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To retire by age 45, start with a plan.

Sunday, June 22, 2014


"Is early retirement the right financial choice?"
Jim Ellis discusses long-term financial growth strategies.

I have blogged about how it is important to have a war chest a number of times before. I have also said during my talk at InvestX Congress that it was precisely because I had a war chest during the GFC that I was able to take advantage of the very low prices offered by Mr. Market.

I also said that I lost quite a bit of money before which set my retirement plan back by about 2 years and how having a war chest ready helped to propel my plan forward by 10 years. What did I mean by this?



Bilbo had a good life.
Now, before I continue, I have to caution that this was something that I thought about a long time ago when I just started working life as a young adult. 


I was trying to grow my wealth through investments and I was a frog in a teeny tiny well in those days. 

I was basically thinking of amassing enough wealth to retire by age 45 and the plan had a projection to age 75.

So, imagine, if you will, a Mr. Tan who would like to retire by age 45. He decided that he required at least $2,500 a month to be comfortable and, assuming a normalised inflation rate of 3% and using a 5 year band to help determine the amount of money needed till age 75, he got the following:


Age 45 - 49: 
$ 2,813 a month ($33,756 a year)

Age 50 - 54: 
$ 3,261 a month ($39,132 a year)

Age 55 - 59: 
$ 3,781 a month ($45,372 a year)

Age 60 - 64: 
$ 4,383 a month ($52,596 a year)

Age 65 - 69: 
$ 5,081 a month ($60,972 a year)

Age 70 - 74: 
$ 5,891 a month ($70,692 a year)

Age 75: 
$ 6,068 a month ($72,816 a year)


Now, these numbers had a bit of a buffer because the amount required per month was actually the amount required in the final year of each age band. So, there was more money in the first few years of each band than actually required. 

Mr. Tan was being cautious.





The total accumulated wealth required to be in Mr. Tan's bank account to fund his retirement years from age 45 to 75 would be $1,358,556. Now, over a 20 years working life, he would have had to save $67,928 a year towards this end.

So, losing $136,000 would set Mr. Tan's retirement back by 2 years. Gaining $680,000 would propel his retirement forward by 10 years. 

Finally, the answer to the question posed in paragraph 2 is revealed. Old people are so long winded, aren't they?

Of course, the problem really was with saving $67,928 a year, every year. On top of his full time job, even with a couple of part time jobs, it was really difficult for Mr. Tan. 

Mr. Tan needed help. 

He sought out Mr. Market in earnest. 





Several times, in the early years, he almost gave up but just like with friends, it takes time to know Mr. Market better.

Mr. Market has mood swings and it was during Mr. Market's particularly bad bouts of manic depression in the last few years that Mr. Tan accepted many offers which were too good to refuse. 

This is why it is important to have a war chest or a few ready.

Deciding that dividends are more reliable than Mr. Market's moods, Mr. Tan bought mostly stocks which paid meaningful and sustainable dividends. 

So, if prices were to be stuck in the doldrums, Mr. Tan would still grow his wealth through dividends collected.

Of course, buying these stocks undervalued meant that there was a decent chance of capital gains in the future too. 

Over time, through a combination of realised gains and dividends collected, Mr. Tan's retirement plan was propelled forward by 10 years.





With Mr. Tan's initial plan to retire based on accumulated wealth, there was a big problem. 

What happens after age 75 if he should be blessed with longevity? There should be some money in his CPF but it wasn't a good solution, was it? 

Well, with a strategy that invests for income, the problem is solved.

The Chinese people have a saying: 

谋事在人,成事在天. 

Humans plan but whether the plan succeeds depends on the heavens. 

Luck plays a part but if we do the right things, the right things have a higher chance of happening to us. 

It all starts with a plan.

Related posts:
1. When to be fully invested?
2. A war chest called "SRS".
3. Be prepared for war!
4. Ready for a recession?
5. $1 million in retirement funds.

45 comments:

E H said...

Unfortunately, most people lucked out at birth.

AK63 said...

Good Sunday to you, AK71....

