As I have previously mentioned my monthly expense is about SGD2k/mth meaning about SG24k per ann. Let's estimate that to be SGD25k for some buffer. My projected return is 5% return on my investments. This is from investing in dividend stocks such as SPH, Starhub, REITS, etc. (This is not a recommendation to buy any stocks. Do your own homework. I'm using these as examples of stocks which currently provide about 5% return.) These are blue chip stocks which have a stable business model and will probably stand the test of time. Historically, stock markets produce around 7% returns over the long run. I set my expected return to be lower so that my calculation is more prudent.
SGD500k * 5% = SGD25k
So a simple calculation would be if I were to have SG500k invested in the stock market producing 5% return, I would be able to retire comfortably with my wife and pursue other interests.
WHAT!!! I can already hear the screams of impossibility.
That's not possible!!! You haven't taken into account .........
The thing is, most people are too insecure with that they already have. At SGD2k per month, one would live a relatively ok lifestyle. Furthermore, I will still be able to cut off other expenses such as the car and maybe drop my qtrly travel to maybe half yearly.
What about inflation?
Historically, the stocks I have mentioned provides about 5% dividend. This is the spending money. I have not taken into account capital appreciation. Theoretically, the stock market will adjust itself according to inflation. I'm not trying to say which stocks are better or that dividend stocks are the way to go. The main point is that generally, a fair portfolio should provide about 5-7% in the long run and that SGD500k should be enough for me to retire and do other things.
This isn't for me. SGD500k is too little for me to feel secure.
You're not getting the point. The concept is the income generating nature of investments. Not the total amount of investments which you are holding at one point. You need to be looking at expenses and income potential rather than what you currently own.
OK! Fine then, SGD2k per mth is too little for my family's monthly expenses.
Ok then put your own number in that formula. If you feel that your family needs SGD4k per mth, then you'll need about SGD1 million to generate about SGD50k per ann. That should be plenty to feed a regular family. If you're looking at early retirement then I don't think you are expecting living on SGD10k/mth, that defeats the point of going into this discussion. Thing about it is we are talking about early retirement. What is the lowest level that we can accept to leave our jobs and pursue other interests in life. Some might even be income producing and that would actually add on to your total invested assets.
Furthermore, expenses after retirement should drop as one would be able to take more public transport or enjoy the lower life. If there is money left over from your passive income, you should reinvest this to gain better returns or have a buffer for your continued retirement.
These numbers may change when/if I decide to have kids. But even so, SGD2k per mth should be plenty to feed my family. And as I said before, if it is not enough, you can state your own magic number. What most people do not realize is that they do not need as much as they think they need. They think they need millions to be able to retire. But that is not true. With investments and proper expense control and frugality, one can make your money work for you indefinitely. (Note, I used the word frugal, not scrimping. This means buy when you need to buy but look for a good deal. Make every dollar count. Most people buy things during a sale/discount. The point is to buy things THAT YOU NEED during the sale/discount and not buy things just cos it is on discount.)
But the stock market is too risky!!! Others may complain. I like secure stuff.
Ok fine. Long term insurance endowment plans provide about 3% return. If you deem that your mental state cannot accept the volatility of the stock market then you'll have to settle for lower returns. 3% is a respectable amount compared to bank interest. You'll have to save longer and accumulate more as you will need more money to generate the same amount for your living expenses. As of this date, Australian Fixed Deposits provide about 3% return too. But you'll have to fly over to the land down under open an Aussie account and put a deposit in AUD. You'll have to take into account the currency fluctuations though but its still a safe investment. An idea is to take an annual holiday to Australia to deposit more money every year. It's not good to open an AUD fixed Deposit in a Singaporean bank. The bank would just take your money and deposit with an Aussie bank but give you less interest. Of course the flight to Aussie won't be cheap. But I'm an advocate of balance so it's not just about savings and not spending but there is time to enjoy. So take the trip to Australia as a short trip. That being said. that does not mean that you should enjoy all the time. Travel is fine on a fair budget. Once a year is fine maybe twice. The point is on the path to early retirement, one does NOT need to suffer all the way but that there can be sweeteners along the way and not to mention a 3% return in an AUD Fixed Deposit is a good excuse to go also.
To end this post, what I'm trying to put across is you need less than you think you need. If you are willing to live on less, then you really do not need very much. Yes a few hundred K is quite a large amount but it's better than the millions that most people imagine. Be frugal, save up and invest. Make your money work for you and enjoy the fruits of your labour. Some people make their money work for them but never enjoy the fruits cos they keep thinking that they do not have enough and are too concerned/scared to move into retirement/semi retirement. Furthermore, one may also take up a part time job which is less stressful and that you enjoy. That would provide surpluses to add into your investment account. In the diagram below, once investments become large enough, earning can be cut off and there will still be surpluses.