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).
Diagram 1: Threshold of financial freedom in major cities in 2021 (Source: 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.
Diagram 2: The Heartland household at a recent visit to the Singapore Zoo
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.
Diagram 3: Table of Heartland Boy annual household expense
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.
3. Transport
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.
Diagram 4: Olympia psyched up for her weekly swim class
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.
8. Holiday
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.
Diagram 5: Required FIRE amounts based on range of withdrawal rates
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.
Diagram 6: Olympia is only 2 years old with a good 20 years of expenses to finance
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.
As iterated, you have always provided very informative food for thought. Much appreciations. Just a dumb question fm a fan; What is withdrawal rate in layman terms? Your annual spendings?
Hi Leonard,
Thanks for your compliments. Withdrawal rate can be interpreted as the dividend yield of your retirement sum. For instance, the S$2 mil can be invested to derive a blended yield of 3-5% based on asset classes such as corporate bonds, REITs etc
Hi HLB, thanks for this article.
You didn’t consider capital/principle drawdown in your calculations?
Hi,
Yes i did, the 3-5% withdrawal rate includes a combination of withdrawal from principal, yield from blended safe instruments as well as cost infltaion
Good for you to have done the calculations. The only question is why did you wait so long to do this exercise?
It is the first thing to do when thinking about financial independence and talking about financial independence without doing the basics is like building a house without calculating the cost.
Your insurance expenses seem high, you could have some savings there. Asking an insurance agent what insurance you need may not be the best idea.
Retiring in Singapore is not easy at any age because of the high cost of housing and living. It is much harder to retire young, but higher earnings, lower spending and steady investment will help.
I actually found the figures in the SCMP to be too low because it assumed that income for retirement will be generated using US$1.2M which may be insufficient.
Hi John,
Thanks for dropping by. Difficult to answer why it took so long, perhaps its a combination of fear and procrastination? I know that I only have myself to blame.
I do have some whole life insurance, and that perhaps tilted the equation slightly but I don’t think it can go much lower unless I give up some of the basic protection.
Well done.
You can also consider to use the lum sum. You don’t need to just live on the dividend, and you can use the principal amount.
Thanks David,
Small pat on the shoulder to finally getting to calculate the amount. At my target age of 40, i will be more careful to start drawing down on the principal even though studies have shown that its OK. maybe its psychological? knowing that i prob still have another 40+ years to go given the average lifespan of Sg males
Useful post.
You may consider me the opposite side of the view. I think $2 Mln investable income at retirement is a luxury. But lifestyle post retirement is an individual choice. There is no right or wrong really.
And to be able to achieve it at 40 yo is a great great achievement. I very much doubt any employee can reach this level at 40 yo.
I like to share my opinions on a few items of your list. Domestic helper is indeed the first to go – you would have question if you need since you have hours to kill when you have no income. But if you are still working part time or on things that you like then it may be a necessary trade off.
If you are retired already, then insurance coverage can be reduced. It doesn’t serve the intent to cover your “income”.
You may want to ramp up medical – I think it is too Low. Medical cost is unpredictable and will go up with age. Safer to have more buffet.
You will notice that School and enrichment may reduce once you kid enters formal school.
House mortgage will eventually finishes. If I have no income, I may consider max out CPF to make my current cash reserve last longer.
But having the transparency that you have done is a great thing as it triggers other thoughts on how your retirement lifestyle. After a while, many of us would realise that many things we spend on are luxury and not necessities. Hope you find this useful. 🙂
Hi Warriortan,
Thanks for dropping by and sharing your heartfelt thoughts. I agree with many of your views and you are definitely right that I have under provided in terms of medical fees. Insurance is on the high side because there’s some whole life policies in there.
I was hesitant to share the extent of the expenses because I know this could invite backlash, in both ways. But I am also glad that readers and bloggers like you are chipping in with your views because they help to crystalise my thinking!
Hi Alison,
Wow, it all adds up, doesn’t it?
I always thought that you are closer to the $5k expenses a month household than the $10k a month version. Maybe you also shared the same sentiments. =p
So assuming $10k a month, $120k a year and 4% withdrawal rate, that’s actually SGD 3 million.
That’s indeed a lofty target for most, even for financial bloggers like us. But I think it’s a realistic figure if both the husband and wife does not want to earn a single cent anymore for the rest of their lives when they are in their forties.
I guess if work/job is not exactly a pain point, maybe retiring at 45 is a more realistic age to secure this number? In a corporate setting, peak earnings tend to come after 40.
It is indeed a series of trade-offs. Otherwise, one person can retire earlier?
Moreover, what will retirement life be like? Based in Singapore or travelling around? That would definitely affect income and expenses.
I know inheritance is like a taboo topic, especially in our culture. But it matters a lot in such calculations. There is likely to be an “expected sum” to inherit or maybe “disinherit” depending on circumstances. Maybe a flat or a condo being passed down, or *fingers crossed*, debts to service.
I do feel these are additional important factors to consider since they will move the scale greatly.
Enjoyed your article and it left plenty for me to ponder over too.
Hey Thomas,
Thanks for dropping by as part of your daily routine of consuming financial information. My wife was surprised at the numbers as well, but I really wasn’t. 5K per month would be very tough with a kid imo especially when you are still giving more than 1K per month of allowance to both parents. Ever since this post came up, I received quite a bit of feedback that I spent quite a bit on insurance. Maybe worth looking at that category. You are absolutely right about inheritance – I am loathe to think about it because it seems like I have ‘cheated’ my way into financial freedom. This has more to do with my character, I must say though.
Good idea on the topic of one retiring earlier, I am telling my wife tonight that I will volunteer myself first.
Age 40 is definitely a stretched target and agree that 45 is more realistic. So back to the grind!
It could be a couple goal together to share the financial goals. It is often too hard to achieve such amount by ownself especially for a salaried person, unless you are a high risk investor.
Hi,
For sure it works better if its a couple goal! each partner pull their respective weight!
u dun need domestic helper when u are retire, -10k
sch are very affordable when kid reach primary, you can take 50% off
holiday $12k also too over liao, can take 50% off
why your insurance so much ?? over insured or expensive whole life, ILP?
your home mortgage shd be finish by the time u Fire – 11k off
I think u can 50% off to be reasonable
Hi,
Yeah, you are right that I dont need domestic helper when I retire as I have stated on my article. I don’t think I want to compromise on holiday because I do cherish the overseas experience. I don’t have ILP but I do have whole life.
14,000 household insurance is a huge amount. Can you do a post to share what insurance you have?
Hi,
Sure, I would consider doing that in a separate article as there is sufficient interest and debate around it. Broadly, i would classify our insurance expenses for 3 persons as this:
Integrated shield plan with riders: $2,200
Personal Accident: $500
Term with ECI: $3,700
Whole Life with CI/ECI: $6,400
Endowment: $600
Fire &Home Content: $100
Careshield Life: $500
Figures are rounded up and added with some buffer.
Hi Alison,
I am neither surprise by your expenses figures nor your insurance figure. It is not over-stated from the detailing, although for a small family of three, it is on the high side considering no cars, and low mortgage and tax.
I applaud and admire your filial piety a lot.
I am largely surprised by why the urgency to retire at age 40? Perhaps you have better plans of what you intend to do after 40…
Hi Rolf,
Thanks for dropping by. Overall, I acknowledge that my household expenditure is definitely not low. Thanks for your compliments! I just want to achieve financial freedom very early so that I have more “options” in life.