 from my OA to form the FRS in my RA and leave my $230,000 in my SA intact to earn 4% interest pa.

Right on my 55th birthday, I woke up in the morning, logged in into my CPF account and lo and behold, my RA was created. At that time, the FRS was $161,000, and all the money came from my SA with a little leftover.

Right from the start, I had planned to top up my RA to ERS. If I were to use my CPF money to top up my RA to ERS, they would take money from SA first before taking money from the OA. Since I didn't want my SA to be hollowed out, I had to use cash ($80,500) to top up my RA to the then ERS of $241,500.

Every January 1st since then, I have been topping up my RA with $7,500 in cash, to keep up with the new ERS limit. The interest earned in your RA each year is not counted towards the new ERS limit. Let me explain:

This year the ERS limit is $264,000. By next year, it would be increased by $7,500 to the 2020 limit of $271,500. My current RA amount is $296,000 including the interests earned over the few years, but I would still be able to top up another $7,500 in January 2020.

So you can indeed continue to top up your RA to meet the new ERS amount of each progressive year up till you are 70 years old. 70 years old is the latest age at which you can join the CPF Life plan. 55 years old is the earliest age at which you can opt to join the CPF Life plan.
[This para may be misleading. Firstly, what Adam is saying is that a CPF member can choose to delay CPF LIFE payout till age 70. So up till then, top-ups to RA up to ERS are still possible. Secondly, a CPF member can decide which CPF LIFE scheme to select any time after age 55, up till a decision is made to begin payout (latest by age 70).]

The biggest hurdle (and pain) is the very first top-up from the FRS to ERS. For those turning 55 years old this year, the FRS is $176,000 and the ERS is $264,000, this makes the top sum to be a whopping $88,000!! This is no small sum and takes some saving effort to build up. So if you intend to top up your RA to ERS, you must plan and start saving early. After that first top-up, every year is $7,500, a more manageable sum.
--

How's that for maximising our CPF?

--
[Appended ...]
Stay tuned for next two weeks' posts on CPF Board's responses to some related queries.

Using CPF-OA as a High-Yield Savings Account

Property is really expensive in Singapore. For most, buying a home is pretty ingrained as a basic need to establish a family. So it is often the case that we would tap on our CPF as a source of cash to fund the purchase of a house.

We are poor savers, by and large, particularly at the tender ages of 20's to 30's. Being new in our career, with a salary at its lowest point, and yet filled with floords of commitments and distractions. Plus, we're probably dead silly in the way we manage our money anyway.

So we raid our CPF-OA (Ordinary Account) to help fund a huge chunk of the property purchase and continue to ride on our CPF-OA to pay the consequent installments. And we thank the gahmen for forcing us to compulsorily contribute to this. Over time, it can be a really huge chunk that we take out of our CPF-OA.

Now, there is actually no requirement to pay it back, unless we sell away our property. It remains optional to pay back what we took, plus accrued interest, otherwise. And so we never have to if we don't wish to, till the day we kaput (transit to the netherworld).

So here's an idea:

Suppose you are already past 55 years of age, and you have fully funded the Full or Enhanced Retirement Sum (FRS/ERS) into the CPF-RA (Retirement Account).  And because you have achieved FIRE, you are happily retired, drawing a passive income that is generated from a range of investment instruments. Well done! Being the studious hack that you are, you are looking for ways to manage this cash flow generation.

Suppose you generate $50,000 a year, but you only require $4,000 a month to cover monthly expenses.  Instead of keeping the remaining $46,000 for the rest of the year in cash in a bank savings account at a pathetic savings interest rate, what if you do a voluntary cash refund of CPF savings used for housing into your CPF?  The money goes into your CPF-OA where it earns 2.5% (or whatever prevailing rate). But because these are excess over the fully funded FRS/ERS, we can request to withdraw anytime, any number of times, as you're already post-55. So we can gradually withdraw $4,000 per month thereafter. Rinse and repeat.

Now, 2.5% (or whatever it may be) is pretty much risk-free and not to be scoffed at.

Is this workable?  Any catch?

--
This is what the CPF website says:

You can refund any amount, capped at the full principal amount you have withdrawn for the property with the accrued interest. Please complete the Application to make cash refund of CPF savings used for property (HSD/VR) (PDF, 0.4MB) and enclose a cheque/cashier's order in favour of 'CPF Board' for the amount you want to refund. Mail both the form and the cheque/cashier’s order to: Central Provident Fund Board Housing Schemes Department Robinson Road P.O. Box 3060 Singapore 905060 Alternatively, you can deposit the cheque/cashier's order and the form at any of the CPF service centres. The refund will be made to your CPF account within 7 working days from the receipt of your cheque/cashier's order (subject to fund clearance).

I don't understand why they still go with cheque though. *shrug*

Where Does a $120,000 Annual Retirement Income Go To?

