An article originally published on South China Morning Post stated that the threshold for financial freedom in Singapore was US$3.23 million (approx. S$4.33 million), placing it seventh on the list of 11 global gateway cities. The article got picked up by AsiaOne and quickly went viral on the personal finance community, largely because of the staggering amount stated. I was intrigued too because I have always sold the goal of achieving early financial freedom to my wife. If it truly requires S$4.33 million to achieve financial freedom in Singapore, she would be devastated and trust me, it wouldn’t be just my bubble that would be popped. I believe that the amount needed for financial freedom differs for every household and therefore I decided to find out what is the amount for my household.
Calculate Cost Of Financial Freedom In Singapore
According to online property portal Juwai IQI, it costs US$3.2 million to ‘maintain a desirable lifestyle in Singapore without having to work’ (the meaning and definition here is by SCMP).
In the process of selling this Financial Independence Retire Early (‘FIRE’) movement to my wife, she has always asked, “how much money do we need?” Unfortunately, I could never really provide the amount that we need to set aside because I was lazy/terrified to get down to computing it. Instead, my response to her has always been, “The strategy is to work very hard now if we want to retire at age 40.”
Frankly, if we are serious about achieving the FIRE dream, I think we need to nail down the range of amount that needs to be set aside. The sooner this is done, the better before she starts reading articles online (such as the one on SCMP) and forming her own conclusions.
Step 1: Tabulate Our Annual Household Expenses
If you have been a long-time reader of Heartland Boy, you would know by now that I have a young toddler. Together with my wife, that is a household of 3 family members.
In calculating our annual household expenses required under FIRE, I have assumed that both of us are unemployed and would therefore be devoid of the following:
- Company’s fringe benefits including paid medical expenses and check-ups
- Disability income insurance will be cancelled since we are no longer employed
- The need to pay Income Tax
After poring through years of credit card statements and expense trackers, I was finally able to calculate my annual household expense as shown in Diagram 3.
At current estimates, the annual total household expenditure would be approx. S$102,000. The rule of thumb in this exercise is to be conservative on my estimates. I applied a 10% mark-up and always round up to the nearest hundred whenever possible. After all, this is clearly one simulation whereby it pays to overestimate than underestimate the household expenditure.
Here’s a high-level summary of some of the category of expenses with the assumption that current lifestyle is maintained with no tangible downgrade. Therefore, it is not LEAN or Extreme FIRE that we are targeting.
1. Household Utilities
This is the easiest category to estimate with high degree of certainty as I simply need to average out the amount my household spend on electricity, water, broadband, conservancy and mobile phone based on past consumption behaviour. Maintenance fees include regular air-con servicing, carpet cleaning and the occasional handyman fees to replace broken fixtures and household appliances when my renovation warranty lapses.
2. Grocery, Dining and Shopping
Most of our meals are cooked at home, resulting in weekly average grocery bill of $150. During weekends, we often dine out as I am a foodie.
The shopping budget is to buy necessities such as new clothes, books, electronic goods etc.
My household scores pretty well on this category as we do not own a car. My philosophy on car ownership can be found in this article – how parents with young children can survive without buying a car. There is plenty of buffer in this category as I have catered for 9 long return taxi rides in a month which is an amount we have never exceeded.
4. Domestic Helper
If our FIRE plans go awry, this is likely one of the first expenses to go. I admit that having a helper while both parents are able-bodied and unemployed is a luxury. I am happy to take over the household chores and cooking in the absence of a domestic helper.
However, since I am doing this exercise with no lifestyle inflation or degradation, this category stays for now. Besides, a FIRE without a helper may not be an idea that the missus would subscribe to.
5. School and Enrichment
Currently, Olympia is enrolled in a preschool which is a partner operator under EDCA. This keeps her school fee quite affordable for now. Her only enrichment activity now is swimming as we thought this is a good life skill to acquire early on.
This category might see some increment as she grows older but thankfully my wife and I are aligned on how we would like her to spend her childhood- plenty of outdoor play and definitely not some left or right brain training classes.
6. Home Mortgage and Property Tax
This is based on my current home mortgage whereby the loan tenure is 27 years. As my home loan interest is fixed at 1.5% p.a. for 5 years, I can predict the mortgage amount with certainty. Do obtain the lowest mortgage loan possible for your house which you can find out by utilising PropertyGuru’s Smart Refi. I cannot emphasize how much money you can save simply by refinancing regularly.
7. Household Insurance Premium
This category covers the insurance policies for the 3 of us, which includes the following:
- Term and whole life policies with early critical illness riders
- Integrated Shield Plans
- Personal Accident
- Careshield Life (coming soon)
- Fire and Home Content
My insurance agent has been advising my household and assures us our insurance coverage protect our financial wealth against most types of common unforeseen events.
For annual leisure travel, I have budgeted 1 long holiday and 2 short holidays. An example of a short holiday would be our recent Cruise to Nowhere with Royal Caribbean.
I am the first to admit that going overseas for holidays is definitely not a necessity. Yet, this pandemic has proven that we have all grown accustomed to travelling such that it has become part of our lifestyle. Moreover, when my daughter was born, I have promised her that I will bring her overseas to widen her global exposure if our household finances permit. I can imagine how an African Safari will deepen her knowledge about animal extinction as well as the brutal reality of apartheid.
Step 2: Apply A Withdrawal Rate On The Retirement Sum
After finding out we require $102,000 annual expenses under Step 1, I then perform a sensitivity analysis by applying a range of withdrawal rates to derive the amount that I need to set aside. A different way of viewing this withdrawal rate would be the blended yield (interest, dividends, capital gains net of inflation) that your portfolio is required to generate.
By applying a range of withdrawal rates, the amount we need to set aside based on current lifestyle ranges from S$2.04 million to S$3.40 million. Honestly, I feel like ending the article right here because this amount still looks like a tall order, despite it being significantly lower than the $4.33 million reported on SCMP.
Step 3: Scenario Planning
As I have repeatedly stated, the derived fund was based on current lifestyle and with no increase in household member. If we decide to have a kid, I can imagine that we will definitely need a bigger house. Other categories such as school & enrichment, insurance, medical, grocery will also increase respectively. By now, I am quite resigned and have no further motivation to calculate the revised amount.
Even in the absence of an additional family member, there are other shortfalls to this exercise. First and foremost, it is static and cannot be applied forever. The amount does not account for inflation and portfolio growth rate from investments. Furthermore, it does not cater for future expenses such as Olympia’s tertiary education.
Conclusion of Cost Of Financial Freedom in Singapore
Many might argue that at age 33, I am a young adult and still have a long runway. However, from my perspective, if the goal is to retire by age 40, there would be another 7 years or at most 2 electoral cycles left to accumulate the required amount. In the improbable scenario that we excel and accumulate cash savings of $2 million, can we really FIRE based on proven withdrawal rates of 3-5%? Even the usual confident me feel that the assumptions may not stand up to the wife’s scrutiny and scepticism.
Regardless of the future, I am glad that I set aside this weekend evening to finally derive the FIRE number for my household and put it down in a blog article. That is probably the first step to financial freedom. At least there can be no excuses now since we know the absolute amount to work towards. Back to the grind.