Agreed wholeheartedly with you on that chinese saying 谋事在人 成事在天 You can have the best plans in life, but success is still up to that joker above.... :p (sorry if any religious person reading this finds this offensive)

I have no plans for my future when I was younger, I live only for today. I would enjoy myself to the fullest each day in any way I possibly can, even after I got married. It's only when I found that our finances are depleting faster than we can make, that I decided to look back at what I had done, reflected on them, and started planning for what lies ahead....

At 33, I made a life-changing decision to give up on my present job and take on a totally different line of work which pays more but a lot less glamorous. The day before I started my new job, our total bank balances with cash in hand was exactly $175. I remembered so well is because it's so scary. Just a few years in this new job has turned our lives around. We became more aware of what prudence means and we started to budget and save as much as we can. We didn't give up completely on what we enjoyed most, but just cut down the frequencies and expenses involved....

I have plans since then, and I reviewed and improvised my plans every two to three years. Sad to say again, that chinese saying is so true, I can plan all I like, but a sudden event is going to upset everything, and it did....

We have nice jobs, we have investments and emergency cash, we also have endowment policies and enhanced H&S plans with assist riders, we have everything in place that can somehow guarantee a comfortable living till at least 85. Then came the 晴天霹雳 (sudden thunder on a sunny day?) Exactly two years ago, a mysterious medical condition struck me down. Lost my job and my wife changed to part-time work to take care of me, and everything I have insured for doesn't cover this condition. Sucks right?

Drastic changes in life have to be dealt with by drastic but careful decisions to make necessary adjustments to all future plans to accommodate these changes....

So here I am, still having all the plans in place, still having to cope with new changes in my conditions, but slightly better prepared with the finances especially investments, just that I cannot afford to re-invest any dividends received and capital gains, they all go to cover our daily expenses and most importantly, my medical bills....

Wish everyone here a healthy and fulfilling life ahead.... :)

Capricon said...

AK
Could you share how much is your war chest before GFC ? Do you commit the entire war chest after putting aside emergency funds ? I believe emergency funds at that time probably not 2 years expenses ?
I understand everyone's situation is different, but just I thought it is good for us to understand practically whether doable for us with what we building up now. Of course it is also dependent on whether we got the luck to invest on the right counters.

Singapore Man of Leisure said...

AK,

You breakdown of the money you need per month from age 45 to 75 is a good answer to those who question why the CPF minimum sum keeps getting raised ;)

Maybe we should ask children to give their parents basic math revisions as part of financial literacy?

Richard Ng said...

Ahhhh! War chest theme again. It is undeniable that war chest is really really important in investing. Accumulating....

AK71 said...

Hi E H,

Yes, everyone's circumstances are different and there are people who got the shorter end of the stick from day one. :(

However, I also believe that unless severely disadvantaged, also with a bit of luck, we can make positive changes to our lives and achieve financial freedom. :)

AK71 said...

Hi AK63,

Oh, I remember you sharing your story here before. I am very sorry to hear about your condition but, of course, you did not share your story to get sympathy from me or anyone here. I should know better after reading your other comments recently. My impression is that you are a pragmatic person who does what must be done. No nonsense. :)

It is easy to say that when life gives us lemons, we can make lemonade but not all of us like lemonade. Anyway, to make lemonade that I would drink, I will need sugar. So, must spend money to buy sugar. Lemons and water alone won't cut it. -.-"

I believe that your story is inspiring. Circumstances might be difficult sometimes but we have to try to make the best of things. You have been challenged and you have done what is necessary to get as positive an outcome as possible. I admire that strength in you.

Thank you so much for sharing your story. I truly appreciate it. :)

AK71 said...

Hi Capricon,

Hmmm... I had to think for a long time whether to share this. Haha... I guess as long as I stay faceless, it is OK to share.

However, memory is a bit fuzzy by now. So, please take this with a pinch of salt. I probably had the following available to invest with (in my war chest) at the time:

1. Cash - $300+K
2. CPFOA - $50+K
3. CPFSA - $100+K
4. SRS - $30+K

I was about 37 years old then.

