Does Your Desired Financial Freedom Lifestyle Cost SG$4.3 million? I break down the numbers realistically.
South China Morning Post (SCMP) wrote about a survey comparing how much it cost to achieve a set of financial freedom in different cities.
You can review how much financial freedom cost in this chart here:
Singapore ranks number 7 on the list. Our frequent rival Hong Kong is quite expensive in number 2 place. Kuala Lumpur is the place with the lowest threshold of financial freedom.
To be financial free, according to the standards of those surveyed by online property portal Juwai IQI, it would add up to US$3.23 million in Singapore (SG$4.33 mil)
That may look like a very big figure for some of you.
When I read this article, I tried adding up the cost of the desired lifestyle in my head and felt that the kind of the desired lifestyle they describe would cost much more than US$3.23 million in Singapore.
But I got a hunch that like a lot of survey, the respondents were lead in a certain way which results in the figures turning out this way.
Let me try to interpret the figures by wearing my financial independence and financial adviser hat.
What is Your Desired Financial Freedom Lifestyle?
Before you can find out how much financial freedom cost, you need to know the desired lifestyle.
Juwai IQI defines financial freedom as having the following parameters:
- Maintain a desirable lifestyle without having to work. In a second paragraph, they further define this as not driven by the need to earn a set of salary each year.
- Having enough savings and financial instruments to retire.
To attain this financial freedom status, you would need the following line-items:
- Home measuring 120 square meters (1291 sqft) in a decent urban area
- Two good cars
- Roughly US$1.2 million in financial investments
- US$90,000 in household income after tax
I find it challenging interpreting this desired financial freedom lifestyle purely from this set of description.
Let us break down the US$3.23 million by working out how much is roughly needed for each line-item.
How much does it cost so that you can have a desired lifestyle without having to work?
I think this set of description leans closer to what the financial independence community would term “FAT FIRE”.
This is a scheme of financial independence (you can review all the financial independence schemes of living here) where your residual income is so comfortable that you won’t feel constrained in your annual spending.
To achieve FAT Fire, your income needs are larger (because usually people who builds up towards FAT Fire builts in ample buffer)
The US$90,000 a year in household income is weird but after thinking through it, I think they refer to this as the income requirement during financial freedom.
This is one of the data point that makes me question if the journalist interpret things wrongly or Juwai IQI are very poor wealth planners.
If we take 90,000 divides by 1,200,000, we get a current withdrawal rate of 7.5%. The current withdrawal rate allows us to have some sense as to how long the money will last if the money is invested in financial investments that grow over time.
7.5% is a high withdrawal rate that I suspect won’t last the past 15 years.
The following 2 tables were taken from Dr Wade Pfau’s book on retirement planning calculation:
Observe that from both tables, with a 7.5% first-year withdrawal, your money would last between 10 to 15 years. It could last 20 years if your rate of return is very high.
If their definition of financial freedom is to not work indefinitely, US$1.2 mil would not be enough.
Typical retirement planning will usually give us around a 4.5% withdrawal rate (don’t ask me why it is just an observation.). If you wish to be financially free in a very optimistic manner, you will need $90,000/0.045 = $2,000,000.
That is almost twice the amount Juwai IQI computed.
But using 4.5% is not entirely safe. If we assume $90,000 is really enough for FAT Fire, and you don’t wish to work since your early 50s, using a 3% withdrawal rate might be safer.
This would mean we need $90,000/0.03 = $3,000,000.
I think there should be some misinterpretation and it might be that their definition of financial freedom is “not driven by the need to earn a set of salary each year.”
This means they just want some safety protection and to have optionality in life. This means that they are still looking to work just not be so dependant on their job.
I think perhaps that is their definition of freedom overthere.
How Juwai asked the respondents in the survey greatly determines how the US$1.2 million comes about. The respondents could have been asked to select from a few numbers what is the desired sum of money they think is good to have.
If they were asked that way, then the respondents have set themselves up to be pigeon-holed to a limited set of financial independence figures.