I am most grateful to a reader who shared his monthly expense figures. I'm not even sure if I should say "he" or "she"? But for convenience, I'm going to just call him Adam (A).

[To: 'Adam' - Give me a shout out if prefer to be called by another name?]

It looks like Adam's household is made up of a couple, an elderly and a maid.  Not sure if there are any children? In contrast, my situation (B) is that of a couple and two children.  While the specifics are not the same, there are high similarities - i.e. four persons in the household, close to retirement.

I took the liberty of regrouping Adam's data so that I could make reasonable comparisons.

Expenditure Item	A	B
Condo maintenance	$      330	$      295
Car/transport related	$      670	$      594
Property tax	$      280	$        33	A's is for 2 condos
Utility, broadband, phone	$      350	$      474	B's includes replacements
Insurance	$      300	$        40	B's exclude Medishield using CPF-MA
Food/meals, groceries, households	$   1,500	$   2,392
Medical	$      100	$      750
Gifts, clothings, misc	$   1,750	$   2,286	B's include contributions to parent
Donations	$      150	$        53
Condo maintenance (investment property)	$      350
Maid (to look after elderly parent)	$      650
Maid levy and medical	$      150
Travel	$   1,500	$   2,110
TOTAL	$   8,080	$   9,027

One key difference is that Adam has a second property, an investment property, from which he is earning rental income. And he has a maid to look after an elderly folk.

Adam also mentioned that he owns a car, which he views as essential to ferry the elderly. And he is concerned whether there is enough money to buy a replacement in time to come. This is clearly something he needs to prepare for. Buying a replacement car is a hefty investment, perhaps $100,000? This is an expense that is going to happen once every 9 to 10 years. But as one age, perhaps we would reach a point where it is no longer safe to even drive one? But the removal of car-related expenses (road tax, car inspection, insurance, maintenance, fuel, parking - they really add up!) would be substituted by other public transportation expenses.

Going through the data, I was wondering if I might have missed out something in my insurance. Wifey and I do have Integrated Shield plans, ElderCare plans, and property insurance. But nothing else. With the income stream from our investment portfolios, there didn't seem any reason to need anything else for retirement. With most of it paid via CPF-MA (and therefore not reflected in above), there is little cash involved, for now.

Our medical expenses are higher, as both wifey and I have certain conditions that require regular treatment. That explains the much higher medical expenses compared to Adam's.

My family is probably spending a lot more on food (groceries and meals out) and household expenses. That is something of a lifestyle desire. Or perhaps we are just eating too much and growing fat!? Hah.

Adam's family has been fortunate, investing early in their career in property and shares, and that has paid off.  My family started investing late, much of that only in our 40's, in shares and some unit trusts. It was too late to go into properties, but we were lucky to have gotten a decent condo at a fairly low price.

Adam's family is also comparatively more generous with tithing/donations. This is an area I am prepared to contribute more on if my investments pay off.

My family's travel expenses are higher. Perhaps Adam's family travel expenses do not include one or two persons in the household? This is probably seen as a major luxury item. But it is certainly something meaningful to my family, exploring the world around us. For sure, this is an item that some flexibility can be exercised on if financial circumstances vary - especially, during market downturns.

In time to come, my family's expenses will drop significantly once the children are working and eventually, moved out.

In summary, neither hit $120,000 a year, although close to. But with inflation, both surely will soon.

A Lifetime of Income for Retirement

Recent articles mentioned local survey results which suggested that an aged single could live off $1,379 per month. That works out to be $16,548 annually. A portfolio of $413,700 could generate that income perpetually based on 4% extraction (i.e. annual income needed x 25). But we need to understand that this is for a minimalist lifestyle for a single.

Referencing the last published Department of Statistics report on Household Spendings by Age Group, the average monthly household spending of those aged 50-59 was $4,837 (or $58,044 annually), and drops to $3,586 (or $43,032 annually) for those aged 60 and above.

But these were based on 2012-13 survey data. If we compound these with an estimated annual inflation of 1.5% (inflation has been low in recent years) for 6 years (from 2013 to 2019), the corresponding figures would be $63,468 (aged 50-59) and $47,053 (aged 60+) respectively.

Summary of data points:
For an annual spend of $16,548, perpetual income portfolio is $413,700.
For an annual spend of $58,044, perpetual income portfolio is $1,451,000.
For an annual spend of $43,032, perpetual income portfolio is $1,075,800.
For an annual spend of $63,468, perpetual income portfolio is $1,586,700.

For an annual spend of $47,053, perpetual income portfolio is $1,176,325.

So indeed a household spend of $120,000 annually would be quite a FAT FIRE to retire on. It should be pretty comfortable.
--

Somebody mentioned to me that assuming he retires at 65 and lives for another 25 years, he would need $3,000,000!  $120,000 x 25 = $3,000,000.  And if he was to retire earlier, he would need even more. So if he was to plan for 30 years, that would be $3,600,000!

