Wednesday, March 27, 2019

The 10 Years Financial Independence Target

Achieving financial independence in Singapore is possible but honestly, only a handful of the population can achieve it. This is because most of us are brought up being taught that we need a job to survive and we will probably have to work till we are quite old. That is sadly still happening when I see some of my colleagues still struggling to make ends meet even in their 50s and 60s.

In the financial goals page of my blog, the target I set for myself is to achieve financial independence by the age of 42. This is about 10 years from now as age catches up quickly unknowingly. In Singapore, I reckon we need more than $800K to $1 Million in order to achieve financial independence. My way of financial independence is to invest and get enough investment income to substantiate my expenses indefinitely. Investing $800K at 6% dividend yield will get us about $48,000 a year or $4000 a month. Most of us would probably need more than $4000 a month if we have a family and thus the target of more than $800K came about.

How long does it take to save $1 Million dollars?

A million dollars is the sweet spot in financial freedom. Investing a million dollars at 6% dividend yield gets us about $5000 a month. For a person who does not invest at all, achieving $1 Million is almost impossible. For a person who saves $20,000 a year and puts it in the bank earning almost 0% low interest, he'll need 50 years to save up $1 Million. If he saves $40,000 a year, it still takes 25 years to save up that amount.

Now, if the same person who saves up $20,000 a year and invests it to get 6% investment returns, he'll only need 24 years to achieve that $1 Million as compared to 50 years. This is the power of compound interest where it effectively shortens the time to achieve the same financial target by about half. Not many people will understand compound interest as it is always almost confusing for most people. This is why 90% of the population will continue to struggle to retire even in old age. Only the top 10% of the high income earners can retire comfortably because of the high savings they have even without investing. The rest of us will not make it if we do not know what to do.


Investing for dividends to reach financial freedom

While compound interest concept is so difficult to understand, investing for dividends should be more familiar to most of us. It is actually still compounding at work but explained in a more layman way. The focus is to keep on saving and investing and getting stable dividends and one day we will just reach the financial target that we set out for.

Let's look at a person who earns $3000, spends $2000 a month and invests for 6% dividend yield, how long will it take for him or her to achieve $1 Million in savings?

Additional assumptions is the income will increase by 3% each year which I think is quite conservative as most of us would be able to earn higher income faster through promotions. Bonus is not included also. Additional savings is ="income - expenses + dividends".

This is the result:


Year Net worthIncomeExpensesDividendsAdditional SavingsInvestment return
1$0 $36,000 $24,000 $0 $12,000 6%
2$12,000 $37,080 $24,000 $720 $13,800 6%
3$25,800 $38,192 $24,000 $1,548 $15,740 6%
4$41,540 $39,338 $24,000 $2,492 $17,831 6%
5$59,371 $40,518 $24,000 $3,562 $20,081 6%
6$79,452 $41,734 $24,000 $4,767 $22,501 6%
7$101,953 $42,986 $24,000 $6,117 $25,103 6%
8$127,056 $44,275 $24,000 $7,623 $27,899 6%
9$154,954 $45,604 $24,000 $9,297 $30,901 6%
10$185,855 $46,972 $24,000 $11,151 $34,123 6%
11$219,979 $48,381 $24,000 $13,199 $37,580 6%
12$257,558 $49,832 $24,000 $15,453 $41,286 6%
13$298,844 $51,327 $24,000 $17,931 $45,258 6%
14$344,102 $52,867 $24,000 $20,646 $49,513 6%
15$393,615 $54,453 $24,000 $23,617 $54,070 6%
16$447,686 $56,087 $24,000 $26,861 $58,948 6%
17$506,634 $57,769 $24,000 $30,398 $64,167 6%
18$570,801 $59,503 $24,000 $34,248 $69,751 6%
19$640,552 $61,288 $24,000 $38,433 $75,721 6%
20$716,272 $63,126 $24,000 $42,976 $82,103 6%
21$798,375 $65,020 $24,000 $47,902 $88,922 6%
22$887,297 $66,971 $24,000 $53,238 $96,208 6%
23$983,506 $68,980 $24,000 $59,010 $103,990 6%
24$1,087,496 $71,049 $24,000 $65,250 $112,299 6%

The above chart shows it takes 24 years for this person to achieve that $1 Million sweet spot. However, if you look at the dividends column, his dividends have already covered his $24,000 per year expenses at year 16. 

This person could grow his money because the dividends received could offset his expenses and in turn increase his additional savings significantly when he has more capital. If you look at year 10, the dividends received of $11,151 is contributing to his savings which is quite significant. 

Of course, some of you will say it is impossible for expenses to stay at $24,000 a year ($2000 a month). Now, this brings me to the 10 year financial independence target. 

The 10 Years Financial Independence Target

Achieving financial independence in 10 years is possible with the following in place:
  1. Starting savings/investment capital of $300,000
  2. Take home pay of $6400 with 2 months bonus
  3. Salary increase of 3% per annum
  4. 6% dividend yield
  5. With $5000 per month expenses
If you look at the above scenarios, it would most likely apply to a couple who work towards a financial target together. If you are already earning that amount of salary with the above investment capital, then you can achieve it yourself. 

