Have I reached Coasting Financial Independence at 33 Years Old with $550,000 – Reader Question
Up till now, you have manage your money well, create a good wealth foundation for your family.
So could you make a career switch to another industry by taking a much lower pay?
I received this question from my user about his current financial situation. He would like to seek an employment that is more meaningful.
He did his sums and it seems he has a good plan.
He would like to get a second opinion about his situation and his possible plan going forward.
So let us get right down to it.
His Family Situation
So here is my reader’s current situation:
- Currently 33 years old, didn’t reveal the age of wife, one daughter that is 3 years old
- Worked for 8 years
- Diligent Saver and Building Up his Nest Egg using Exchange Traded Funds (ETF). Rate of return in the form of XIRR is 6%
- Emergency Cash: $30,000
- Stocks/Bonds/ETFs: $520,000
- CPF SA: $110,000
- Not revealed or doesn’t have much
- Current Liquid Net Worth Revealed (Assets – CPF SA – Liabilities): $550,000
- Since 2014, or 3.5 years ago he has been posted overseas with a decent allowance package
- Cash Inflow: $11,500/mth or $138,000/yr
- His Base income: $5,375/mth (After CPF: $4,300/mth)
- His Allowance: $5,300/mth
- Rental Income (I assume is his flat): $1,900/mth
- Cash Outflow: $4,500-$5,500/mth on Parents, Food, Transport, Insurance etc
- Net Cash Flow: $6,000 – $7,000/mth or $72,000 – $84,000/yr
- His Ultimate Goal:
- Attaining Financial Freedom
- Definition: Retirement at 65 years old with $5,000/mth cash flow or $60,000/yr
So he feels like he would like to switch to pursue some work that he like. This is likely to entail a drop in income.
Based on his research the starting pay could be $3,500/mth. He thinks that with his wife income when she goes back to work (she should make ($3,000/mth), their monthly savings is likely to drop to $1000/mth. This is after deducting expenses, especially their daughter’s early years of schooling.
My reader thinks his plan is doable.
He just am not sure if Kyith can raise any red flags or provide a different perspective.
So let me try.
Based on Conservative Estimate, His Family Should be able to Coast or Barista FI
This family is awesome.
To reach this state at the age of 33 years old, with a child, it is a good balance of having wealth, and having family pursuits.
A lot of people will die to be in their position I feel.
There are some information that I do not have:
- Do they own a HDB? I think they do, else the rental income might not be possible
- Do they still have mortgage? or any other liabilities
- Were his wife working before going overseas?
He wishes to:
- Safely have wealth to retire at 65 years old
- Ensure that the family lives well (not stated but I assume most of us would want this)
- Pursue meaningful working
The best kind of financial independence scheme this fits into is Coasting Financial Independence or Barista FI (I explain this concept here)
In this scheme, you accumulate wealth aggressively, by taking advantage of your good earning power. Usually our pay increment is the best in the earlier years. We also have the most energy to dig deep and work longer working ours, to improve work performance, to gain a better salary.
We do this for 10 years, then we take a step back, to work in a job that we find more comfortable with.
For a lot it is to have a work life balance and find meaning in work, especially if what you are originally trained in pays well, but soul sucking.
As you have already build up your wealth aggressively for 10 years, your wealth on its own will continue to accumulate on its own without cash flow injection towards your retirement at age 55-75 years old.
The cash inflow from his meaningful work will just need to pay for their expenses without needing to worry about saving.
His $550,000 Will Grow on Its Own to Fund The Target $5,000/mth Cash Flow
The key to working this out is to find out:
- when you need the money: 65 years old or 32 years later for him
- how much cash flow you need then: $5,000/mth or $60,000/yr
- what is the rate of return of his wealth growth: this is debatable and he has achieved an XIRR of 6% in the past. We can work out a range
With this we can work out the sums using the Time Value of Money Calculator.
How much should my reader need?
According to the 4% Withdrawal Rule, which is to withdraw an initial cash flow equal to 4% of the portfolio, then subsequently, their family expenses will increase annually based on inflation.