I said no, that's not correct. Using the rule of 4%, he would only need $3,000,000 to generate a perpetual lifetime income of $120,000 annually.  $3,000,000 x 4% = $120,000.

And thanks to a little hack, all thanks to CPF, it's not even necessary to have $3,000,000 to generate $120,000 annually.

How Much Do We Need in Retirement?

When you start getting old (older), you start thinking about this kind of question. But really, should start thinking early. The trick is to start early. Very early. I've been thinking about this a lot more. And it's a pity I started late.

Anecdotally, it seems like a comfortable retirement lifestyle will require $3,000 per month.  That's a number I came across a couple of times.

Of course, if I'm going to live a retirement drinking only tap water, living on a remote isolated kampung on a distant island, and eating fish fished from the sea everyday cooked any number of ways, maybe I need a lot less. But that's not the kind of lifestyle I'm thinking of.

For a couple, that works out to $6,000.  And for each additional dependent, a.k.a. kid, that's $1,000 each. I've been tracking our expenses down to the last cent, and it is surprisingly accurate.

BTW, it is quite easy to keep track of expenses when all your spending either appear in your bank accounts or credit card bills. I use very little cash. That's the trick. Go SMART NATION!

So, for a family of four, that works out to $8,000 monthly, or $96,000 annually. Circa 2019.

DOES NOT INCLUDE EXPENSIVE HOLIDAYS OVERSEAS and other loan commitments (e.g. housing, car, etc).

Stacking on $24,000 for holiday expenses, that's $120,000 per year.  Those are numbers for my family at least. 

What works for you?

Multiple Streams of Income

A stocktake of income streams ...

At age 55, excess funds in CPF after deducting for CPF-RA (to fund CPF-Life)
From age 62, Supplementary Retirement Scheme
From age 65, CPF Life

And throughout, complemented by passive income streams from ...

Savings accounts - interests (<0.5%)
Money market funds - interests (0.5-2%)
Savings account with special/high yield - interests (1.5-2.5%)
Shares - dividends (3-4%)
Preference Shares - dividends (4-6%)
REITs - dividends (5-7%)
Bonds - coupons (4-6%)
P2P Loans - interests (12-25%; effective interest is lower due to defaults)
Blogging income - click-ads (pathetic)

Additional sources with constraints ...

CPF-OA - interests (2.5-3.5%; subject to policy changes)
CPF-SA/RA/MA - interests (4-5%; subject to policy changes)

Everything starts to look more interesting as age creeps towards 55.

Do we need $1.5 to $2 million to retire on?

$1.5 to $2 million seems to crop up often as the typical range for a retirement investment portfolio. It seems daunting and extreme, especially to somebody who is single and below 35 years of age.

But as one progresses into the 40s and starts to have a family, the maths starts to be a lot more serious.

What is $2 million? If one works on the basis of a perpetual income, then $2 million at an extraction rate of 5% each year would work out to be $100,000 per year, or $8,000+ a month. If it is $1.5 million, that would work out to be $75,000 a year, or $6,000+ a month.

The range of $6,000-$8,000 may seem a lot to those living below this level of income today. But once we take into account that this is a family unit, and seeking a comfortable retirement (certainly not trying to live at the poverty line!), it may well be typical?

Where would the money go to? Here's a possible distribution (monthly):

- $500 for parents (two sets!)
- $250 for utilities (too many aircons, laptops, etc!)
- $350 for broadband, mobile lines, cableTV
- $500 for transport-related (car petrol, maintenance, parking, bus, taxi, MRT)
- $500 for housing-related maintenance, property tax, etc
- $1,500 for meals and entertainment
- $1,200 for groceries and households
- $600 allowances and education expenses for 2 kids
- $150 newspapers, magazines, books
- $50 donations
- $1,500 healthcare and other insurance, medical expenses
- $50 sports

That's $7,150. Add on holidays and other miscellaneous, and it starts to look like $8,000 and beyond. Reasonable or extravagant?

The profile will change as the kids grow up and moves out to morph their own family nucleus. But even as such reductions happen along with key life events, inflation will continue to creep and raise the bar.

I'm sure we don't aim to retire poor and settle to a lower standard of living. For sure, we're looking for that sunshine at the end of the rainbow, for a life of comfort and happiness.  So there, being a millionaire is not enough, unless you're single and intend to remain so. But that's too lonely. I figure we need to be a millionaire twice over.

Related:
How much does a household spend a month?

How much does a household spend a month?

Cost of Living

The Department of Statistics publishes various sets of data that are available to the public to download from its data collection efforts. One of the interesting data set I came across is on Household Expenditure:

Source: 
http://www.tablebuilder.singstat.gov.sg/publicfacing/createSpecialTable.action?refId=3988&exportType=csv

Average Monthly Household Expenditure
HDB 1 & 2-room: $1,287
HDB 3-room: $2,478
HDB 4-room: $3,918
HDB 5-room: $5,283
Exec Flat & Condo: $8,000
Landed Property: $10,409

My own bottom-up estimates suggest that for my family of four residing in a condo, I would need $7,800 minimally to more or less maintain the current lifestyle. If I were at age 55 now, I would need $7,109. And at age 65, $5,977.

