“Do you have enough wealth to retire now?”, Published in The Star, On 24 June 2023.
When it comes to retirement, individuals have diverse perspectives. Some dream of the freedom and escape from the traditional work-life cycle that early retirement can bring. Other priorities building a secure financial foundation or have dependents, making early retirement challenging. Doubts about accumulating enough wealth and societal expectations also play a role. Factors like perfectionism, risk aversion, and a lack of financial knowledge can contribute to the belief that early retirement is out of reach. Meanwhile, career fulfillment may lead some to delay retirement to achieve professional milestones.
Meet Phillips, a long-standing client of mine who owns a small accounting firm.
Over the years, during our occasional meetings, Philips has shared about his exhaustion running his business and his desire to escape the rat race. He talked about his desire to spend more time with his two teenagers who are going through their rebellious phase, and of the growing disconnect between them. Ultimately, Philips is concerned that his all-consuming business and career commitments may lead to future challenges within his family.
Hence, when Philips once again expressed his worries and desires to me, I encouraged him to draw up a holistic financial plan to guide him out of his financial indecision. Suffice to say, he agreed.
Throughout my career as a licensed fee-charging financial advisor, I often shared about the importance of projecting and mapping out one’s financial goals. This principle is extensively covered in my book, Roadmap to Financial Freedom.
The following week, as Philips and his wife stepped into my office, we started on the initial phase of crafting their roadmap to financial freedom—the crucial step of conducting a comprehensive financial fact-finding process.
Based on their input, we know that:
- Phillips is 46 years old and Jane is 44. They have a son aged 16 and a daughter aged 13.
- Philips earns RM210, 000 annually while his wife who works as the human resources manager of his firm, earns RM60, 000 annually
Phillips has the following financial assets:
- House – RM630,000 with a mortgage loan of RM250,000.
- A fully paid-up shophouse valued at RM800,000 and generating RM2,500 in rental per month
- Unit Trusts (Bond funds) – RM480,000
- Shares – RM210,000
- Bank deposits – RM280,000 (local), RM100,000 (Singapore)
- EPF – RM430,000 (himself), RM200,000 (Jane)
- He and his family currently enjoy a lifestyle of RM84,000 per year, excluding mortgage repayment, insurance premiums and income taxes.
- They would like to provide RM250,000 each for their children’s tertiary education. If possible, they would like to provide more.
- They intend to provide RM300,000 each for their critical medical expenses.
Based off his sharing, Philips was entertaining the idea of retiring 2 years later when he turns 48, while allocating a budget of RM60,000 for annual retirement living expenses until he turns 80.
Using these aspirations as reference, I plotted the first Roadmap to Financial Freedom for Philips. This is what it looked like:
From the roadmap above, it became evident that Philips and his wife’s wealth experience a temporary decline around the age of 54. This coincides with the completion of their children’s tertiary education, where significant financial resources are allocated. However, following this dip, their net worth continues to grow on a steady upward trajectory, just short of hitting RM 3 million, before depleting gradually until his 81st year.
It is not always that a client’s roadmap pans out successfully on the first try. But it is also not as rare as one might expect.
Philips and his wife were overwhelmed with joy upon discovering that their long-cherished dream of early retirement could become a reality. The realisation that, should they decide to retire at the ages of 48 and 46 respectively, their accumulated wealth would effectively sustain them until the age of 80 brought a profound sense of relief and disbelief as they never thought it could be possible.
Despite knowing that they’ve already achieved their financial goals in the first roadmap, we continued to press on in the hopes of exploring new possibilities and better outcomes.
One glaring fact that stood out to me during the fact-finding was that Phillips overall investments added up to a return of 4.27%, which is a rather low ROI. So, I suggested that Philip increase his ROI to a modest, yet attainable 7%.
From the adjusted roadmap, Philips’ wealth now will last him way beyond his 100-year mark! Seeing this encouraging projection, I asked Philips what he would do differently with his wealth in this new scenario.
