"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)
$ 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. He 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.
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.