- I do not smoke, drink nor gamble. The occasional Toto don't count.
- I own a car and assumed that I would continue to maintain one till age 64.
- I assumed all housing loans have been paid down. No other debts.
- Overseas holidays are not included. I would need surplus to fund these luxuries.

The numbers seem to be fairly close to the overall statistics. I shall be collecting detailed data over the next 12 months to validate these figures.

Funding the Cost of Living

Based on my norms of 4% extraction from an investment portfolio, that means I would need the following to retire on (figures in bracket are if 5%):
Now - $2.34m ($1,87m)
Age 55 - $2.13m ($1.71m)
Age 65 - $1.79m ($1.43m)

In Teh Hooi Ling's "Show Me the Money - Book 1", chapter 19 on "Debunking the 'safe instruments for retirement' myth", she analysed various $1m portfolios over during timelines, and concluded that a 5% extraction to get $50,000 each year was largely viable. This was despite the ups and downs of the market.

Looks promising.

Retiring on $2,000 a month [updated]

Retiring Siblings

Benny and Erica Tan are a brother and sister sibling pair. Benny had reached his statutory retirement age but was re-employed for a few more years.  Erica who is a tad younger, has however chosen to resign from her job and retired a year early. She got fed up working for an overly demanding boss. When she tendered her resignation, the boss begged her to stay. But she had already passed the point to turn back. She left with no regrets and is now picking up some ad-hoc work to fill her time.

They live in a 5-room HDB flat that have been fully paid for. The flat was transferred to them by their parents before they passed away. Not being graduates, they had basic jobs with decent but not 'obscene' pays.

Their lifestyle seems basic. While they do watch TV, they do not subscribe to cable. They do have an Internet subscription and each own a mobile phone with fairly basic plans. Both are singles with no spouse and kids to worry about. No car and certainly no motivation to do so as both do not even have a driving license!

It looks like they could survive on just $2,000 a month each. According to the Department of Statistics data on average household income and expenses, a 5-room HDB household averages $5,282.60 per month, while a 4-room HDB household averages $3,917.90 per month. I would judge that they are more akin to the 4-room HDB household although they live in a 5-room HDB.

Not having to spend a single cent on housing all their lives, their CPF contributions have been pretty much maximised and left untouched all these years.

Back to the Future

If they could rewind the clock and are instead at age 55 today, how would they make a decision on their CPF Life scheme?

[https://mycpf.cpf.gov.sg/Members/Schemes/schemes/retirement/cpf-life]

Under the revised CPF scheme , they could go for the Enhanced CPF Life with a CPF-RA of $241,500, giving a perpetual monthly pay out of $1,770 to $1,920 each from respective retirement age. Assuming the lower end at $1,770, they would each face a shortfall of only $230. How can they close this gap?  There seems to be a few possibilities ...

Monetise their Property

Rent Out

As they are living in a 5-room HDB flat, they have a room to spare. Being near to a Polytechnic and a Junior College, it's a location with possibilities. They could rent out a room. I wonder what's the market rate for a room rental in a HDB flat? Is $460 a month realistic? The risk lies in whether they can secure continuous rental.

[Renting out via AirBnB is an alternative. Unfortunately, it's illegal. For now.]

Sell Down

They could consider selling off their current 5-room HDB and downgrade to a smaller HDB, and then take the difference to invest for an income stream. So they could consider the newly announced 40-year lease 2-room flexi scheme (More: Joint Press Release by MND and HDB on 2-room flexi scheme, HBDWeb on 2-room flexi scheme).

For this to work, they would need to be able to extract out a cash value of $138,000 to be invested into income yielding products at 4% to get $460 a month. It seems possible. A check against this nifty tool at Simplyjesme on HDB resale prices shows an average resale price of over $600,000 for a 5-room.

The risk lies in whether the income yielding products are assured or come with downsides. But there seems to be more than enough margin of safety. If they sell their 5-room for $600,000 and buy the 40-year lease 2-room under the flexi scheme at $28,600 (for first timer applicants), that would leave them with $571,400. At 4%, that would generate an income stream of $22,856 a year, or $1,904 per month, well over the $460 gap that they needed to close. There's money to spare for overseas holidays, or to save for a rainy day.

Work Part-Time

Part-time Work

They could pick up some part-time work and earn some income. Assuming $8 per hour, they each need to put in only 29 hours a month to close the gap. That sounds like less than 4 full days of work a month! Seems doable. But are there employers willing to offer jobs designed for semi- retirees?

