Sunday, 21 February 2016

Thoughts on Early Retirement – A Year On

Nowadays, seldom do anyone blog about early retirement any more. About a year ago, after I past my 40th birthday, I went through a thinking exercise about early retirement and thought about what should I do if I were to retire, how should I fund my retirement, what are the challenges in retirement, etc. You can read more about these issues in the following blog posts:

It is about a year later, and no, I have not retired. If you read my earlier posts, you would know that I am not a fan of the "not-working" type of early retirement. However, I am open to the idea of the "keep-yourself-busy" type of early retirement where you might still work for something that you like but not for the sake of making money. 

One year later, what additional insights have I gained about retirement? Currently, we have encountered major volatility in the financial markets in the past 6 months, whereby stock prices have fallen sharply, property prices have peaked, stock dividends are cut, REIT distributions are tapering off, interest rates are rising and regional currencies are falling. On top of that, there are worries about a possible recession and people being laid off. All these make for a difficult time for a retiree. This validates the point that I made in Concluding Post on Early Retirement, where our financial freedom might be conditional on financial markets remaining steady. While we do not need a bull market to be financially free, a bear market could put that financial freedom at risk.

Even so, the current stock market rout has taught me something about retirement planning that I had not foreseen earlier, which is that you need to plan ahead for retirement and de-risk in advance. Prior to the stock market rout in Aug, my portfolio was not under stress and I had around 53% in war chest, which appeared sufficient to provide a comfortable cushion to handle any stock market decline even if I were to retire early. That war chest has since declined to 35% due to a major investment and bargain hunting. It is still facing downward pressure as attractive bargains remain. In other words, cash that is meant to be deployed as war chest into the stock market in times of market declines is not free cash available for retirement. Cash meant for retirement must be separated from cash kept as war chest. That means that prior to actual retirement, the portfolio must be de-risked in advance. It is not possible to retire immediately even though cash appears to be sufficient when times are good.

The second thing I learnt is that when you either run out of war chest or are reluctant to dip further into your war chest, a monthly salary is still the most reliable means of funding your stock purchases. Even though stock dividends and REIT distributions might be sufficient to cover your expenses in retirement and add to your war chest, they do not arrive at the time when they are most needed. Most of the listed companies in Singapore have December as their financial year-end, which means that the majority of dividends are only paid in May. Outside of the dividend-paying months of May, Aug, Nov and Feb, you can only wait if you do not have other streams of regular income.

I still have some more years to go before I actually retire. Still, the thinking exercise in early retirement has been a very fruitful exercise and provides useful lessons in how we should plan and execute our retirement correctly.


26 comments:

  1. i think the question is: when does it stop? if you are not planning for a productive person like yourself but someone who genuinely wants to stop. that will be the question of what plan to recommend.

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    1. It's a tough question. I haven't found a good answer yet. The best answer I have now is to progressively de-risk and shift the cash into a separate account meant for retirement. When the cash reserved for retirement has reached a certain comfortable level and won't be deployed as war chest, that would be the time for retirement.

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    2. there is a research done by micheal kitces on keeping say 2 yr of cash expenses. the end conclusion is that it is not as good as a 60/40 portfolio because the cash is a huge drag on performance

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    3. Thks. I'll go and check it out.

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  2. Maybe if your yearly expenses is only 30K per year you can retire now.

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    1. There are just too much uncertainties. Take, for example, negative interest rates whose long-term impact is still unknown. The longer the retirement period, the more uncertainties there are.

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  3. Good that you have realized it earlier before actual retirement. Some retirees may not be comfortable depending bulk of their retirement income from volatile market.

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    1. You're more advanced than most of us in planning for retirement. Pls share with us how do you manage it. I think a lot of us will benefit from it.

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  4. Do you have bonds in your retirement fund?

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    1. I do have bonds, but they are part of the war chest. They are not segregated into a separate retirement fund.

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    2. I see. Might consider putting bonds into the fund? At least they can provide some payouts while waiting for the market to recover. Just my two cents.

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    3. It's OK, I'm not retiring soon. When I plan to retire, I'll segregate the funds and put the bonds in the retirement fund as what you've suggested.

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  5. BI,

    Another silly solution is not to think of retirement and keep working and be happy in work.

    For those who might "never have enough" either relatively or absolutely ...

    I think I need to work till my dying days. Used to think it's a sad thing, but come to terms with it. Lol

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    1. Yes, that's true. If you love what you're doing, it's not boring work at all, and you might not even want to retire from it, just like investing!

