The dust is settling from my recent homebuying, and I have since collected my very first rent payment (feelsgoodman). Time for me to get used to a mortgage and start planning for the longer term. A while ago, I decided that I’m not ready for preparing for FIRE yet, but I think it’s good for me to start planning and working towards my retirement in future.
Between my mortgage, bills, and personal expenses, I think I can live rather comfortably on $40,000 a year, and that’s the goal I will set for myself. That means I need to set aside a nice and round $1,000,000, of which I would draw down 4% each year to sustain my expenses.
Timeline? Age 45, which means I have barely 13 years to start preparing for this. It’s quite audacious, I guess, but goals shouldn’t be too comfortable. Is it SMART? It’s Specific, Measurable, Attainable & Realistic (we’ll see later), and a Timeline is set, so I think this goal passes. We will see whether I am as good as hoarding wealth as I am with miles.
The way I see it, I have two main ways to reach this magic number for financial independence; my two-pronged FIRE plan, if you will.
1. Save, save, save
Now, even saving $50,000 a year would take me 20 years to reach the magical $1 million, so I have to rely a little on the magic of compounding interest.
With 7% pa compounded returns. $50,000 per year will turn into a little over a million dollars by the time I’m 45 years old. Is 7% a little too optimistic? Stock indices like STI Index and S&P 500 have averaged 10% pa for the past decade or so, so I don’t think it’s too difficult.
Even if I were a little more pessimistic and project 5% pa returns (mind you, even conservative insurance participating policies project at 4.75% pa returns), it would take me a year and a half longer to reach my goal. It’s not really a big deal I guess.
|Saving Amount||Rate of Return pa||Number of Years|
Even if things don’t work out too optimistically, I am going to be financially free at age 53 if I can save $30,000 per year for the next two decades and invest it at a modest 5% pa growth.
Should I start contributing to SRS?
I should explore this topic more in a post of its own, but my desired retirement age could mean that the Supplementary Retirement Scheme is more relevant than CPF, and the good thing about being self-employed is that I have more flexibility in choosing between the two.
Like CPF, SRS can provide a tax shelter each year while I’m financially productive, but unlike CPF, I can choose to draw down on the savings when I’m 45 (or 53). There is a 5% penalty plus tax on the amount withdrawn, but if I withdraw only $20,000 per year, there’s no tax on it if I’m no longer earning an income at that time. The 5% penalty then isn’t too bad compared to tax tiers of 7% and up.
Chances are, I wouldn’t touch the SRS until I really have to, and it can stay there until I’m 62 and can withdraw it penalty-free, with only 50% of the amount taxable.
My actionable point is that I would probably have to start contributing to SRS this year to save precious dollars from the tax man. And I’m going to have to track my income and expenses more closely starting from now to see if I actually do hit my $50,000 target for 2020.
2. Keep building my income streams
The second way is actually way more important towards the goal. Building my income streams obviously translates into an increased amount of money I have each month to for my quality of life, and to squirrel away for my retirement.
Also, one of the motivations of starting a business is to build something that would provide income without my active involvement. The way I see it, there are three main stages of a typical business:
- Business Development
As one of the main tutors in my tuition business, I am still very much involved in the Production stage, and am currently juggling it with my Business Development duties. Eventually, my involvement in Production will lessen as we employ more teachers, and I focus more on growing the business and increasing my revenues. In time, that role will also be replaced by marketers and business development people, and I can reach the Management stage where active work is minimal and the income is close to passive.
I’m also quite heartened that my hobby – writing this blog – has also started to bring in some money which can supplement my income. I hope to continue building this up, and I thank everyone who has been coming back to read my posts, commenting, and also signing up for the various products that I have promoted. Really glad to bring value to people through the few things I have some knowledge in.
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Do you have a plan for retirement?