At the depths of the GFC, I pretty much went all out. It was a case of not being able to get enough money to invest with. I was being tempted to use leverage but I didn't give in because I had a home loan I was servicing using my CPF-OA. Not comfortable with having too much debt in my life.

I did quite a bit of trading as the stock market recovered and that grew my war chest quite substantially.

Some of my investments doubled and some tripled in value in the following years. Some increased only 50% in value but some of these gave high dividend yields of more than 10% on cost. Some 20% or more. So, they have been good to me too.

I said during Invest X Congress that I have what I have today not purely through investing in stocks for income although it has helped a lot to build my wealth.

It is obvious from my blog that I do a bit of trading and investing for growth too. I also talked about how we should consider investing in real estate in Singapore in the early days of my blog in 2009 and 2010.

Capital gain from the sale of my property 3 years ago has given me a leg up too. Now, my current war chest is mostly made up of this capital gain and regular dividends received from my efforts in income investing. :)

AK71 said...

Hi SMOL,

Warren Buffett said before that we only need to know how to add, subtract, divide and multiply to be investors. LOL. Yes, basic math. :)

Unfortunately, like what my friend, Victor Chng, told me, he can only focus on teaching financial literacy to the younger generations because for the really old and I think he meant those in their 60s or 70s, it is already too late. :(

pf said...

谋事在人,成事在天。But I think planning is half the fun. It's what keeps us focused and motivated.

However, as AK63 shared, we can't plan for everything. So, best to hold on to plans too tight.

Capricon said...

AK, thanks for sharing. But CPF SA cannot be used for stock investment unless you are referring to funds.

Do you base on solely TA on trading long/short or counters that are recovering from GFC ?

TA Trading is not everyone's cup of tea and can be mentally stress ... I learn to appreciate sleep in peace at night after experiencing contra, forex, leveraging. A trader need to be very discipline and control emotions which many retail traders are unable to do so.

Regards

AK71 said...

Hi pf,

Oh, for sure, we must always have a plan. If things pan out the way we expect them to, good. Otherwise, we might have to tweak our plans or replace them altogether. It is about having a focus and being pragmatic at the same time. :)

AK71 said...

Hi Capricon,

Yes, I used my CPF-SA to invest in certain approved unit trusts which gave me much higher returns than the SA's interest rate of 4%. Even unit trusts could provide fantastic returns when bought at the right prices. :)

TA is an important tool for traders. However, I would mostly trade stocks which I have done some FA on. Trading can be very stressful and it is not suitable for everyone. Personally, I find it quite stressful too and prefer investing for income. However, when the trend is strong and the signs are clear, I am not averse to making some money from trading. Oh, I am a long only trader. I don't short. :)

flyingchicken said...

Wow! Very nice for AK to finally share a glimpse of how much he's worth!
Much thanks to Capricorn for asking this qns!

Sitting on a pile of $300k is a very impressive accomplishment for a 37 yrs old.
I'm 32 this yr and I have no such war chest to speak of :(

My only "war chest" is what I have in my bank account which should be call a "box" rather than a "chest" when compared to AK's.

haiz...

pf said...

I mean not to hold on to plans too tight.

pf said...

After playing with stocks for a while, I still do not know my strategy. I do some trading and hold some stocks for dividends.

However, the dividends I got is really not meaningful given the small portfolio I have.

Trading is quite stressful and sometimes I don't make the right call.

So I concluded that I better keep myself fit and work hard at my job. Lol....

AK71 said...

Hi flying chicken,

Actually, there are readers in their late 20s and early 30s who wrote to me to say that they have $100K to $200K in their war chest now. So, I believe that it is probably within the realms of reason to accumulate $300K in a war chest by age 37. ;p

However, I must emphasise that the absolute amount in our war chests should not be the main focus. Everyone's circumstances are different. The main focus is that we should have a war chest! :)

AK71 said...

Hi pf,

Sounds like you have a plan! If you have a good career, be the best that you can be and accumulate wealth through earned income! :)

If you find trading stressful and does not reward you, then, it is possibly not a tool for you. If you find income investing more suitable, open your war chest when opportunities knock. You will build up your portfolio gradually to be quite substantial, I have no doubt. :)

veronika said...

