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Can we retire at age 40 with peace of mind?

Saturday, April 25, 2015

I am sure that some of us have thought of when we might be able to retire from active employment before. So, this conversation with a reader might be of interest to some:

Reader says...

I am 32 this year and I planned to achieve financial independence by 40. I actually realised it is easier to achieve lump sum cumulative retirement fund than passive income > expenses. 

Few reasons:

1) returns are ups and downs

2) To generate a decent passive income, the invested amount must be at least $600,000 to generate $30,000 at 5%.

3) I don't really need that much money to live the life i want, so about $550,000, coupled with my private annuity and CPF Life will be sufficient.

4) Invest in safe money instrument such as Singapore Saving Bond, OCBC 360, and so on to get between 2-3% return.

5) Once a while gain some profits from Bear markets or obviously under-valued shares

I think passive income is great because it generate lifetime income, but I still think it is not a must for early financial independence.

Based on your financial knowledge, you think my figures and reasoning are sound?

I actually felt topping up CPF is not an option for me because I got child, NS, annuity and other relief that I can be exempted from taxes for years. Since obviously I don't have spare cash as I am aiming for early retirement, I think topping up CPF is a no go, right?

Retire with peace of mind.

My reply:

If we have a very simple lifestyle, we don't need too much money to be financially free. You are absolutely right. Everyone will have a figure in mind, I am sure. So, how much do we need? This is very subjective.

I cannot tell you if your figures are sound enough for what you have in mind. Only you will know this, even if it is just an estimate. ;)

Is your reasoning sound? 

Well, if we wish to retire very early and retiring in our 40s is considered very early by most people, I feel that we need a bigger buffer unless we are willing to consider the option of re-joining the workforce if things should go wrong.

If we do not invest for income, retiring at 40, $550,000 in savings won't last very long especially with a family to support. 

The CPF Life will only start paying us at age 65. OCBC 360 only pays a higher interest on the first $50K and once you stop working, you will lose that extra 1% interest from salary crediting. 

SSB, you will only get the full coupon of 2+% if you hold for the full 10 years. It isn't very liquid that way.

Inflation is probably the biggest threat to your plan. 

Investing for income, the returns could keep pace with inflation or even beat inflation. 

Not investing for income, it is likely that your wealth will shrink in value, year after year.

For me, it should be about having a level of certainty that our assets are not being chipped away in our retirement and that they are, in fact, generating meaningful income to help fund our retirement. 

Then, we can retire with peace of mind. :)

I certainly do not know everything and, perhaps, this blog post will generate a meaningful discussion which will provide different points of view.

Related posts:
1. National Day Rally: Retirement adequacy.
2. Retiring before 60 is not a dream.
3. Millionaire or not, plan for retirement.


Kyran Tan said...

Hi AK, I am convinced that I would need to amass at least $1.5m in liquid assets to retire decently in 30 years time when I hit 65. And then continue to invest for dividends using this $ so as to equalize or hopefully better still beat inflation. This is bearing in mind that $1 now could become as little as 30 cents due to inflation by then. Can't agree more that inflation is the silent killer to one's savings!

pansy t said...

Ak, may i know where you put your email address? i just spent the past 20 mins looking around your website and Facebook with no luck... must be the biggest IT idiot around.

apex property investment said...

Congratulations on being able to retire at 40. You are 32, building up $550k nest egg. You have not fully disclosed your financials, so enough or not, it would be hard to make a judgment, but if you had worked it out and change your lifestyle it is possible.

AK71 said...

Hi Kyran,

Well, the conventional wisdom in financial planning is that we should have enough liquid assets to last us for at least 30 years from the day we retire based on a 4% withdrawal rate. This 4% would be made up of interest income which should include coupons from investment grade bonds.

Conventional wisdom is that retirees should not take on too much risk. So, they should stay away from equities.

Of course, in a situation where interest rates are pretty low or when bond yields are pretty low, retirees could end up withdrawing part of their principals.

It is always difficult to look into the future with much accuracy. Could the low interest rate environment persist in the years to come? If it does, then, should people consider retiring a few years later or to accept a lower withdrawal rate of 3%, for example? Could they accept that they might have to rejoin the workforce in their retirement?

In planning for retirement, I like to "overcompensate" in the earlier years as we try to make more money, be prudent in our expenses and invest our savings for higher returns. As we grow older, we would be able to cut ourselves some slack.

To me, saving and investing are like twin engines in retirement planning. We could run on a single engine (i.e. savings) but it would take a lot longer if our earned income is not very high. If we are a high income earner, then, possibly, we might not need to invest for higher returns if we have a frugal lifestyle.

Everyone's circumstances are different. Each person will find his own way. However, I believe that I am writing for the vast majority of middle class Singaporeans who are not high income earners who really should think about using both engines in retirement planning. :)

AK71 said...

Hi Pansy,

Go to the top of my blog and you should see "Contact AK: Ads and more".

Click on that if you would like to send me an email. :)

pansy t said...

thank you =)
obviously i need to think out of the box! i thought that was solely for ad or guest bloggers.

Cory said...

$500K in 20 to 30 years time is not really big if you don't grow it. And it can be a real problem if you retire early say in mid 40s when you can have another 40 years or so to go.

Another is quality of life. Social life. Hobbies. Holidays. Medical bills. Gifts.

I would say passive income is a necessity because it proves your ability to regenerate funds. If I on average can generate median salary $3800 today, i think myself probably ok for the next 40 years with reasonable insurance.

