Retirement! It's a word that many people use in their old age. To stop working and not having to worry about money is a dream come true for many. But retirement don't have to happen only when you're old. It can happen when you're young too. When we talk about early retirement, its known as financial independence. This means you don't have to rely on your job for an income to survive any more. Imagine the freedom to do the things you love, the unlimited amount of time you can spend with your kids and see them growing up. Imagine not having to put up with your unreasonable boss and don't have to go through the frustrating mid year and year end appraisals. Then imagine you can pursue what you really like or always wanted to do.In my previous article, I wrote on how if we saved 75% of our income, we can actually retire in 7 years. Here's the article: Save 75% of your income to retire in 7 years I also wrote that with Singapore's high cost of living, it seems impossible to retire at all with our average household expenses at more than $3600 per month. But, there's still hope for us if we plan it out diligently. With the help of an excel spreadsheet to visualise the numbers and stir up our imaginations, early retirement is certainly within reach. Yes, its early retirement and not late retirement.
So how can an average family in Singapore retire within 10 years of working?
The ideal scenario to retire within 10 years is as follow:
- Household expenses maintain at $2500 per month
- Household income at around $7000 per month
- Invest savings at 5% return after inflation
- During retirement, passive income at 4%
Here's the numbers that shows how your life will unfold each year:
Click image to enlarge
With a household income of about $7000 and expenses at $2500, this household saves about 65% of their income which enables them to retire in 10 years. The age above is only for illustration purposes only so tweak it according to your age currently.
Is $2500 per month expenses enough for a family?
Now, some of you will probably be thinking will $2500 per month for household expenses be enough at all? Am I crazy or something to suggest $2500?
In that case, let's look at higher household expenses of $3000, $3500 and even $4000 with the same level of income at $7000 per month. How long will it take to retire then?
For $3000 expenses, it'll take the household 14 years to retire.
For $3500 expenses, it'll take the household 17 years to retire.
For $4000 expenses, it'll take the household 20 years to retire.
The more expenses you have, the longer time it'll take for you to retire.
Another point we need to take note is that most Singaporeans use their CPF to pay for housing loan instalments. In this case, we can exclude some of the housing cost that we pay monthly using CPF. Since I did not factor in CPF as savings, we should also exclude housing loans paid by CPF as expenses.
$2500 may be enough for household expenses if we take the effort to live a frugal and simple lifestyle.
Is 5% investment return realistic?
For the scenario to work, the investment return must be at a minimum of 5% after inflation on an annualised basis. With inflation at an average of 3%, our investment return needs to be at around 8%. Is this achievable?
If you've invested in the STI ETF in 2002, you would have achieved an annualised return of 9.2% (with dividends) for the year ending December 2013. Here's an article by Shares Investment which reported on it: Instrumental Returns Of The STI Over The Past 10 Years
Just by investing in the STI index fund, one will be able to achieve that kind of return and retire in 10 years. See for yourself whether its achievable?
Is 4% passive income realistic?
For the scenario to work, the passive income must also be reinvested in the first few years before retirement. Thereafter, we assume a 4% withdrawal rate from passive income to sustain our lifestyle. You may be thinking is 4% passive income achievable? Unfortunately, there's no way I can prove that a 4% passive income is achievable. This rate is debatable but I guess if you ask most people who do invest their money in stocks, a 4% dividend yield for passive income is not hard to achieve. The question is will these dividends be sustainable. There needs to be some active managing and rebalancing of investment portfolio involved. When you're retired, I'm sure you'll have lots of time to do that.
Another way is to have an investment property which you can rent out. If you're able to achieve the desired monthly rental to offset your expenses, you also can stop working indefinitely.
Is $7000/month household income possible?
Income is also important for the scenario to work. $7000 household income means $3500 per person for husband and wife. If you don't have this kind of income, not to worry. You can either reduce your household expenses or try to increase your income.
Just remember, to retire in 10 years, you need to save about 65% of your income. If you save 50% of your income, it'll take 17 years to retire. By now, you should be familiar with the formula of how it all works out.
What if I'm single? Can I retire in 10 years?
Now, here's the truth. If you're single like me currently, then it's actually easier to retire as most probably your expenses will be lower. The amazing thing about the formula is that it works for a family and it works for a single person too. It's all in percentages. If you're single and can save more than 75% of your income, then it'll take less than 7 years for you to retire.
Retirement is not about doing nothing all day everyday
Contrary to the believe that retirement is filled with images of old people idling around aimlessly, true retirement is actually the ability to find your own passion and pursue it. It is the ability to do what you love without worrying about money. This is called financial freedom. When you don't have to work, you can actually have more time to think about life and create products which will be beneficial to people and our society as a whole. You can do volunteer work, do part time teaching to help others or maybe write a book. Some of these will still generate income for you but the gist is even if it doesn't, you're still happy doing all of it.
Early retirement aka financial independence is possible. Numbers show us how it can be done and it will become a reality as long as we can see it. 10 years to retirement for your family? Watch and see how things can unfold for your life.
Image credit: s.jfch.net
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Related Posts:
1. Save 75% of your income to retire in 7 years
2. The 3 Big Decisions in Life - Marriage, Buying a House and Retirement
3. Will we have enough CPF savings to retire on after using it for housing?
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