A general rule of thumb is to have a portfolio of shares with a group of companies that should remain the core.

One should not be trading this core group.

I view this as 3 concentric circles with the inner most circle containing 5 to 7 companies that is the core. I would not trade these, as they are the companies that represent the cornerstone of the economy. In Singapore's case, they are the banks, conglomerates that provide utilities and recently ( 7years ago ) the reits.

The 2nd circle would contain companies that have international presence and are always growing. These could be shipyards, airlines, transport related.

The 3rd is where companies have been identified with growth potential, small sized but niche markets. These are companies that I will trade if their prices appreciate and offers gains. These normally do not distribute any dividends or very small dividends.

The war chest is on standby to buy shares in the inner core, to increase the exposure and also for opportunities in the other circles.

Inevitably, one should begin identifying which company to buy if the market crashes.

When would you buy SIA if their share price drops from $10, to $9, or $8 or $7 or $5? along with news that the world economy is expected to remain weak and China goes into political turmoil?

The war chest can be on standby, but if you have no battle plans, the entire chest can be emptied in seconds.

5 steps to consider:

1.Prepare the plans now.

2.Do not hesitate to pull the trigger.

3.Accept the outcome.

4.Smile

5.Share the experience

AK71 said...

Hi Veronika,

Thanks for sharing with us your plan in such great detail. Indeed, having a war chest without a plan is not very meaningful and could lead to wastage. It all starts with having a plan. A plan should in fact come before having a war chest, I would say. :)

Earn Money Online said...

Hi AK

Care to enlighten me? You said that your dividend come is 100k a year which is equal to about $8000 a month. Then why you said that your retirement has been brought forward by only 10 years when you can do it NOW? To many people having passive income of $8000 a month is pretty decent.

AK71 said...

Hi EMO,

Oh, the blog post is not about me. It is about Mr. Tan, remember? The blog post is not a partial autobiography. ;p

Anyway, there are 2 parts in my blog post actually and I was thinking of whether to split it into 2 blog posts or just publish as 1. In the end, I went with the latter.

In the earlier part, you will see that I talked about accumulating wealth for retirement and how Mr. Tan's plan was to draw down on this accumulated wealth from age 45. That is where you will find the relevant statement on how Mr. Tan's retirement plan could be set back by 2 years or propelled forward by 10 years.

In the later part, I said that Mr. Tan's original plan had a problem but investing for income solved that problem.

If we were to follow this approach of Mr. Tan's, indeed, the problem identified in the later part could be solved so well that we could retire earlier.

I am lucky to have followed Mr. Tan. ;)

Sanye ◎ 三页 said...

Hi AK,

Thanks for sharing Mr. Tan's plan. I think I have somehow walked a similar path without knowing Mr. Tan.

So is Mr. Tan planning to quit his job after achieving the planned wealth accumulation? :)

AK71 said...

Hi Sanye,

I don't know. Mr. Tan didn't say. He is a little secretive about things usually. -.-"

You walked a similar path? So, maybe you have an inkling what went on in Mr. Tan's mind. ;)

Ana said...

Unfortunately for me, I didn't invest or don't know how to until my thirties....;( :(. :(

Capricon said...

Hi Veronika
Do you mind to share greater details of your experience base on the 3 concentric circles ? Sounds that we can learn from you too.

A guest blog ?

😁😁😁

AK71 said...

Hi Ana,

I think that starting in your 30s is not late at all. So, if you would like to have a similar plan like Mr. Tan's and if you start at age 35, you could retire by age 55. How does that sound? ;p

Realistically, we have to understand that everyone has different circumstances. The important thing is to do the right things and, given the circumstances that we have, try to get a good outcome. We can only try and whether we succeed or not is something else.

Remember to stay the course and never give up. :)

AK71 said...

Hi Capricon,

Actually, you might remember that most of Veronika's comments are truly gems. It is a pity that they are all in the comments section of my blog since fewer readers bother to read comments, I found out. :(

A guest blog or a few from Veronika would be a good idea.(looking sideways at Veronika now).

cindy tan said...