If he needs $60,000, he will need 60000/0.04 = $1,500,000 in 32 years time.
Suppose he would like the plan to be more conservative. Instead of 4%, he could use 3%.
He will need 60000/0.03 = $2,000,000 in 32 years time.
That looks doable because 32 years is a long time and his original capital of $550k is large enough.
The table above shows whether my reader is able to grow his $550,000 to $1.5 mil or $2 mil by 32 years later.
I have list out 4 different rate of return of his investments in the long run (4% to 7%).
In 32 years, the range of wealth he would have built up is $1.9 mil to 4.8 mil.
Thus, it will be able to hit a conservative withdrawal rate of 3% for his initial annual expenses.
Now could his plan be sped up?
I have list in the last column how long it will take for the respective rate of return to hit $2 mil, the conservative future wealth amount.
If the return is 5% on average, it will take them 26.5 years. If its 7% it would take him 19 years.
So he could do this today if he wants.
He could delay his Coasting Plan and Barista FI Plans for X Years
My reader could increase his wealth by $72,000 – $84,000 a year. This would make growing to $1.5 mil and $2 mil easier.
Easier in that he can reduce the risk on his investments.
He does not have to aim for a higher rate of return. (read the section of My Wealthy Formula, where I explain that if your savings rate goes up, you do not need higher risk higher return assets to reach your wealth objective)
However, there is a balance, because if you keep searching for that buffer, he will keep extending and extending.
If he does that, he increases his angst in the current job and loses out on what is precious which is time.
If he works 2 more years and save $72,000/yr, he would start off at 35 years old with $694,000 instead.
Instead of 32.9 years, he would take 27 years or 6 years less to reach $2 mil. Even at a rate of return of 6%, the difference is 4 years. The difference is not a lot.
Spend 2 years to save 3 to 6 years.
I cannot say whether that is worth it or not. Perhaps the current job is struggling more, perhaps its just boring and not too challenging.
What Will Make Up his Future $5,000/mth Monthly Expense Target?
My concern here is that, my reader is aiming for a $5,000/mth expense target 32 years from now.
By 32 years later, that might not be worth a lot.
From what I gather of their cash flow while he is attached overseas, his family monthly expense is $4,500 to $5,500/mth now.
So either he forgot to plan this or the items that make up the expenses now and 32 years from now will be different.
As a rule of thumb $4,500/mth at 2.5% inflation 32 years is $9,916/mth.
We should always think about what makes up our expenses not just for ourselves now, but to see perhaps, our end wealth goal is closer/further than we think (I explained about the items that make up my annual survival expenses here)
What about his Income Starting Over? Does it Cover?
I think based on his income and his wife income, if she goes back to work, it should cover the expenses.
If both of them back $6,500, after CPF they will earn $5,200. This will cover the upper bound of their current monthly expenses of $5,000.
It may be more comfortable if part of the monthly expenses is mortgage payment, paid through CPF.
In that case, the cash outflow is less.
Any increases from his work, can be used to tackle the increase costs of life.
Would $6,500 be good enough? Let us look at the floor.
In this article, a single income father with spending of $3,000/mth and assistance can bring up 7 children with the oldest being 16 years old.
If a person can work out the math as diligently as my reader, I am sure he should be able to raise one child on a much higher income.
They will have Another Cash Flow at 65 Years Old: CPF Life
Judging by the $110,000 in my reader’s CPF SA, I would think he has done some CPF transfer.
This makes me suspect whether he owns a HDB at all because most of us would use our CPF to service our mortgage so how come his CPF SA is more than myself.
The current CPF Full Retirement Sum (FRS) is $171,000. So at my reader’s age 55 years old, which is 22 years later, the FRS can be estimated to be $294,388.
Would his CPF SA hit the FRS when he is 55 years old?
Assuming his income base now is $3,400/mth or $40,800. His pure CPF SA would be around $3,770/yr.
Together with the $111,000, in 22 years time the sum would be $392,175.
This would exceed the future FRS.
At 65 years old, my reader and his wife can look forward to another income stream to supplement the $5,000/mth he is looking for.
