For the Average Singapore Investor: What should the Size of your Wealth/Retirement Fund be? What is the Rate of Return from your Wealth Machines? Find Out how you can mathematically calculate your sums.
This concept was taken from either a book or a website, but unable to credit the exact source to due to unable to recall as it was quite a while back.
I will put it in a Singapore context/ SG context for more relevant understanding.
As an average investor, do we know how much a retirement sum is sufficient for us to go to retire comfortably through our golden years? Some of us may not be too sure, or may not have a valid retirement figure/sum to stand by. Below is a guideline to help you to figure out how much you need to have before you can probably call it quits at your miserable work and have the cashflow to do things/work that is much more meaningful to you.
Eventually, at the end of this article, we will finally understand how much money is required in our Wealth Fund in order to achieve our Financial Independence (FI) through simple mathematical calculation in 2 steps.
The Size of Your Wealth Fund depends on a few factors:
- Your Annual Expenses
- Your Wealth Machine Rate of Return (ROR)
- Inflation Rate, e.g. 3%
Wealth Machines could come in the form of:
- Fixed Deposit accounts
- Trading accounts
- Savings/ Endowments
- Properties
- Businesses
- Royalty
Step 1: Let's say that your retirement lifestyle requires $6,000 per month.
Therefore in one year, you will need $6,000 x 12 months = $72,000 per year.
Wealth Fund required in FI (to fund a $6k/mth lifestyle)
= Total amount required per year divided by Rate of Return to generate cash flow in FI
In this example, we shall take a decent average rate of return of 4% from our investments, also the risk-free rate if we were to put into Central Provident Fund (CPF) retirement account (https://www.cpf.gov.sg/Members/AboutUs/about-us-info/cpf-interest-rates).
Therefore,
Wealth Fund required in FI (to fund a $6k/mth lifestyle)
= $72,000/4%p.a.
= $1,800,000
Step 2: Rate of Return (ROR) of the Wealth Machine
= ROR to generate cashflow in FI + ROR to keep up with inflation
= 4% + 3%
= 7% p.a.
A rough guideline would be, for every $1,000/month in returns/payout, you will need about $300,000 of assets in your investments to support that monthly income.
Your assets should not exceed 15% in high volatility instruments, e.g. stocks.
The unpredictability of inflation ==> One can't really predict inflation as it is somewhat a function of the political climate. That is why the most appropriate instrument are those that does better in an inflationary scenario, such as TIPS in the US, which are inflation indexed bonds that track the level of inflation, and in Singapore context, it could be CPF, value of properties which moves with the inflation rate.
One word of caution: It is not about randomly finding any financial instruments and randomly investing. No it doesn't work that way. One needs to be careful with their investments and invest wisely. Be careful of mutual funds/hedge funds etc that charges high commissions and fees, which could eat into your capital and cause you to have losses instead of gains.
Investing the Right Way: Investing and choosing in the right stocks or right properties could further expedite your process in reaching your Financial Independence or Financial Freedom.
If you are keen to know how to invest well in stocks and REITs, you might be interested to attend this free investing workshop http://bit.ly/1TCWyqg .
If you have signed up for the workshop, do drop me a comment or message here, so that I can followup with you to ensure that your investments produce results. All the best in your investing journey! Cheers!