Hi AK,

This is a very interesting post to me, especially since I'm still a newbie in investment and have not been through any market crash. There are 2 questions in mind as I read through your replies to the comments:

1) At age 37, what is the percentage of your stock investments as compared to your warchest? I'm wondering how much I should set my cash aside as warchest so that I'm not overly invested currently.


2) U mention you also some unit trusts with yield higher than 4% with your CPF (SA). Could you share more info. on how you found those unit trusts. Are they from banks or insurance companies? How can we find out their prices?


Thanks for sharing!

AK71 said...

Hi Cindy,

I am not going to reveal anymore. I think I have ventured beyond what is usually comfortable for me this time. LOL. However, if you have been reading my blogs, you will know what I think about staying invested etc. ;p

You might be interested in this: When to be fully invested?

As for buying unit trusts with the SA back then, I went to Fundsupermart.com and looked at the few options for which we were allowed to use our CPF-SA money to invest with. I chose a Singapore centric one and it returned 4.5x more than what I would have received if I had left the money in the SA.

I don't take big risks with my CPF money, whether OA or SA. The returns must look pretty good and almost assured before I would invest with my money in the OA and SA. :)

cindy tan said...

Thanks AK ... no prob about not revealing more. I'll read up on the links provided and find out more.

:)

cindy tan said...

Hi AK,

When you mention Singapore centric unit trust, do you mean the unit trust is in Sing dollars or do you mean the the Unit trust invests in Singapore stocks?

Pardon my really newbie questions cos I am looking through the different unit trusts and realise the sheer amount of unit trusts to look thtough :P

AK71 said...

Hi Cindy,

It was a unit trust that invested mainly in Singapore blue chips and it was denominated in S$. :)

The frog in a well was more comfortable with local companies. ;p

arithmos said...

Hello AK71, I read your blog every other day. It serves as an (in fact most) important financial reading and investment tool for me.

I have retired ~ 45+ not long ago. I think for your retirement ...another interesting aspect to blog is what would you really want to spend on ...

I use reit/dividend stocks as income (~100K)I don't invest in growth stocks but reit values have climbed (not sure if it is sustainable)

US economy will trudge along. Interest rates should remain low, as i follow the long de-leveraging cycle theory. Probably i should ramp up a little more reits.

Actually i was hoping things will go down, maybe a crisis(hmm), like you I keep half in cash.

Your health and sanity is i think the greatest wealth you can posses

cindy tan said...

Thanks AK!

I guess when you mean a Unit Trust you bought with SA, you mean a balanced fund? Cos I understand a pure equity fund is not allowed for CPF SA.

AK71 said...

Hi arithmos,

I am glad you enjoy my blog enough to visit regularly. Thanks for letting me know. :)

I don't know whether my spending habits will change or not when I retire from active employment. I have a feeling that I could actually be spending less money since I would then lack an earned income. Make less, must spend less, right? ;p

As for whether to increase exposure to S-REITs, I believe that there could be a better time to do so as I still prefer buying undervalued. I don't see any S-REIT as being particularly compelling at current prices. Of course, this is just my POV.

Prices could continue higher but it wouldn't bother me. If prices were to decline meaningfully which they would eventually, I hope I would be brave enough to buy some, all else remaining equal.

In the meantime, I can only try to make sure that my investments are sound.

Indeed, staying physically and mentally healthy is most important. Thanks for the reminder. :)

AK71 said...

Hi Cindy,

I must say that I cannot remember exactly by now. Will have to make a visit to Fundsupermart.com to be sure. You could be right. :)

veronika said...

Hello Capricon

My experience in investments is a journey.. sometimes painfull.

I simplified my investment portfolio into 3 circles so that people in AK's blog can understand easily.

Over the years, I realised that I had accumulated shares of several companies that paid dividends well. What began as a conservative approach appeared to have some structure!

I have not read any books
I failed mathematics in school
I do not have a degree

But I was prudent by nature and I was willing to delay gratification for material wants.

With extra money from annual bonuses ( remember those days?.. hah! ) I would buy shares. My first investment was in a fund managed by OCBC: S'pore/Malaysia Fund ( S$ ). I bought 2,000 units at S$1 per unit way back in 1970s. I still have them. Never bought any more either.