Monetise a Hobby

Benny in particular is an avid photographer. He could pick up some part-time work as a wedding photographer. But there could be some difficulties in getting sufficiently regular assignments to secure a steady income.

Conclusion

Inflationary considerations aside, there seems to be a few avenues to close the gap. Although, each does come with some level of uncertainty that could derail the plan. Are there other alternatives?

What is the inflation rate for Singapore? [reposted]

I was doing some analysis of my investment portfolio to assess how close I was to being financially independent, and started doing some "what-if" of the various planning parameters assumed. One of the important factor was the future "inflation rate".

I've always worked under the impression that 3% was a reasonable number to use, and I wondered how realistic that was? Tweaking the figures between 2% and 4% showed dramatically drastic impacts. It is clearly a very sensitive parameter - i.e. small changes would cause disproportionate outcomes.

I came across one article (http://www.tradingeconomics.com/singapore/inflation-cpi) which mentioned that the average was 2.75% (from 1962 to 2015).

Checking against the Department of Statistics data (http://www.singstat.gov.sg/statistics/browse-by-theme/prices), I obtained the following:

Table 1. Time Series on CPI (2014=100) and Inflation Rate (as at Feb 2015)
Year	Consumer Price Index (2014=100)	Annual Inflation rate
1980	50.6	8.5
1981	54.7	8.2
1982	56.9	3.9
1983	57.4	1.0
1984	58.9	2.6
1985	59.2	0.5
1986	58.4	-1.4
1987	58.7	0.5
1988	59.6	1.5
1989	61.0	2.3
1990	63.1	3.5
1991	65.2	3.4
1992	66.7	2.2
1993	68.2	2.3
1994	70.3	3.1
1995	71.5	1.7
1996	72.5	1.4
1997	74.0	2.0
1998	73.8	-0.3
1999	73.8	0.0
2000	74.8	1.3
2001	75.6	1.0
2002	75.3	-0.4
2003	75.6	0.5
2004	76.9	1.7
2005	77.3	0.5
2006	78.0	1.0
2007	79.7	2.1
2008	84.9	6.6
2009	85.4	0.6
2010	87.8	2.8
2011	92.5	5.2
2012	96.7	4.6
2013	99.0	2.4
2014	100.0	1.0

Based on the more recent 35 years of history, it seems to average only 2.22%.

Given this, I will revise to 2.5% as my planning norm, and to use 3% only to test the worst-case scenario. Using too high a figure may be unnecessarily inflating the extent needed from my investment portfolio, and inevitably postponing my FIRE. *hmm*

Can I retire now?

--
For an alternate view on this subject:
Bully the Bear's take on personal inflation

I recall having a bowl of Mee Pok Dry at $1.50 in 1980. Today, a typical bowl would cost $3 to $4. That correlates reasonably with the doubling from the above inflation data.

Of course, there are also other data points that could suggest otherwise - e.g. housing.

If you're looking for a less expensive bowl of Mee Pok Dry, it's still possible to do so at certain places. Here's one from a coffee shop in Teck Whye.

A Taxi Driver Who is Far Richer Than I Am

Drained and tired after a day of non-stop brain work, I was feeling really exhausted. As I waited for a taxi, a fellow colleague appeared, queuing behind me. She said, "So late?"

I paused as I contemplated how to answer her. I was thinking, so was she. But I could only utter a "Huh?" Told you I was tired.

She went on to say, "If we're leaving when the sun is already down, it's late." Couldn't agree more with her definition. I nodded in agreement. We managed to flag down our taxis soon after.

It turned out to be yet another interesting taxi journey. I recognised the driver by his voice. I was pretty sure I had taken his taxi before. When I mentioned this, the driver said enthusiastically, "Yes, I recognised you too!"

With most taxi drivers, they were usually (a) the silent type, (b) the chatty type who talks about anything under the sun, or (c) the anti-PAP type. This gentleman was the chatty type.

He volunteered that he was emigrating to Australia next month. Curious, I asked how much did he need to emigrate. His answer was a cool $5 million, and went on to add that he had $20 million. I was dumbstruck!

"If you have that much money, why are you still driving a taxi?"

"I'm just hardworking." He chuckled in reply. Seems he owned four properties and was collecting rental from three of them. He was a former Forex trader and had made quite a bundle. With more than enough money, he was looking forward to enjoying an easy life in Australia. He had bought a plot of land in Melbourne and was planning to do some farming. That didn't quite sound like an easy life to me. I'm more sedate I guess.

His two kids were grown up and already working. They would be joining him in Australia as well. I wished him well. Guess I am not likely to take his taxi again.

WTF, with $20 million, who needs to work? If I had only one-tenth of that, I would have happily retired. WTF. Ok, I'm obviously envious. I should have asked if he wanted to adopt a godson.

$20 million at 4% would have reaped $800,000 a year in perpetuity. That's tons more than I earn a year. It's enough passive income to buy a new house every other year, even by Singapore standard. It could also fund a retirement for somebody every year. That's a lot of zeroes. WTF.

