## Saturday, February 27, 2010

### Daring to dream big

After a night of chatting with AK, who is truly inspirational, thoughts began to come to me until I can formulate a 10 yr plan. This plan occurred to me while I was on my way to work this morning. As a 'big-picture' kind of plan, it must be simple enough for me to be able to work out the sums with just a handphone or mentally, and also simple enough to be able to explain it to someone without that person going 'duh'.

Let me share with you:

The goal of the plan is to be able to stop working when I wish to, that is to reach financial freedom. Since my average monthly expenses is around 2.5k, let's put a good passive income as 3k per month. I thought of 2 plans.

Plan A:

Since I need to get 3k per month, the sum goes like this:

3 k per month x 12 months = 36k per year

If I'm able to invest at 10% yield, I'll need 360k of capital base in order to get 36k of income stream. So the question is how to get that 360k capital base. For simplicity, let's round to 400k. Let's ignore all the complicating compounding and keep it simple. If I'm able to save 50k per year, I'll need 8 yrs of savings to reach that capital base.

10%?? Too much? Let's put it at 8% - which means I need 450k and that will take 9 years. Let's put it as 10 yrs savings at 50k per year.

Summary:

By saving 50k per year for 10 yrs, I'll be able to have a capital base of 500k. Investing this sum at a rate of 7% will get me the required passive income. The good thing about this is that after 10 yrs, I'm 42 years old. This sum of passive income will be a good platform to start building up more passive income. Am I going to stop work at 42? Definitely not - and to hell if I'm going to work as hard as I am now.

However, I was thinking about the feasibility of this plan, knowing how much I worked my ass off to get 50k in 2009. I think moving forward, I should be able to get more by working less. The thought alone makes me rub my hands in glee :) I'm aiming to hit 100k savings in a year, then my 10 yrs plan becomes 5 yrs plan, wahahaha!

The other good thing is that the capital base is not touched at all, so this amount can be used to draw down in case of emergencies, or passed down to future generation.

Plan B:

This is more of a capital drawdown method. I'm 32, and if I stop work at 55, I've another 23 years of working life. If I leave hotel earth at age 85, I've another 30 yrs to live after retirement. Supposing that I need 3k a month after retirement in passive income stream, then I need:

3k/mth x 12 mth/yr x 30 yrs = 1.08 million

Since I've only 23 years of working life, I need to save 47k per year to make up 1.08 million at the end of the period. Let's make it 50k per year. I'm taking the stance of no investment at all, just hard core savings.

Hey, I'm a millionaire (just 23 yrs too early!). Okay, I digress.

How to save 50k per year? I just proved that I can do it, so if necessary, I can repeat this for 23 yrs, albeit by working less. If I save 100k per year, I can half the time needed, making it 12 years.

Summary:

Save 50k a year for 23 years, or save 100k a year for 12 years and I'll be a millionaire. After which, I'll draw down the money till it goes to 0. That's silly right? But the thought that savings alone can achieve this is amazing.

Life being the way it is, means that I'll probably have to employ both methods to achieve my aim. Need some passive for retirement and draw down some from capital base. But that's the fun part, which I'm not so worried. Regardless of the plans laid out, the only part for me to do now is to earn more and save more. The ultimate challenge is to save 100k per year, and to do it consistently for at least 10 yrs, regardless of potential milestones like kids, marriage, housing, medical problems and all the curveballs that life throws at you from time to time.

To put it very simply, the goals are as follows:

1. Save 400k first in 10 years time.

2. Make sure I have 1 million by age 55.

The method of achieving that depends on the situation years down the road. A general idea should suffice for now and the plan should become clearer as time passes. Own time own target, carry on!

AK71 said...

Hi LP,

I like this post very much. Dream big, start small. Taking incremental steps, your dream would surely come true. :)

Dou said...

I think there a report before on saving of \$4K every month and 10 % yield up on savings. In 20 years, u be a millionaire.

Saving is not that hard but achieving a 10% yield is hard part

cif5000 said...

Let's think Plan A, specifically on the 10% or 7% investment yield. Before reaching the 400K, I would try to demonstrate my ability to achieve that yield while building up the capital, preferably evaluated on a 5-year rolling average. And if I realize that I can hit that 7-10% investment yield, my capital accumulation time will decrease. If I can't, then 400k is not enough.

Musicwhiz said...

Sounds ambitious and bold, just the way I like it!

I have to learn more from you on how to budget for my future! Right now all I have is a 3-year plan and goal....haha.

My compounding target is 5% per annum based on my current portfolio cost of \$150,000, so that's a target of \$7,500 per annum. Coupled this with S\$3K savings per month (and plus bonusess), that's about hopefully \$50K per annum. So if this goes on, it's only about \$150K in 3 years. Quite sad eh? But then I have a kid and house, so perhaps that's just about right....hehe

Cheers,
Musicwhiz

la papillion said...

Hi AK,

Thanks for your encouragement :) You're doggedness on pursuing your goals systematically is inspiring, so I would wish to follow it too :)

la papillion said...

Hi Dou,

I was showed a table of the various types of combination for saving a 50k sum. The tables have vertical columns of 'investment yield' and horizontal rows of 'years'. For each row and column, there's a sum to save per month.

I commented that there should be a column with 0% investment yield, 1 yr time period, each saving 4.5k per month :)

What I meant is that with a damn solid savings goal, you can beat a solid investment plan in terms of consistency :)

la papillion said...

Hi cif5000,

Thanks for your encouragement :) Actually I plan to do it in one lump sum during a crisis, on blue chips quality but with yield of >8%. The thinking is that once the price bonce back to normalcy, I'll have both a good margin of safety and a good yield to boost. Rather this, than pumping capital constantly as in a dollar cost average kind of strategy to increase my passive income slowly.

But you gave me a very good evaluation criteria to judge my own ability before the plunge. Thanks for the advice!

la papillion said...

Hi mw,

The title of the article is about daring to dream big afterall :)

It's not sad, in fact, it's a very heroic feat! At least you've proven to yourself that you can do it. I've yet to show that I can fulfill it. If I can't, it's just talk :)

Thanks for sharing :)

Createwealth8888 said...

I am assuming you don't plan to have kids, right?

Createwealth8888 said...

Dare to dream even bigger ...

http://createwealth8888.blogspot.com/2010/02/daring-to-dream-big-sometime-we-may.html

la papillion said...

Hi bro8888,

I intend to have kid/s. The challenge is therefore to increase my savings while accounting for parents' liabilities and kids expenses. It's not going to be easy, hence the challenge, yet it's not going to be impossible, hence I dare to blog about it.

How to do that? Earn a lot more money by leveraging on time. I can potentially earn 2-3 times as much, which should be able to offset the higher expenses that is sure to come when I reached life's milestones, hence I should at least maintain my savings rate (I even hope to increase it).

I'll be able to see if this dream is concrete or just plain dreaming by next year end. The plan should be more concrete by then too :)

Do note that in my plan, I do not include my current assets. I am assuming a clean state, starting next year. The amount I have in cash and stocks should be able to provide a strong buffer against potential bombs.

Thanks for letting me have a chance to clarify my thought process by answering you, haha :)

ucypmas said...

What about inflation? If you want 3k in today's purchasing power - the absolute number is larger 30 years down the road. This means the size of the kitty needs to be larger.

la papillion said...

Hi ucypmas,

Good point you've raised :) I didn't account for that because so far, I can pass down the cost of inflation to my clients. In fact, my fee increment is more than the inflation rate.

Many ways to offset inflation in my case ;)