When presented with this question, some clients may choose to allocate a little more in areas that they were holding back, such as getting a new car, or even leaving their children with an inheritance after their passing. In Philips case, his wife immediately suggested that they increase their children’s tertiary education funding to RM 350,000 each. This decision held immense significance for them as it reflected their priority to provide more for their children’s educational future.
Taking into consideration Philips and his wife’s desire for increased family time, I suggested that they also factor in a RM 10,000 holiday every year, along with the idea that they retire now instead of waiting for two years.
However, it became evident that incorporating this holiday expenditure, alongside the decision to retire immediately rather than waiting for two years, would impact the longevity of their wealth.
Under this new scenario, their wealth will be depleted by Philips’ 75th year, which understandably raised concerns and worry for the couple. Therefore, I showed them one more adjusted roadmap, assuming that both of them will retire 1 year later when Philips is 47.
In the last and final adjusted roadmap, we can see that Philips’ accumulated wealth will last and sustain them until their 82nd year. Needless to say, Philips and Jane were delighted with the final optimised roadmap, which had ironed out their financial indecision, and enabled them to take the leap into retirement.
Thanks to the roadmap and the adjustments that we made together, Philips and his wife now are comfortable in their decision, and are committed to make the following adjustments to fulfill their roadmap:
- Restructure their existing investment portfolio with an estimated average of 4.37% ROI to 7% ROI, which will see them taking on a comfortable level of added risk to generate higher returns.
- Philips will retire one year later at age 47 and his wife will retire at age 45.
- They will increase their children’s tertiary education funding from RM250,000 to RM350,000. To them, that was the best present they could give to their children in addition to spending more time with them.
- They will spend RM60,000 every year for living expenses during retirement.
- They will budget RM10,000 per year for their family vacation. Both Philips and Jane are very excited about this and have already started planning their vacation destinations!
The Value of a Financial Roadmap
Had Philips and his wife not gotten their financial roadmap drawn out, Philips would have remained toiling for his company, thinking he was unable to retire until his mid 50s. He would have continued to tirelessly run his business, experiencing exhaustion and potentially sacrificing precious time with his children, thus straining family relationships. Not just that, but the guilt from it would have left him with sleepless nights!
To know that you have accumulated enough wealth to achieve all your goals is what financial freedom is all about. With the clarity provided by their financial roadmap, everything changed. Philips now understands that he has amassed enough wealth to fulfill all their goals and aspirations. Now, Philips knows that he is not forced to work in his firm anymore. He has the choice to go on for a couple of years, or he can quit now and enjoy his time with his family. He has the freedom to make this choice, thanks to the roadmap.
Philips and his wife are now also able to monitor several key performance indicators, and will be able to manage their finances with ease. With the roadmap at hand, they know that they need to limit their annual living expenses to RM 84,000 and can confidently spend RM10,000 on family vacations every year. The balance of their wealth needs to be invested with an ROI of 7% on average. Finally, they know that they can spend about RM350,000 for their children’s tertiary education expenses. .
Importantly, they can now finally enjoy the sense of accomplishment and freedom that they have worked hard to achieve for their family.
As a licensed fee-charging financial advisor, I have seen a fair share of cases where clients were unaware that they were able to retire early and enjoy a more fulfilling life. Through these experiences, I have identified that people tend to be held back by two things.
The first is the lack of clarity surrounding their retirement goals. Without knowing or projecting the financial figures of your desire lifestyle into a roadmap, you will not know how much you need to retire. This lack of clarity can breed uncertainty and prevent them from confidently taking the necessary steps towards early retirement.
Second is the fear of being income-less: Many of us think that even if we have enough wealth accumulated, having income from a job or a business is always better than having no income at all.
This is not true if you already know what financial goals you are working towards achieving. If you knew that you had the wealth to accomplish all your financial goals and needs, wouldn’t you desire the freedom and choice to shape your life according to your own terms?
Yap Ming Hui is a licensed financial planner. The views expressed here are the author’s. Any reliance you place on the information shared is therefore strictly at your own risk.
The article is featured in The Star Online, at the following link: Do you have enough wealth to retire now? | The Star