Can we retire at age 40 with peace of mind?

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.

Wake them up before they get financial nightmares.

I remember when I was a boy, I sometimes had to help wake my siblings in the mornings. 

Sometimes, they were the ones who had to wake me up in the mornings. 

We looked out for each other because we didn't want anyone to be late for school.

When a reader wrote to me in FB to say he woke up after reading my blog, I asked him to help wake his friends up as well. 

I am sure we want everyone around us to be prepared financially for retirement too. 

I am sure we want our friends and family to be financially secure.

My task as a blogger, I feel, is easier because people who are willing to listen will read blogs like mine. 

Targeting people who we believe need to make changes to their money habits and to sit them down to talk about it is a more delicate task. 

It is a sensitive topic, after all. 

Good intentions could be misinterpreted.





Well, let us try to make a difference, anyway. 

They might not see the light now but the suggestion we have planted in their minds might grow and blossom one day. 

They might or might not remember who planted the seed by then but that shouldn't be important to us. 

If they do change for the better, I am sure we would be happy for them.




Related posts:
1. Wealth is attracted or repelled by habits.
2. Ambassadors of financial freedom.

Beef up financially to attain financial freedom sooner.

Reader says...

First stop, thanks again for sharing your knowledge on financial literacy. I have made progress again, lol! 

The best part is the progress is very tangible and someone could actually see these effects within months.






Anyway, I have a question on the topping up of our CPF. 

As much as I do understand that topping up the SA account is important, given the 4% risk free interest rate coupled with 0 re-investment risk, this is just too good to ignore. 

However, what do you think of topping up the medisave account to its mms before putting money into SA instead?

Therefore, once the amount in medisave hits the ceiling , the amount that is supposed to be allocated into the medisave would go into our OA in which then one could subsequently transfer into the SA account. 

In this way, this will result in a higher contribution into the SA account per year. Do correct me if I'm wrong.






Something else which I would like to ask you is, what do you think is a good amount for Singaporean to set aside in the OA account assuming that they haven't bought their flat.

Just to share, I used to have this habit of wasting money on the latest gadgets released. 

After knowing you (technically yes, since a blog post is almost like a one-to-one conversation), whenever such thoughts of spending money crosses my mind, I transfer half of this money into CPF and the remaining half into a separate savings account.

Without money being accessible, no money to spend, no money to waste! Best part, money is saved! Thanks again!

Learn from the squirrels?

AK says...

I am very happy to learn that you are beefing up financially. 

Having financial muscles early in life will set the stage for, ultimately, achieving financial freedom later on in life. ;)

Should someone in his 20s top up his CPF-SA or the CPF-MA first? 

Well, my preference is to top up the CPF-SA first because the first $40K in the CPF-SA will earn 5% per annum. 

Topping up the CPF-MA has more practical considerations, of course. 

So, perhaps, after reaching $40K in the CPF-SA, switch to topping up the CPF-MA instead. :)





How much should we accumulate in the CPF-OA before buying a flat? 

I think this is rather subjective. 

So, please remember that this is just my opinion and I am going off tangent to share what I feel is more important.

I will try to use as little of my CPF-OA money as possible in the purchase of my home. 

This is because it earns a risk free 2.5% to 3.5% per annum. 





In the future, when I sell my home, I will have to pay interest to my CPF-OA (i.e. the accrued interest for the money in the CPF-OA I used). 

This was how I approached the subject on the use of my savings in the CPF-OA in the purchase of my first home donkey years ago.

I like how you ended your email. 

Yes, don't see money, won't spend money. 

I told this to a spendthrift friend before too. Haha... ;)

Where did our money go?

Reader says...

Indeed, and learning that each step we take is bringing us closer towards financial freedom just makes things feel so much more joyful.

On the part of frugality, being frugal has made me happier as a person in total as I learnt to be contented with what I have while balancing the equation of needs and wants.

Sadly, as my generation of folks (gen y) are largely exposed to new age media content, its hard not to be taken in by those fancy marketing campaigns for the latest product and service offerings that are largely wants but hardly needs. 

Unfortunately, the result of which is more expenses incurred on an individual, worse still, these things hardly produce much tangible benefits to warrant the expenditure.





However, the best part is, we all have choices. 

As opposed to spending, we could instead save this amount of money, and subsequently making them work harder for us through investments. 

If one has the discipline and is regularly putting aside income into savings while investing for a sensible return via both cash and the CPF-SA, financial freedom is not as far fetched as it sounds, and is in fact very achievable for a commoner like myself.

On that front, I started out by reminding myself of the opportunity costs incurred for this purchase which would potentially set me back from my eventual goal. 

Now, I don't even have to post mental reminders to myself anymore, it has been infused into my habits. 





I hope I don't sound like a drug addict who has just successfully undergone rehabilitation. =P

Noted on the point you have made on the CPF-SA. 

Right before I started to type this email, 

I have already transferred a proportion of my CPF-OA into CPF-SA, resulting in a $40k amount in my CPF-SA. 





And upon keying some numbers into the calculator, I finally understand why $40k is seemingly the "magic" number and why the government has provided additional incentives in the form of an additional 1% interest rate on the CPF-SA account of below $40k. 