For another taxi ride story:
Condo, wife, kids and a taxi

24 Tales in the Journey to Wealth

RETIREMENT

"Financial Independence, Retire Early" (FIRE) - that seems like a wonderful catch phrase to set the flames going. What does it take to achieve this burning desire? I think it boils down to a magic number.
[1. http://lizardorealm.blogspot.sg/2015/05/light-fire-can-i-retire-now.html]

STOCKS

To achieve this outcome, I invest in the market, diversified across market regions, namely Asia Pacific (except Japan), global emerging markets, the US, Europe and Japan. 

Unit Trust.

I use funds from the Supplementary Retirement Scheme (SRS) and CPF OA and SA funds to invest into Unit Trust on the Fundsupermart platform. Since each year I can contribute up to to $12,750 into SRS, that is the capital injection that goes into this portfolio. This unit trust portfolio is further complemented by ETFs. Fees in Unit Trusts are relatively higher compared to ETFs, but the latter tends to be less liquid.

[http://lizardorealm.blogspot.sg/2015/01/the-performance-of-unit-trusts-in-2014.html]

Singapore Stocks.

A value investment approach in dividend paying stocks can be most rewarding. I diversify across the Singapore stock market by buying a dozen stocks (or two!) to spread the risks. The wonderful part of this is that I can happily collect dividends to reinvest while waiting as well. Of late, the dividends can run into an average of $1,000 a month. This will be the means by which I intend to generate the eventual passive income for retirement. The dividends would have been more, except that I typically take up the script offer (i.e. collect more units of stocks in lieu of cash), so as to continue to build up my portfolio, and at a discount from the market value.

[2. http://lizardorealm.blogspot.sg/2015/04/my-singapore-team-of-dividend-stocks.html]

US Stocks.

Likewise, for US stocks. I invest through POEMS which hold the US stocks as a custodian account. US stocks (if you pick carefully!) have a practice of steady dividend growth. So even if you do nothing, the dividends tend to hold stead or growth with each passing year. The only problem is the 30% withholding tax on the dividends. The custodian fee that POEMS charge is quite minimal really, so that I can live with.

[3. http://lizardorealm.blogspot.sg/2015/06/my-us-team-of-dividend-stocks-2015.]

Exchange Traded Funds (ETF).
Since I already hold diversified portfolios of Singapore and US stocks, the rest of the market regions are held via ETF, which complements the Unit Trust portfolio mentioned earlier. I prefer to hold ETFs that pay out dividends - or what I refer to as an Income ETF Portfolio.

[4. http://lizardorealm.blogspot.sg/2015/01/2-portfolios-of-etfs-growth-vs-income.html]

BONDS

The stock portfolios are complemented by bonds and cash. While my plan was to maintain only 10% in bonds and cash (or bond-like instruments), it has typically reached 20%. In addition, I maintain 6 to 9 months worth of expenses in cash instruments.

Preference Shares and Retail Bonds. 

These can be bought off the SGX. The coupon payments, usually half-yearly, provides yet another income stream.

[5. http://lizardorealm.blogspot.sg/2015/01/non-convertible-preference-shares.]

Bondsupermart.
More recently, a wider spread of bonds can also be bought through Fundsupermart. Aside from the few retail bonds, the majority will require hefty $250,000+ investments. Something beyond my reach and need for now, so it's something to keep in view as a future option. As an income stream, perpetual bonds can be quite attractive.

[6. http://lizardorealm.blogspot.sg/2015/05/bondsupermart.html]

Singapore Savings Bond.
This offering from the Singapore Government will be available to retail investor soon. While not a inflation-linked bond, it has some semblance of it. I will most certainly park some of my cash components here. That will serve as an emergency buffer that can be cashed out if needed.
[7. http://lizardorealm.blogspot.sg/2015/04/singapore-savings-bond-as-safe-as-it.html]

Central Provident Fund (CPF).
The compulsory savings into CPF actually is another bond component, offering steady and fairly risk-free growth. The only problem is the lock-in. The lock-in becomes less of a worry for someone like me who is reaching the half-century mark. CPF funds has serveed many useful purposes thus far, especially to fund housing (used), support the kids' education (an option not yet used), or invested into stock or unit trust funds if I prefer to take more risks.
[8. http://lizardorealm.blogspot.sg/2015/02/a-great-retirement-offer-from-cpf.html]

Bank Savings Accounts.
Even the traditional banks can offer interesting saving accounts with higher interest rates. But a bit of acrobatics need to be done. This is the other component of my cash funds.
[9. http://lizardorealm.blogspot.sg/2015/06/how-can-we-stretch-interest-on-our-bank.html]

MAXIMISING SAVINGS, REDUCING EXPENSES

Even as the investment portfolios are being built up, it is also worthwhile to examine options to reduce 'leakages'.