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  6. Just to share my thoughts. My plan is to retire/semi-retire at 55. Since I bought an affordable BTO flat, I foresee a considerable amount of monies left in the CPF OA which I will transfer to the SA over my working years. After setting aside the Basic Retirement Sum, the monies left in the SA will be drawn down over the next 40 years, which should support basic needs.

    Dividend income from stocks will supplement the draw down from SA. Dividend income will fund "wants" such as holidays and a car (if possible). Also not to forget CPF Life which will start paying out from 65.

    Hope my planning is holistic enough.

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    1. The thing I didn't foresee is the need to segregate cash for retirement from the war chest, which means that I need to dip into the "retirement fund" to fund my bargain hunting. I see that you've segregated the funds, so you won't have the problem that I mentioned above.

      I believe recessions and market declines are the best time to gauge whether you have enough for retirement. Assuming that you want to retire and you find that you are comfortable doing so despite all the negative news, it means that you're well on your way to a comfortable retirement!

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  7. it is interesting that most people think of retirement as a phase of life and after a certain age, say 45 or 55 will be the starting point and start to plan forward.
    How about spending an hour or two and increasing it slowly month after month leading the lifestyle you want when you are retired?

    For me, I love gardening and have been potting more and more plants over the last 3 months - Nature has its unique way to educate me about timing, patience, slowing down and admiring its beauty, commitment,etc

    The more I spent time doing what I love (retirement or not technically) the more I find a renewed energy continuing it.

    Once we become clearer what we want in life, we know subsconciously what to delete from our lives and spend time doing what we really enjoy.

    All the best to you :)

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    1. Thks for sharing your experience. Yes, I agree that this is another way of retiring. If we can just work a few hours a day and get to enjoy the rest of the day doing the things that we like, it is also quite fulfilling.

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    2. like! exactly what I feel about retirement planning. Plan now not just the money but already spending few hours slowly a day doing what u like. The problem is many pple plan financial freedom only n when reitre at 45 or 55 dunno wat they wanna do. Or their so called things like charity or voluntary work they say they wanna do years back is actually what they do not like once they retire!

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  8. Hi Chin Wai,

    To me, it is not retirement. But second career and something I truly owned and control. To be honest, if I trim my current lifestyle like temperament said, I can be FF. Or if I do not have my so many people to feed!

    But what is the use FF, when my current lifestyle (no regrets) give me the experience of life I feel enriched. And the so many people to feed are actually giving me more joy than FF.

    So to me it is planning early for your second career that is utmost important. And our second career must be planned already at least 10 years in advance and this second and last career must be die die the one we truly love!

    My ex-boss after retiring with millions are now downgrading to smaller home and smaller house. He told me he was more busy now than he use to own a few hundred people business. He served god now but do not go to church. He prefer house church and helping people around him by being there for the people who needed him.

    End of the day, life is about people. I feel!



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    1. Hi Rolf,

      Agree with you that happiness and having a purpose in life are ultimately more important that having enough money to retire early. I agree that richness in life is defined by how much happiness you have rather than how much more money in your bank account (beyond the amount needed to sustain a reasonable lifestyle).

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    2. dun get me wrong. money is impt n certainly to me, it is! But as u grow ur money, u grow more of other more IMPT things too! evolution is the key! :-)

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    3. Understand what you mean. Different things are important at different stages of our lives.

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  9. I was wondering where that additional traffic to my blog came from.

    Retirement is a very scary endeavor because of the consistent risks that you would have to acknowledge from the financial markets. There is also the issue of your parents getting older.

    Your advantage is that you do not have a wife or kids so you can afford to really ramp in your spending when the going gets tough during your retirement. If you are worried about the economy, you will never quit your day job. It's fine if you like your work environment.

    For a single guys with about a $300,000 portfolio, it may be time to start field testing a retirement lifestyle.

    First, push your salary into your separate bank account and try to live on your dividends for two years. With any luck, you will find that you are drawing $3000 a month from your portfolio in no time because of reinvesting all your earned income.

    Second, find a full-time postgraduate degree that you've always wanted to do. A student lifestyle is cheap because like me you'll be too busy with school work. It also provides a credible excuse not to have a job for a year or two.

    If your retirement fails, like possibly in my case, use your new qualifications to find a job you've always wanted to try out. More likely you will find that your retirement plan is actually sustainable.

    I think you can pull off a great retirement lifestyle with low expense and frequent travel.

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    1. Hi Chris,

      I don't think I'll retire any time soon. A full-time retirement is out for me as I prefer to keep myself busy. Studying is out for me too, as I've done the course that I wanted, which is finance.

      I think the key take-away from this series of thoughts about early retirement is that it is not as simple as it seems. As you've pointed out, it probably requires some experimenting and fine-tuning. It's good that we understand this early so that we have sufficient time to find the approach that works.

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