Understanding the Financial Independence Model | part 1
In this post, Max will describe in deeper details on the modeling principle of the FIM.
Objective of FIM
Objective of the FIM: Compute minimum retirement age based on customized financial input, with in built financial principles in Singapore's context.
Principle of the FIM
The income and expenses are one of the most critical input to the FIM. Someone who expects zero expenses for the rest of his life can in fact retire yesterday. On the other hand, someone who has a higher annual expenses than annual income can forget about retirement altogether.
Expected income:- Employment income - determined by monthly gross income and annual bonus, which will be increased yearly based on the annual increment rate, with annual contribution until the age of FI.
- Additional income - which user can input to capture one-off income at specific year, or repeated supplementary income that has a corresponding time validity.
Expected expenses:- Basic/ survival expenses - are regular and recurring in nature, which will be increased based on inflation rate. Basic annual expense has no time frame, and will continue indefinitely until end of modeling age.
- Additional expenses - similar in concept to additional income
- Employment income - determined by monthly gross income and annual bonus, which will be increased yearly based on the annual increment rate, with annual contribution until the age of FI.
- Additional income - which user can input to capture one-off income at specific year, or repeated supplementary income that has a corresponding time validity.
- Basic/ survival expenses - are regular and recurring in nature, which will be increased based on inflation rate. Basic annual expense has no time frame, and will continue indefinitely until end of modeling age.
- Additional expenses - similar in concept to additional income
Additional income/ expense table for user to customize their income/ expenses |
Allocation of cash equivalent
- Emergency fund - to be maintained at percentage of annual basic expenses earning risk-free interest rate. E-fund will be set to zero after age to stop maintaining E-fund (which is usually the FI age).
- Investment (cash) - investments that can be converted to cash to finance expenses when necessary, earning profit based on ROI table.
- Investment (SRS) - investments using savings in SRS, earning profit based on ROI table. The combined investment in cash and SRS will be maintained at percentage of 'investible' fund, to be cap at maximum investment sum.
- Savings - remainder of cash equivalent that is not kept as E-fund or invested, earning basic interest rate.
ROI table for user to customize their investment profit |
CPF savings and schemes
CPF is the other main category of saving for the model, which is why the FIM is very applicable in our local context. The CPF is an integral part to our retirement, so the FIM will not be complete without building in the CPF concept.
Interest earned from each of the accounts is also modeled based on the CPF interest rates, which also include the extra interest and additional extra interest for eligible CPF savings. More details is available on the CPF website here.

CPF allocation rate, extracted from CPF website
Users can also decide whether to maintain their CPF at the full retirement sum (FRS) or the enhanced retirement sum (ERS) at age 55.
In general, the sum keep in CPF RA account will earn an annualized rate of return of about 5% to 5.5%, so if your ROI is below this range, the better option will be to keep the CPF savings at ERS.
The estimated annualized rate of return for CPF RA savings will be elaborated in another post
CPF savings and schemes
CPF allocation rate, extracted from CPF website |
As the ERS and FRS in the future will be much higher than the amount today ($166k and $249k as of Jan 2017), the FIM has an in-built function to extrapolate the estimated FRS and ERS amounts at user's 55 year of age, based on the historical rate of increase for the past 15 years.
Any withdrawal from CPF savings at age 55 and CPF LIFE payment at age 65 will be contributed towards the cash equivalent pool.
Another key usage of the CPF is the public housing scheme (PHS). User can input their own BTO-related variables such as the downpayment sum and the BTO monthly installment (using CPF OA) to determine the utilization of the CPF OA account towards housing.
Initialization of FIM
- current cash equivalent,
- current CPF balance (in each of the OA, SA and Medisave accounts),
- current annual gross income and expenses, and
- current SRS balance
Testing out the FIM
If anyone would like to receive their customized output using the FIM, please feel free to contact Max using the contact form here.
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