Here's the breakdown of the numbers: 


Year Net worthBasic SalaryBonusTotal incomeExpensesDividendsAdditional SavingsInvestment return
1$300,000 $76,800 $12,800 $89,600 $60,000 $18,000 $47,600 6%
2$347,600 $79,104 $13,184 $92,288 $60,000 $20,856 $53,144 6%
3$400,744 $81,477 $13,580 $95,057 $60,000 $24,045 $59,101 6%
4$459,845 $83,921 $13,987 $97,908 $60,000 $27,591 $65,499 6%
5$525,344 $86,439 $14,407 $100,846 $60,000 $31,521 $72,366 6%
6$597,711 $89,032 $14,839 $103,871 $60,000 $35,863 $79,734 6%
7$677,444 $91,703 $15,284 $106,987 $60,000 $40,647 $87,634 6%
8$765,078 $94,454 $15,742 $110,197 $60,000 $45,905 $96,101 6%
9$861,179 $97,288 $16,215 $113,503 $60,000 $51,671 $105,173 6%
10$966,353 $100,207 $16,701 $116,908 $60,000 $57,981 $114,889 6%
11$1,081,241 $103,213 $17,202 $120,415 $60,000 $64,874 $125,289 6%
12$1,206,531 $106,309 $17,718 $124,027 $60,000 $72,392 $136,419 6%
13$1,342,950 $109,498 $18,250 $127,748 $60,000 $80,577 $148,325 6%
14$1,491,275 $112,783 $18,797 $131,581 $60,000 $89,477 $161,057 6%
15$1,652,332 $116,167 $19,361 $135,528 $60,000 $99,140 $174,668 6%
16$1,827,000 $119,652 $19,942 $139,594 $60,000 $109,620 $189,214 6%
17$2,016,214 $123,241 $20,540 $143,782 $60,000 $120,973 $204,755 6%
18$2,220,969 $126,939 $21,156 $148,095 $60,000 $133,258 $221,353 6%
19$2,442,322 $130,747 $21,791 $152,538 $60,000 $146,539 $239,077 6%
20$2,681,399 $134,669 $22,445 $157,114 $60,000 $160,884 $257,998 6%

It would take some time to digest the above numbers. In summary, in just 10 years, the above person or couple can achieve close to $1 Million in 10 years with dividends received of $57,981 using 6% dividend yield. They can spend about $5000 per month freely even without working at this stage. This would be the desired financial independence where quality of life is still quite alright.

Achieving financial independence should always start from good savings habit to accumulate a sizable investment capital. Once the foundation is built and investment capital crosses above $200K, focusing on investment will make more sense. I am at the stage where I should be focusing more on investing and so generating more passive income through dividends is what I am going to do.

If you do not want to be stuck in a job you don't like but have no choice but to keep working because you do not have financial independence, then its time to start planning and see how it is actually achievable. There are many disgruntled employees in the workplace where they have no choice but to work till their old age. I've worked in 3 different companies and everywhere I go, there will be unhappiness in the workplace. I foresee in the future, working in Singapore will get more and more stressful as the ageing population puts a strain on the infrastructure spending in our country. As our workforce shrinks, each employee have to work longer hours and take on more roles and even roles of multiple persons. It is already happening and the drive for productivity using technology doesn't seem to really work. Instead, what I see is more workload for the existing employees.


12 comments:

  1. "more and more stressful as the ageing population puts a strain on the infrastructure spending in our country"

    Taxes will need to go higher. So far govt prefers to use consumption taxes (GST, water, stamp duties) rather than wealth taxes (e.g. low income tax, no CGT, no dividends tax). This benefits investors in Singapore. Moreover, if you're jobless but financially free, you're considered "low income" and still benefit from GST vouchers LOL!

    "As our workforce shrinks, each employee have to work longer hours and take on more roles and even roles of multiple persons"

    Currently becoz of voter sentiments, govt is trying to go the automation way & redesigning processes to be more manpower-lite. But if push comes to shove, don't be surprise to see floodgates open again. Remember --- economic growth is mainly a function of 2 things: productivity growth + population growth.

    ReplyDelete
  2. Hi,

    Spot on in your comments. Hopefully they don't tax capital gains or dividends in the future else it'll change the situation totally.

    Govt has been trying to drive automation for a long time now. Lots of money has been spent on technology but adoption rate is still low or people are unwilling to change their way of working. Asking older workers to use technology for work is a struggle to most of them although a few are quite technological savvy.

    ReplyDelete
  3. Any idea how to achieve that 6% consistently?

    ReplyDelete
    Replies
    1. Hi Jimmy,

      Stocks for eg reits are the answer. Quite a few people have done it successfully.

      Delete
  4. I think you need to factor in inflation in your expenses. I use 3%.

    ReplyDelete
    Replies
    1. Hi,

      Yes you're right, should have factored in inflation.

      Delete
  5. Hi SGYI,

    One of the main challenges faced by income / dividend investors is that they have to - from time to time - find suitable stocks to invest in so as to give them their desired rate of return (at least where dividend returns are concerned). In the process, they have to search for companies that are likely to increase or at least maintain their dividend payout amount year after year. If they do not invest properly, their dividends may even decrease if the company does not perform well financially or if the company chooses to retain more cash in subsequent years.

    ReplyDelete
    Replies
    1. Yes you're right on the challenges. It does take effort to consistently find good companies to invest in. We also have to try to invest most of our money else it won't work already.

      Delete
  6. Hi SGYI,

    Thumbs up for the effort in putting the math together. However, the tough question is what are the instruments to achieve 6% returns annually, while preserving the capital? :)

    ReplyDelete
    Replies
    1. Hi,

      I will aim for 6% dividends from REITS or other stocks. This will make it easier for me to see that i have 6% returns and then i just reinvest the dividends.

      Delete
  7. Hi SGYI,

    "Once the foundation is built and investment capital crosses above $200K, focusing on investment will make more sense."

    How did you come up with the figure $200k? Is it because the absolute amount generates a substantial amount of dividends?

    ReplyDelete
    Replies
    1. Hi SG Physiotherapist,

      Yes it is because the absolute amount generates a substantial amount of dividends. $200K invested at 6% yield will get me $12,000 dividends yearly which is $1000 per month. This to me is significant.

      Delete