I am but an accidental investor.. by sheer luck I was able to choose shares that gave good and consistent dividends: SPH/Sembcorp/OCBC/SIA/KepCorp/
These were and still are my core group of companies.

Being uneducated in many things, I wanted to be able to monitor the share prices of these companies while I was overseas. Internet was not available, only newspapers such as Financial Times, Herald Tribune.

I noticed that these papers would print the previous day's closing prices of some stocks. I decided to buy some of them such as F&N.. only because I could monitor the price!

Later I realised that they were simply reporting prices for stocks that were part of the ST index.
By sheer luck I was buying indexed stocks!

I shall not take up bandwith on AK's blog.. thank you AK, for sharing so much about investing and allowing people like myself to learn from everyone else through your blog.

Mucho Gracias
Arigato gozaimas
Terima keseh
Merci

AK71 said...

Hi Veronika,

There is definitely something to be said about being financially prudent and about investing regularly in sound dividend paying stocks.

From the 1970s to the current day, you have shown that a vital ingredient is also patience. None of that "get rich quick" mentality. :)

Thank you so much for sharing your experience and knowledge so readily with all of us here. Appreciate it. :)

hans ng said...

Hi AK71,

Nice post. Slowly reading through your site. Late to this whole internet blogging and social media scene but I am very free recently. :)

Mr Tan needs to also factor in buying a house and paying of the mortgage so that adds significantly to the amount of money he needs to earn / save. This is why I still stay with my parents. Haha

I am personally a big believer in the war chest approach. However, I think the part that is most challenging for people is recognizing a great opportunity. Many people I know had decent amount of spare cash (say 40% NAV) but never had the courage or conviction to buy during GFC. These folks however have all the courage to buy property in Singapore a year ago or in some foreign hot spots such as Johor.

The challenge I face personally, is I require a massive crisis to tempt me into action. This translates to a lot of unproductive time for my capital. I have only deployed my war chest twice (I'm 35). First time was in 2009 and last year in prime residential property in Dublin.

Wonder when and how the 3rd time will come.

Cheers,
Hans

AK71 said...

Hi Hans,

Welcome to my blog. :)

I was staying with my parents till I was 35 too, if I remember correctly. I moved into my own place then. Sold it 3 years ago and now waiting for my new place to be ready.

I thought of investing directly in overseas properties too but decided that I am too kiasi and lazy to do it. So, I do it through selected REITs instead. ;p

A war chest is a must have but too big and, yes, we worry about having too much of an unproductive asset (in today's low interest rates environment).

However, as long as we stay invested and have a war chest ready, I won't worry too much. There will be opportunities along the way. :)

csky said...

HI AK,
I am slowly go through your old posts. Interestingly, I have been to your site previously but the posts didn't strike much of a cord with me at the time

I guess the saying "when you are ready, the teacher will show up" is true! Cos now, I am seeing your posts in new light and have learned much since.

Also, I must say you are really so disciplined to sit on $300K cash. I think many ppl like me will be eager to make that money work harder (buy house, buy more stocks etc) hoping to retire early, or thinking we can retire already. Hahaha.

Thanks for your sharing.

AK71 said...

Hi csky,

There are so many ways to financial freedom. It is never my way or the high way. ;)

AK71 said...

An ongoing local study has found that nearly half of men and a third of women aged 55 to 59 expect to still be working at the age of 65.

About 19 per cent of women and 26 per cent of men also expect to be working at the age of 70.

These were the results released by the Singapore Life Panel study, which surveys an average of 8,000 Singaporeans and permanent residents aged 50 to 70 years old every month.

The study is conducted under the Centre for Research on the Economics of Ageing (CREA) at Singapore Management University's (SMU) School of Economics.

The survey, which was started in September 2015, aims to determine how prepared Singaporeans are in coping with the financial demands and risks associated with ageing.

Source:
http://www.straitstimes.com/singapore/manpower/sporeans-expect-to-work-till-at-least-age-65

AK71 said...

Need to work till age 65 or 70 is different from want to work till age 65 or 70. ;)

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