Early retirement to me means retiring at the age of 35, it can be 50 for you. Early retirement planning is the same as conventional retirement. However, you have lesser time to achieve what others usually achieve with 40 years of work. In addition, you will need more money to last throughout your retirement with an extended spending phase of around 50 years (say I want to retire at 35 and I live till 85). Simply put it, it is having less time to accumulate your wealth and more time to enjoy life.
Conventional retirement planning involves saving and passive investment which is a slow and secure way to retirement. You can maximise your Special Account in your CPF, invest your money in a diversified portfolio and reap the rewards through capital gain and dividends. Conventional retirement planning also involves in extreme saving rate of more than 70% and setting aside money to have a comprehensive insurance coverage.
The downside of passive investment is your dividend income may not grow fast enough for those who are looking for early retirement. Long term returns will be between 2-8% net of inflation which is not a rate to grow wealth for those early retirement. In addition, there will be years of negative growth for a diversified portfolio which is what I am experiencing, for this year 2015, the portfolio is down 10%.
Losing compound growth as a wealth building tool due to shorter time frame will require you to add non-conventional method to your plan.
1. Extreme Frugality – I have save more than 70% of earned income for 8 years. It is possible but not everyone can agree to this.
2. Leverage – it is a double edged sword tool, it can help you to grow your wealth faster but margin call on property or stocks can cause a downfall.
I am trying to retire at age 35, I saved bulk of my earnings through frugality. Currently, I am learning to increase on my investment skills and carry out active investing. It requires dedication and discipline.
A lot friends in Singapore uses real estate to achieve early retirement, because it has financial and business leverage. Another path is leveraging other people’s time through business ownership. When you hire someone, you get to have a total of 16 hours per day. Assume that we work 8 hours a day. In summary, there are three paths to wealth, stocks, real estates and business. I am planning to combine all three paths, coupled with extreme frugality to achieve financial freedom, attain early retirement by 35.
Rule 1 – Build an investment portfolio with dividend income which is sufficiently more than your present and forecast maximum expenses. You can only spend your residual income and never touch the principal asset.
Rule 2 – You need to grow your assets at a rate faster than your annual inflation rate. If not, inflation will eat away your gain and your spending power will be eroded.
Rule 3 – You need to grow multiple source of residual income. You need to have dividend income, rental income and business income.
Rule 4 – You need to have a comprehensive insurance to insure that no external forces can affect you when least unexpected.
I need to make a plan when I retire early, I will not engage in full time leisure because I will get bored of life. I want to retire early because I want to create a lifestyle which is more compelling than my present lifestyle. My parents and parents in law are getting old (in their 60s) and my parents-in-law are staying in Hong Kong. My wife and me need to have freedom to choose where we stay at and not confined to our annual leave. In addition, I need to have a passion and activity which stimulates me, which I will jump out of bed every single morning. My plan is to move into investment business on a full time basis, help people to grow their portfolio and retire early and seek out good property deals and businesses. That is my definition of early retirement, doing something which I am passionate.
Retirement planning is creating a fulfilling and complete life experience. Then live it.