I suspect the cash flow from CPF Life then is $1,933/mth. (Don’t take my word for it)
Savers will likely be Savers. His Family Should be able to Find Cash Flow and Opportunities from the Unlikeliest of Places
Here is the thing.
To be able to reach where my reader is currently, you would have to be rather conscientious and you will have to live a life of agency.
My friend Chris said that, when you settle your wealth foundation well, it gives you confidence. It feeds back to how you carry yourself at work and your level of commitment.
In Your Money or Your Life, Vicki Robins talk about your Life Energy Exchange.
When you coast, you are really optimizing your life energy exchange. You will wish to finely tuned your income, versus all your expenses related to your job, and the amount of hours spend in the job.
You would not want a high income, and in return, you would expect the number of hours spend in the job be much less.
However, the conscientious you might eventually develop whichever new career you venture into something that earns well.
However, this time it is something that you might find that it matches your values better. It will make you look forward to work more.
My reader probably feels weird not savings any money. If I were in his position I would feel weird too considering this is what lead him to be in this position.
Is Building $550,000 in Wealth by 33 Years Old Not Doable?
Now you may find it unconvincing, without external support, how can someone who worked for 8 years is able to build up $550,000.
This amount of money is likely to be funded by the job of 2 person.
He did say his XIRR is 6%.
We can assume his wife and him worked for 4.5 years. Then he got posted overseas for 3.5 years. His wife joined him and stopped working.
Given that my reader say he saves between $72,000 – $84,000, at 6% rate of return, his overseas stint would enable him to accumulate $271,470.
Since his basic salary is $4,300/mth (after CPF), we can assume his average income for those 4.5 years is around $3,800/mth (his earlier salary should be lower before increments).
If his wife was working earning $2500/mth, we can assume her average income for those 4.5 years is around $2500/mth.
That is a combine average of $6,300/mth.
Let us assuming the couple is conscientious and saves 50% of this $6300/mth or $3150/mth.
After 8 years, this $3,150/mth is estimated to grow into $231,600 in 2018.
If you add this 2 sum together you will get $231,600 + $271,470 = $503,070
This is pretty close to the $550,000 in portfolio and emergency fund my reader told me.
A 50% savings rate will allow his wife and himself to accumulate and spend on the big ticket items that a young couple needs such as wedding and renovation.
There was less details about the home provided but he should have a mortgage loan that he is paying through his CPF. However, if he is transferring to CPF SA account, how is the funding his mortgage.
Having $550,000 at 33 years old is possible but not simple for many.
This is because you need to be very cognizant about what you want early in life, and be frugal and save, expand your income accordingly. This is simple but not a lot of people can execute (often because they cannot visualize the end result, which is what we are seeing here today)
I think the advantage for my reader is that when he took the overseas stint:
- they lost the wife’s income
- gain in a good allowance
- they can rent out their Singapore home thus cash flowing an asset that otherwise they were not able to
Putting Your Self in the Same Situation
If you are starting your working career not too long ago, my reader’s situation might be something that might fit your situation.
You see no reason why an active individual like yourself should stop contributing to society but you wish for some form of financial security and financial independence.
Coasting FI is front loading your wealth machine to create a machine that can generate cash flow should it be called upon.
To do that, here are some things to think about and competencies:
- Reflect and discuss with your future spouse the kind of life you wish to live
- How money supports or do not support this kind of life
- Take note of your spouse and your current earnings power and future earnings potential
- Draw a 10 to 15 year cash inflow progression. For example, year 1 combine income after CPF is x, then year 2, then year 3
- Simulate the eventual wealth in 10 to 15 years time (or some where in between) if you channel an absolute amount (e.g. $3,000/mth) or a % (40% of combine disposable income) into an investment portfolio at a conservative 3-4% return (note: unless your rate of return is very high, majority of the wealth 15-20 years time will come from your combine income)
- For the other portion that you do not save, does it match a good life you can live?
- Play around with #1 to #7
Early awakening, conscientious behavior and an agency life can be rather powerful.
If you wish to explore further into how wealth can support the life you live, or be relatively right in the way you manage your money, you can read my expansive section:
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