Invest, Cash Flow and Work was the new model that I took up in 2015. I had given up my managerial role that year and had been on part load for the past 7 years. I am back at full load this year but took a study leave. I have enjoyed the break and during this period, the thought of ditching my regular pay kept coming up.
The original stretched plan was to be financial independent by 50 and based on the current trajectory I should be able to achieve it. However now I would like to fast forward the plan by around 2 years. So I am working on spreadsheet to check if that is possible, especially with the current situation in which a third of the gain obtained over the past two years are gone.
There are two key considerations to ensure that the above can be done:
- I do not run out of money by 90
- I do not run out of money before I can have access to my CPF at 55
Obviously, two factors that affect the above would be the average return of investment and annual expenses. The images below shows the running 3-year, 5-year and 10-year compounded return over the period from 2009 to 2019 for both cash (left) and CPF (right) portfolios.
I rebooted my portfolio in 2020 and the compounded annual return of the new portfolio since its inception till now (2 years and 3 months) currently stands at 15%. Obviously historical data, especially during a decade with low interest (average Fed’s interest from 0.1% to 2.2%) might not reflect future performance. Also, the past 2 years return is boosted by Fed’s loose monetary policy. But given the 10-year compounded return included the period 2001 to 2008 where average Fed’s interest varies from 1.1% to 5.0%, it does mean that it is still possible to get good return during higher interest environment.
Going forward, I am setting myself a target of getting 10% compounded annual return.
Without considering the impact of upcoming inflation, I hope I can keep the annual family expenses below 84k for the next decade. Beyond that, adjustments will be made due to maturity of insurance, independence of children, changing in transport mode and other factors.
If I can achieve the above, my pot of gold would continue to grow. However, there are a few what if scenarios that I need to plan for:
- What if there is a bear market? How much cash buffer do I need?
- What if investment return is less than 10%? What is the minimum rate of return I need?
- What if there is an increase in expenses due to inflation? Can the family expenses be adjusted?
Cash Buffer for Bear Market
The issue of having sufficient cash buffer is more for the period before I have access to my CPF. Once I have access to my CPF at 55, CPF balance in excess of FRS will act as the buffer. Currently with a regular pay check, I could simply hold on to my investment without worrying about my daily life. However, if my expenses are to be funded by investment return, I might have to sell my investment during a bear market for cash flow.
My way around this is to maintain a cash buffer of 3 years of annual expenses at any one time by selling part of the portfolio every year. During bear market, the cash buffer would then allow me to get by for 3 years without any selling.
Minimum Rate of Return
Stock market is a complex system and there is no way that I am certain to achieve my targeted return. My targeted return is based on having my income counters providing 7% return and growth counters contributing 15% return in an allocation ratio of 65% to 35%. The return from income counters are more certain but return from growth counters would be a lot more volatile.
The table below summarises the observations from the number crunching exercise, with 50% of the asset invested in stocks.
| Average Rate of Return | Expected Outcomes |
| >= 10% | Enviable position where pot of gold keeps growing. Can even boast at age 90 that 70%-90% of my wealth comes after I stop working regularly. |
| 8% | Asset at 90-year old will still be more than the initial position. |
| 6% | Asset at 90-year old will be about two third of initial position. |
| 4% | Savings will run out around 85-year old and will be left with just CPF-Life. |
If my calculation is correct, then the minimum average return that I should at least get from my investment is 5 to 6%. That sounds pretty plausible based on my experience.
Adjustment of Family Expenses due to Inflation
Inflation eats into spending power and it is a real concern. If it is just normal 2%-3% inflation, then I think it is manageable but if it goes like 5%-6% consistently, then it will be a headache. If I can get my targetted return, then it would not be an issue. However, if I did not get my desired return and high inflation continue to persist, then I would need to adjust my family expenses. Re-looking at my budget, I am glad that there are some fats in the current budget. So if it is really necessary, this can be trimmed off.
Likely to take the Plunge
After the various considerations, I do think it is feasible for me to ditch my regular pay during the first half of next year. To be clear, I don’t hate my current work. I am doing well in my current role and have good colleagues. It’s just that after more than two decades, I am yearning for a different experience.
So I am not financial independence yet. Based on my conversation with a financial advisor two years ago, I am probably around 70% there. But like she mentioned, they computed it with a more conservative 3% withdrawal rate with the same annual expenses (factoring inflation) until I am a centenarian!
I am definitely not retiring and am open to getting paid from other means. I have yet to figure out what those means are but I do hope that it will be more incidental than targetted. In the sense that I get paid not because I am seeking for it, but because of the work that I am doing out of interest.
I will probably give myself 2 to 3 years to see if things work out and if it doesn’t, then it will be back to the drawing board.
Towards Financial Independence 