Yet another blessing for Singaporeans to count!

Yes! Money saved = money earned. You shared that before too.

I should be the one thanking you as your sharing has changed me and I'm sure many others as well. =)





Related posts:
1. Do the right things and transform our lives.
2. How did AK amass so much in his CPF-OA?
3. Don't see money, won't spend money.
4. Money management: Needs and wants.
5. A dollar saved is a dollar earned.

Is there a secret formula to getting rich? (Wealth is attracted or repelled by habits.)

WARNING (Added on 6 Jan 17):


If you are a "jin satki" (very capable) person, you might want to skip this blog because you might find AK's peasant mentality to wealth building distasteful. 

You have been warned.




As my blog becomes more popular, it disturbs me that people think that I am some investment guru. 

Of course, I am not. 

I might be a bigger retail investor than most of my readers but I think that is where the difference mostly ends.

Regular readers know not to expect magic from AK. 

I don't even have a working crystal ball. 

Well, I try to get my bowling ball to talk to me sometimes but I haven't had much success, have I?





Is there a secret formula to getting rich?

To me, there is no secret formula to getting rich. 

Honestly, to be financially secure and, then, financially free later on, it all starts with being financially prudent and that is where a big part of my level of rather attainable wealth by the common man has its source. 

It is about being sensible when it comes to personal finance matters. 

A dollar saved is a dollar earned and, believe me, it adds up.

Dinner for $2.80.

Even as I make more money in life, I try my best to keep my needs simple and my wants few. 

I try not to be frivolous with money. 

If we do a good job of this, money will stay with us. 




In the last five years, I have heard from readers who changed their habits including one who gave up having Starbucks coffee every day and one who convinced the whole family to cut back on restaurant visits. 

They saw how, in just a matter of weeks and months, the changes they made in their money habits improved their personal balance sheets.




Wealth is attracted or repelled by our habits. 

If we want to attract wealth, then, we have to make sure we have the right habits. 

The results might seem magical but, really, magic is not the reason. 

Discipline is.



-------------------------------------
Added on 6 January 2017:

I saw on Facebook and I had to kaypoh.

The statement above which I took issue with:

"Skipping Starbucks to get rich is really bad advice, my view. It give (sic) you a poverty mindset that I can't afford it..."

OK, I must say I rarely comment on other people's FB wall or even blogs.

If people want to drink Starbucks kopi, it is their choice. 

I might nag but it is their choice.

However, when I read the claim that skipping Starbucks kopi to get rich is bad advice because it gives us a poverty mindset, that, to me, was a judgement which I could not agree with.

A frugal mindset is not a poverty mindset.

We can make a lot of money but if we are careless with money, it will only set us back if we are working towards financial freedom.

Related post:
How to recession proof your life?

QAF Limited: $1.14 a share is cheaper than 93c a share?

One year ago, when QAF Limited's stock was trading at 93c a share, I observed that the PE ratio was 16.6x and I said that to buy in at that price would be making an assumption that earnings could improve dramatically in the future. 

There were pertinent concerns such as rising costs of doing business as well as the weak Australian Dollar and how these could continue to weigh down performance.



Video added in November 2016.

Well, for the full year 2014, QAF Limited has exceeded expectations as earnings per share (EPS) improved 46.4% from 5.6c to 8.2c, year on year. With the Australian Dollar having weakened further against the Singapore Dollar, how did this happen?

There was a one off contribution by Oxdale Dairy through the sale of its dairy business. Group operating profit, thus, received a boost of $1.6m. This will not be repeated, of course. However, considering the fact that Group profit improved some $15.7m (before tax), not having this one off contribution in the current year would still mean that QAF Limited would do very well, everything else remaining equal.

All business segments did well but the lion share of the improvement came from Rivalea, an Australian business segment. Operating profits improved threefold although revenue stayed flat because of higher selling prices, better product mix, productivity gains and lower raw material costs.

Lower finance costs also helped QAF Limited to do better in 2014 as borrowings were pared down. Interest expense decreased $0.9m from $4.1m to $3.2m last year.

Today, QAF Limited's stock closed at $1.14 a share and based on an EPS of 8.2c, we are looking at a PE ratio of some 14x. Even if we remove the one off divestment gain by Oxdale Dairy, we would be looking at a PE ratio of 14.5x, thereabouts.

So, although QAF Limited's stock is priced higher now, compared to buying at 93c a share a year ago, it is actually cheaper at $1.14 a share. This is what I meant when I said that a stock could actually be cheaper although its price could be higher. It is about value, not price.

QAF Limited has made their first foray into China in October 2014. With operations in Singapore, Malaysia, Philippines and Australia stable and doing well, if their Chinese operations should prove successful, we could see things looking even better in the next few years. After all, the Chinese market is huge and bread is an accepted staple as well as convenience food.

A final dividend of 4c per share has been declared for a full year DPS of 5c. This DPS is probably sustainable and I look forward to receiving free bread again in future.

Related post:
QAF Limited: Rising 5c to 93c a share.