Strategies to Early Retirement

Early retirement to me means retiring at the age of 35, it can be 50 for you. Early retirement planning is the same as conventional retirement. However, you have lesser time to achieve what others usually achieve with 40 years of work. In addition, you will need more money to last throughout your retirement with an extended spending phase of around 50 years (say I want to retire at 35 and I live till 85). Simply put it, it is having less time to accumulate your wealth and more time to enjoy life.

Conventional retirement planning involves saving and passive investment which is a slow and secure way to retirement. You can maximise your Special Account in your CPF, invest your money in a diversified portfolio and reap the rewards through capital gain and dividends. Conventional retirement planning also involves in extreme saving rate of more than 70% and setting aside money to have a comprehensive insurance coverage. 

The downside of passive investment is your dividend income may not grow fast enough for those who are looking for early retirement. Long term returns will be between 2-8% net of inflation which is not a rate to grow wealth for those early retirement. In addition, there will be years of negative growth for a diversified portfolio which is what I am experiencing, for this year 2015, the portfolio is down 10%.

Losing compound growth as a wealth building tool due to shorter time frame will require you to add non-conventional method to your plan. 

1. Extreme Frugality - I have save more than 70% of earned income for 8 years. It is possible but not everyone can agree to this.

2. Leverage - it is a double edged sword tool, it can help you to grow your wealth faster but margin call on property or stocks can cause a downfall.

I am trying to retire at age 35, I saved bulk of my earnings through frugality. Currently, I am learning to increase on my investment skills and carry out active investing. It requires dedication and discipline.

A lot friends in Singapore uses real estate to achieve early retirement, because it has financial and business leverage. Another path is leveraging other people's time through business ownership. When you hire someone, you get to have a total of 16 hours per day. Assume that we work 8 hours a day. In summary, there are three paths to wealth, stocks, real estates and business. I am planning to combine all three paths, coupled with extreme frugality to achieve financial freedom, attain early retirement by 35.

Rule 1 - Build an investment portfolio with dividend income which is sufficiently more than your present and forecast maximum expenses. You can only spend your residual income and never touch the principal asset.

Rule 2 - You need to grow your assets at a rate faster than your annual inflation rate. If not, inflation will eat away your gain and your spending power will be eroded.

Rule 3 - You need to grow multiple source of residual income. You need to have dividend income, rental income and business income.

Rule 4 - You need to have a comprehensive insurance to insure that no external forces can affect you when least unexpected.

I need to make a plan when I retire early, I will not engage in full time leisure because I will get bored of life. I want to retire early because I want to create a lifestyle which is more compelling than my present lifestyle. My parents and parents in law are getting old (in their 60s) and my parents-in-law are staying in Hong Kong. My wife and me need to have freedom to choose where we stay at and not confined to our annual leave. In addition, I need to have a passion and activity which stimulates me, which I will jump out of bed every single morning. My plan is to move into investment business on a full time basis, help people to grow their portfolio and retire early and seek out good property deals and businesses. That is my definition of early retirement, doing something which I am passionate.

Retirement planning is creating a fulfilling and complete life experience. Then live it.

Savings 101

Savings for the young

Financial knowledge is not taught in school, not during my times. A lot of fresh graduates taste the liberty of first pay cheque and start to splurge on bags, clothes, shoes, jewelries, watches and fine dining. They have a mindset of spending future money using credit cards and when this viscous cycle gets out of hand, they will severely in debt. They become slaves to debt, living pay cheque to pay cheque. I experienced this through several close friends which hurts me a lot. That is the motivation why I will like to share with everyone the millionaire mindset which is frugality and financial knowledge.

Firstly, we need to understand inflation. For example, if inflation is at average 4% per year (ignore the government's basket of goods which is skewed in a way to their benefits), your mixed vegetable rices with 2 vegetables and 1 meat used to cost S$2.50 and now it cost S$3 in most places. The price increases by 20%! Given inflation, generally cost of living will become more expensive in the future due to inflation. That is the key reason the rich uses different tool to beat inflation. They act like our Central Provident Fund, take your money, give you a 2.5% guaranteed return and invest the money to get return of (modest level) 6-8%, this is a zero sum game and I think Singapore government is doing a fantastic job in this forced saving. Without this, a lot of ignorant Singaporeans (pardon my bluntness and those with financial knowledge will understand where I am coming from) without investing their money will suffer when they are old. If you are a Singaporean and offended with my sharing, I urge you to read up and understand more about investing, entrepreneurship and economics. This will only benefit you and not me.

Secondly, there are a lot of people who complain that they are not in school about financial knowledge, they do not have time, financial knowledge is too difficult to learn. Time is of essence, the earlier you start, the better it is. I will share in future the power of compounding effect which is the crux why you need to invest.

Financial Planning involves three major steps which include savings, insurance and investments. The young graduates should start from learning how to save money. The experts always recommend to use automated method to transfer 20% of income directly to a fix savings account. They will recommend pay yourself first, then spend the remaining. 

I will like to share many years ago when I received my first pay cheque, I remembered the nett amount was $1999, after contributing to Chinese Development Association and 20% to CPF. I wasn't a Christian then, I gave my mum $200 for providing me till 25 years old and $180 to my dad's CPF account to pay off my study loan. I manage to save $1,500 per month because I was giving tuition during the weekend. Like many others, I stopped getting pocket money from my parents since army days, surviving on $300 during army days and started to provide tuition to students. I was tutoring from 2000 to 2008, However, my girlfriend was suffering with me, we only indulged in a good meal during special occasion. Saving to me requires discipline, delay gratification, goal and vision. You need to understand why you are saving for, this will compel you to do the necessary to sacrifice the present to achieve your future goal. I was saving for my business with an initial budget of $100,000. 4 years later, I achieved the goal at age 29 but till date yet to go full time into business. 

I took the employee route and I know it is possible with financial knowledge. Be a bit hard on yourself today for a better tomorrow. It pays to be frugal. 

A difficult yet easy decision to make

Today I am trying to evaluate my portfolio with a good friend and he pointed out my portfolio is risky as Singapore is experiencing slowdown.Almost 90% of my stocks are in Singapore. Furthermore, my portfolio is already 10% below original value. I was thinking of a strategy to either sell all my OCBC and ThaiBev shares and reallocate them to IBM. IBM has been upgraded and target to increase from present share price of 138 by another 8-10%. I was thinking of taking a bet and maybe will bring my portfolio back to original value. Common stocks are subject to recurrent and fluctuations in prices, the possibilities to profit are way of timing and pricing. I should remember that an investor should not believe the day to day prices to make him rich. When you buy the company share, you own part of the business. From the fundamental analysis viewpoint, I need to understand the intrinsic value of the stock and constantly follow the quarterly results. In addition, I need to forecast the future earnings of the stocks. The most important fact about investment is investor is never forced to sell his shares. I should not be anguished by the fact that shares are dropping but rejoice that I can accumulate more at a lower price. I should concentrate only on my portfolio but not how much my friend has made. I should consider both the dividends and long term value of my portfolio. I should think for myself and not let others or market fluctuations tell me. I am in control of my emotional life and decide the based on the market price whether it is to my advantage to act on them. 

Conclusion I will continue to hold on to my present portfolio and trim down on GLP and Singtel, I will start to pump in future money on a monthly basis into IBM. In addition, I will set aside $1,000 each with my wife to purchase MTR for our baby's future education fund.