So let us bear with it and just take on face-value people need US$1.2 million for their desired lifestyle.
How much does it cost to have two decent or luxurious cars?
What about the cost of two “good cars” in Singapore? Good cars give us a vague idea of what respondents were comfortable with. This could mean continental cars or it could mean two luxury cars.
Small luxury sedans such as Mercedes-Benz C-class, BMW 3 series and Audi A4 will set us back at $248k, $178k and $193k respectively (from ValueChampion research). The average price will be about $206,000.
If the desired lifestyle is two cars (do Singaporeans really desire two luxury sedans in Singapore?), that means they need $412,000 (US$307,400).
If good cars refer to two normal cars, then on average one normal car will set them back $110,000. They will need $220,000 (US$164,100). I think this is more likely.
How much does it cost to live in a 1291 square feet home in a decent urban area?
What about a 1291 sqft home in a “decent urban area”. I would think anywhere in Rest of Central in Singapore is rather decent.
If we select the condos of those areas that are closer to town, such as Farrer Road, Serangoon, Toa Payoh, Boon Keng, Marymount, Woodleigh, the new ones that are not too old range from $1,400 per sqft to $1,650 per sqft.
If we do not add any other cost, this would set a couple back $1.8 mil to $2.1 mil (US$1.34 to US$1.57 mil)
Adding up the 3 Line-Items
So if we were to consolidate the numbers:
- $1.2 mil for Savings and Investments
- $164,100 for two cars
- $1.34 mil for a decent condo
We get US$2.7 mil. This is below the US$3.23 mil provided by Juwai IQI.
If we were to use the higher grade option:
- $1.2 mil for Savings and Investments
- $307,100 for two cars
- $2.1 mil for a decent condo
We get US$3.6 mil. This is slightly higher than the US$3.23 mil provided by Juwai IQI.
I think the survey results are not too far off and we get sensing roughly the grade of the desired lifestyle the people are looking for.
Some Thoughts about this Financial Freedom Figure
My gripe with the survey is that it feels less practical for Singaporeans:
- I think in some cities, the mode of transportation is by car and thus having two sedans is desirable. Not so much in Singapore. Perhaps most desired to have one.
- A US$1.34 mil condo is about 15 times the annual salary of a couple looking for US$90,000 a year. If US$90,000 is their desired income to cover their expenses but in general they earn US$180,000 to US$220,000 a year, than that looks more realistic.
There are a couple of good questions you can ask yourself (or your friends and colleagues during lunch and dinner conversations) after reviewing this survey:
- Does your desired financial freedom lifestyle look similar to this?
- What is your desired, acceptable grade of housing, transportation need?
- How secured do you wish your residual income from investments to be?
I think for a lot of my friends:
- Living close to the central region and close to the main transportation line is desirable.
- Having one sedan is desirable.
- Having a certain level of residual income is desirable.
#3 would eventually need to cover all their expenses and last for at least 25 to 30 years.
Financial freedom, in my dictionary (see link below), is more associated with not having to worry about working and expenses so much. Thus, you really need a sum that is either closer to US$3 million, if your desired income is US$90,000 a year.
However, in the meantime, financial freedom aside, I think having 10 times their annual expenses is highly desirable because it gives the family a lot of options. (You can read what I wrote about how different levels of wealth can give you different utility here).
If your desired income is US$90,000, then that will be US$900,000. A single sedan can set you back US$82,000. A HDB that is in Rest of Central Region can set you back US$634,000.
This comes up to US$1.61 mil.
Looking at desired lifestyle this way is very simplistic but gives us an idea roughly how much it cost.
A couple would usually exchange their life so that they can get this desired lifestyle over time instead of needing a lump-sum to get this lifestyle.
You should shift the internal conversation to how you can achieve this desired lifestyle progressively over time instead of saying “I want this lifestyle right here, right now today.”
How realistic do you find this set of numbers? Let me know your thoughts.
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