Supplementary Retirement Scheme (SRS).
Taxation is such a killer, especially at higher incomes. One sure way to reduce the tax burden is to contribute to the SRS (and invest the money sitting in SRS!).
[10. http://lizardorealm.blogspot.sg/2015/02/one-way-to-avoid-paying-more-tax-srs.html]

Donations.
And if you have a charitable heart, donation is another way of reducing the tax burden while doing some good deeds.
[11. http://lizardorealm.blogspot.sg/2015/02/another-way-to-avoid-paying-more-tax.html]

Credit Cards.
Some people view credit cards as an evil thing. But used wisely, it can actually help reduce our expenses.
[12. http://lizardorealm.blogspot.sg/2015/06/4-credit-cards-with-great-cashbacks-and.html]

EXOTICS & ALTERNATIVES

There are many exotic options and alternatives to grow that investment pie. But be very careful! Perhaps, it suffices to keep things simple.

Crowdfunding.
A recent trend has been the growth of crowd-funding platforms. These have arrived on our shores, offering the lure of 12% returns or more. In reality, they are even more risky than junk bonds. I am keeping this in view for now.
[13. http://lizardorealm.blogspot.sg/2015/02/moolahsense-embarks-on-new-fundraising.html]

Starting a Business.
This requires more careful considerations. I'm not quite ready for that leap.
[14. http://lizardorealm.blogspot.sg/2015/01/running-cafes-as-business-owner.html]

Inheritance.
One could wait for an inheritance, if there is any to be had! But I wouldn't bet on this.
[15. http://lizardorealm.blogspot.sg/2014/12/20-years-and-200000-mothers-savings.html]

Exciting Bank Offers.
This is an oxymoron. With the exception of the aforementioned special savings accounts, what can they offer that can do better than all the self-help options mentioned earlier given their exorbitant charges?
[16. http://lizardorealm.blogspot.sg/2015/05/a-fantastic-investment-deal-at-bank-or.html]

STAY HEALTHY

Be Healthy.
Most importantly, is to stay healthy. What's the point of an early retirement, if one is in bade health? Or worse, expired early!
[17. http://lizardorealm.blogspot.sg/2014/07/investing-and-dieting-wealth-and-health.html]

Medical Insurance.
But we can never be certain of good health. So medical insurance is a must in my view. Without this, all the savings and investments can be easily wiped out in no time. Sometimes, we really have to spend money to save money.
[18. http://lizardorealm.blogspot.sg/2015/04/thank-goodness-we-had-medical-insurance.html]

Staying Healthy on Cruise.
One can still enjoy life, even while on a food binge on a cruise. It's not that difficulty to stay healthy, really.
[19. http://lizardorealm.blogspot.sg/2015/04/not-too-difficult-to-stay-healthy-on.html]

ANTHOLOGY OF DISASTERS

Con Jobs.
These are just plentiful and are happening everyday. Always worth repeating the mantra, "if it sounds too good to be true, it probably is too good to be true". Greed is our greatest enemy. And the enemy is that person in the mirror.
[20. http://lizardorealm.blogspot.sg/2015/05/rags-to-riches-riches-to-rags.html]
[21. http://lizardorealm.blogspot.sg/2015/02/the-allure-of-gold-treachery-of-glitter.html]

Job Loss.
This can really be painful and disastrous. A family unit that has multiple wage earner helps diversify the risk. But for the single-income family, there really isn't any room. Best to move on and deal with the realities.
[22. http://lizardorealm.blogspot.sg/2015/05/what-do-you-do-if-you-get-laid-off.html]

Extravagance.
A lifestyle of living beyond one's means is a sure road to disaster. Live within your means. What you can't save isn't yours.
[23. http://lizardorealm.blogspot.sg/2015/05/a-millionaire-and-yet-completely-broke.html]

Careless Decisions.
Sometimes, we will make bad decisions and lose money. Hopefully, this doesn't happen too often and too painfully.
[24. http://lizardorealm.blogspot.sg/2015/06/sumiko-tans-money-no-enough.html]

--
"Good health, great wealth!"
Or should it be, "Good wealth, great health!"

Sumiko Tan's "Money No Enough"

Among the journalists whose articles I greatly enjoy reading in The Sunday Times are Sumiko Tan and Teh Hooi Ling. I've always found Sumiko's reflections and musings of her everyday life amusing, and Hooi Ling's financial commentaries insightful. Alas, Hooi Ling had left the papers and gone into fund management as the Head of Research and Executive Director at Aggregate Asset Management. A loss for the public, but great for her.

Anyway, seems Sumiko Tan really wasted her money. Poor thing. She got a really raw deal for a "retirement" plan that would have given paltry returns of 2.38%, and then decided not to go ahead with it only after the "free look period" had past. Oh dear.

Source: The Sunday Times, 7 Jun 2015.