Housing/Car loan can easily throw a spanner to the plan though.

Nick said...

Based on CPF retirement calculator to retire at 62 with a desired monthly income of $3,000(in today's dollars) one may need $1.85 million (in future dollars, accounting for inflation of 3% and return on investment of 3%). This is the amount one would need to have in 2047 and have it last for 20 years.

Similarly, the amount of $1.85 million at 62 is the equivalent of $720,000 in today's dollars

pf said...

The OCBC 360 account is reducing its interest rates starting May 2015.

Frugal_Daddy said...

Thanks AK for helping to gather feedback and ideas from your blog followers! Indeed, i have planned for this for years, so it is not an impulse or idealistic dream. It is possible, with frugality, proper planning, and discipline to save and invest.

I would think what i am lacking in is i rely too heavily on bond and saving, If i get boost my return from investment, that will be a perfect world to ensure my retirement at 40 is full-proof. Investment wise, i am considered a newbie, so i will take a more cautious approach but will not analyse until paralysed. haha.

AK71 said...

Hi FD,

It was only after you shared with me in a later email that you have a like minded spouse who is matching your efforts that I was convinced that retiring at age 40 is not only a viable option but a comfortable one for you. :)

This really highlights the importance of having a cooperative spouse when planning for retirement as both parties pull their own weight. ;)

Kyran Tan said...

Hi AK, to your earlier reply, could investment grade bonds garner 4% returns every year with a lower risk than stocks? Please pardon my lack of knowledge in the area of bonds. Thanks!

AK71 said...

Hi Kyran,

Impossible to find in today's environment unless we are referring to the CPF-SA. I better stop here as I could go on for a while on why we should max out our CPF-SA or RA and why the CPF Life should be an important tool in retirement funding. ;p

A 4% withdrawal rate for any retiree who depends on interest income and coupons from bonds will probably see him withdrawing part of his principal. Of course, including partial principal withdrawals, year after year, if the strategy could fund a 30 year retirement, it would have worked, leaving nothing for surviving family members.

What if the retiree should live for longer than 30 years in retirement? That is where an annuity like CPF-Life that pays a monthly allowance for life would come in.

Kyran Tan said...

Hi AK, yes indeed one's longevity can't be predicted. But I certainly wish to stop working by 65 if I could help it. I think with a healthy lifestyle and relatively comfortable environment like an office job, this is highly possible. With my parents who were fishmongers, that wasn't the case as my father had to retire before he turned 60 because of the toll the manual work inflicted on him.

So the job nature of one could also affect how long one could possibly work, which is another factor altogether as we plan for retirement.

AK71 said...

Hi Kyran,

Yes, although the average lifespan for Singaporeans is in the mid 80s, we could well live to be 90 or more.

So, with this in mind, having the official retirement age pushed from 55 to 62 makes does seem to be quite reasonable.

For anyone who would like to retire before the age of 55, I think it is more important than before to make sure that our retirement funding strategy will ensure a constant stream of meaningful income that would last longer than just 30 years.

If I would like to retire at 45, for example, then, I would feel safer if my assets, in terms of the income they generate as well as their values if liquidated, would be able to fund my retirement for 50 years or more.

Matt said...


I feel very uneasy whenever I read someone in their 30s telling everyone that they want to retire by their 40s. There will be a few who can but the majority will not be able to afford it.

Before you even contemplate retirement, please ask yourself the following questions :

How much do you need for living expenses?
Do you need to support your parents or siblings?
Do you have any health conditions that require long term medical expenses or care?
Do you have children?
Do you need to support your children's education?
Is there any recurring medical expenses for chronic illnesses for your children?

Do you own a home already?
If so, do you still have a mortgage and how much is left?
Is the property of a larger size that you can monetise by downgrading if necessary?

How much savings or money do you have?
Is the savings invested or in FD?
Can your savings generate sufficient funds to fund your lifestyle?
How much emergency funds can you set aside?
Is this amount sufficient to tide you over 1 year should something unforeseen happens?

This list is by no means comprehensive. But if you don't have answers for them, work out how or when you can reach a level of comfort with your own answers before even thinking of retirement.

If you still have a huge mortgage or have young children, please think again about retiring before yo can pay off that mortgage or have reserves to see your children through their education, should they need it. Most of all, watch your health if you want to have a happy retirement and also to minimise your medical expenses.

AK71 said...

Hi Matt,

Hey, long time no see! Good of you to weigh in on this matter. :)

I am going to provide a link to a guest blog you did in 2013 here:
How much is sufficient to stop full time employment?

Wise words from someone who has been there and done that. :)

betta man said...

Hi AK,

I would like to seek your views on these retirement products in our retirement planning . Thanks.

AK71 said...

Hi betta man,

I did a review on AXA's "Retire Happy" before. I wasn't impressed.
Inflation adjusted retirement income plan.

I think that none of the offers by private insurer can beat CPF Life if we are looking for an annuity.
Would you rather have it or not?

Of course, if we have plenty of money and would like to have another annuity after maxing out CPF Life, we might want to consider a private annuity as an option.
An annuity plan for retirement needs.

You can tell what is my preference. ;p

AK71 said...

Reader says...
Do we really need a million dollars just to retire for a person who spends only $500/month currently? Assuming no debts, of course.

AK says...
It would also depend on the retirement age you have in mind. To be honest, not everyone needs $1 million to retire. You might be interested in this blog, for example:

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