Doesn't look like she is ready for her retirement either, although she did mention she has some insurance and shares. I hope those are enough for her retirement. Her lifestyle shouldn't have been that expensive given that she has no children and she married really, really late.

I think she needs to make friends with Teh Hooi Ling. *grin* Wishing her all the best regardless.

Related:
Light the FIRE! Can I retire now?
Golden Harvests for Golden Years

Light the FIRE! Can I Retire Now?

This was the first time I came across the term: FIRE (by Googirl). Or to elaborate, that's Financial Independence, Retire Early.

Quite a catchy tag line. Achieving the left gives the option to exercise the right.

I view Financial Independence as the situation when my passive income can support a desired lifestyle.

For me, it works out to be an investment portfolio of $2.5m if before age 65, or $1.8m if at statutory retirement age of 65. The reason for that difference is the additional payout from CPF Life payout by then, and because parts of my current investments are using CPF funds and Supplementary Retirement Scheme (SRS) that are locked up till age 55 (the excess beyond the minimum sum from CPF Retirement Account can be withdrawn) and statutory retirement age respectively.

Alternatively, if I strip away these, I could likewise retire on a portfolio of $1.8m anytime if they were all using fluid cash based investments. Why $1.8m? Because at a 4% dividend/coupon payout or withdrawal rate, a $1.8m portfolio would give me $72,000 per year. That's $6,000 a month. I think it's enough for my wife and I.

Howzabout $1.8m in bonds from Bonds@FSM (see Bondsupermart)? That's like 6 blocks of bonds at about $250,000 each. A bit too much for me to stomach for now. I prefer wider diversification at this accumulation stage. But it is certainly one way.

If I were nearer retirement age, it might still prove to be attractive. A yield-to-maturity of about 4% seems achievable based on the various Singapore corporate bonds presently available.

A search on Bonds@FSM based on a yield-to-maturity above 4% with a time span of above 10 years threw up 17 options. Most are familiar names from the Singapore Stock Exchange. Many of these had yield-to-maturity in the region of 5% to 7%. Obviously, there are higher risks for the higher yield end of the scale (e.g. Olam and Hyflux). And interestingly, all are "perpetuals".

Another way of thinking about above is that every $300,000 worth of bonds at 4% yield would generate $1,000 of income per month.

What's your magic number?

Related:
The Good News About Retirement

Size Matters - How Much Is Enough? [updated]

Size matters. No sleazy thought please. Rather, Singapore Man of Leisure had an interesting article on Size Does Matter for Income Plays where he blogged about an investment approach to reap a $50,000 per annum income. The question he posed was, just how much capital would be needed to do this?

He offered a few possibilities and discussed the implications of: (a) $1 million at 5% yield; or (b) $500K at 10% yield. His conclusion however was to go with (c) $2 million at 5% yield. Why? Because the earlier options all hinged on the assumption that the portfolio do not diminish due to a fall in market value. So doubling up the portfolio provides a buffer in case the portfolio should collapse by 50%.

I thought maybe there's a solution to this involving less capital. I'm making an assumption from historical past that any collapse of that magnitude would likely see a recovery within 5 years. With that assumption, I could keep 5 years worth of cash at half of $50,000 (i.e. $25,000) per year, and add that to $1 million at 5% yield. So that way, even if the portfolio collapse by 50%, it would still generate $25,000, and can be topped up by another $25,000 from the safety buffer. Hence, the total portfolio needed is simply $1 million at 5% yield plus $250,000 in cash.

What say?

As an after thought ... come to think of it, with $2 million at an expenditure of $50,000 a year, that's 40 years worth of retirement budget! If one is already at age 55, I guess there's no need to invest or do anything hairy with it? The only risk is living too long, specifically, beyond age 95.

The Good News About Retirement - How much do we need to retire on?

Just how much do we need to retire on? Some rule of thumbs I've seen suggested 60-75% of last earned income as a reasonable estimate. Others I've seen have highlighted the need to provision more for medical expenses as one ages. In general, there is also the factor of inflation that has to be considered.

In some illustrations on investment returns, the term "real returns" is used. This refers to the return after deducting off inflation. Hence, a real return of 3% against a backdrop of 2% inflation would actually a mean an absolute return of 5%.

In a post on The Good News About Retirement by Darrow Kirkpatrick from US perspective, it was actually suggested that expenses are likely to decline with age, and highlighted health care support from ObamaCare, the enduring US Social Security system, availability of part-time work and bonus cushioning from inheritance. Darrow concluded that a prudent lifestyle and a reasonable effort to save would be pleasantly rewarded by the realities of retirement. Quite a significantly different point of view.

Taking our Singapore context, our equivalent would probably be our Medishield plans and Medisave for health care, pension contribution from CPF Life based on the CPF minimum sum contribution in CPF-RA/SA, and as a bonus, any inheritance comes tax free. We seem in pretty good shape.