Episode 2: How Much Do You Need for Your Retirement?

Max Keeling

The first step to have a successful retirement plan is to know how much do you actually need after you have stopped working. In this episode, I will be sharing with you some tips and guiding questions that will help you to figure out your number for retirement.

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Welcome to episode 2 of the Expat Wealth Blueprint podcast, simple approaches for managing personal wealth of $2 to $20 million. I’m Max Keeling, I’m your host. And every week, I’m going to be sharing some tools and tips on how to manage your own wealth as an expat in Asia, specifically for people that got around SGD $2 to $20 million. Why that range? Well, I think there’s a real lack of credible information out there for this group, which can make you vulnerable to being taken advantage of by some banks and financial advisers. So hopefully, this podcast will help educate you on some of the core frameworks or blueprints regardless of your financial or investing knowledge.

So what am I going to cover today? So I want to talk about how much do you need in retirement. What is your number? How much do you need to accumulate to get to financial independence? And at Providend, we classify or define financial independence as the ability to stop work if you want to. So you could quit your current job. You could go work on other projects if you wanted to. That’s your number.

So my preferred approach is to go and think about what kind of lifestyle you want to achieve. So why are you working? What is it you want to do? So I would suggest you get a pen and paper and you take yourself somewhere away from the kids if you got kids. Somewhere quiet. Maybe take yourself down to Sentosa and sit on the beach and look out to the sea. Or get yourself a coffee. And write down, “What are some of the things you want to achieve?” So if you had all the money that you needed, what kind of lifestyle are you realistically looking to be able to live?

So write down, “What country are you living in?” So I often find if you’ve been an expat for a long time, it’s not natural that you necessarily want to go back to UK or Australia. So think about that. Maybe it’s having a multi-centre. So maybe you are based in Europe, you want to spend some time in Asia or Australia? So go and write that down.

Go and think about what kind of accommodation you want to live in. Think about if you need a car. Think about how much you want to spend on travel and holidays every year. So are you flying business class? Are you flying economy? What is it you want to be able to do? And let’s go and put some placeholders. Now obviously when you actually get to retirement, your life is going to be different to what you’re planning now. But we want to put some placeholders in to say, “I’ve got a travel budget of, let’s say, GBP $10,000 per year. I know that will cover 2 or 3 trips per year”.

So that would be my preferred way of doing it. It’s working out what kind of lifestyle you actually want to obtain. Now, one of the reasons is, it might not cost as much as you think. So some people come and are less stressed about how much they need in retirement but maybe you haven’t got expensive taste. And so maybe actually the lifestyle that you’re working hard to get to isn’t as expensive as you think. So let’s say that comes out at GBP $50,000 a year, GBP $40,000 a year. And you’ve got a clear idea of what you’re going to be doing in the first 10, 15, 20 years if you were to retire.

On the flip side, you might find out that the things you really want are really expensive and your lifestyle cost is more like GBP $200,000 a year. And by listing it out and working out, you know, “I really want to be able to fly business class”, let’s say. Then when we go through the rest of this exercise and we work out what kind of pot of money you need to accumulate. If that’s not possible, you can go back to this kind of vision work that you’ve done to work out what things you can compromise on. So let’s say it was business class travel. And what you’re earning and what you’re building up just doesn’t support that, we know we can go and downscale that. Whereas if we’re just looking at generic numbers, it’s quite hard to do that.

So this will take a little bit of prep, but I highly recommend you go and do it. Because writing it down will force you to think about what it is you really want. If you’re a couple, I would suggest doing it separately and then coming back. Maybe having a glass of wine, discuss it over a meal. And every year, you can make that a bit of a ritual to go back through it and start trying to clarify what it is you’re trying to work towards.

But let’s say you say, “Max, I haven’t got time to go and do this work or I really just haven’t got an idea of where I want to get to”. So I want to give you some rule of thumb that we can use to come up with some parameters of what you might need to accumulate. And then when you go and do that kind of vision work of what you want to achieve, it might be a bit easier for you to do it. So I found out that some people prefer to know what they can afford first and then they’ll build a lifestyle around it.

So the first rule that I want to bring to you is the 4% rule. So it’s a really simple framework. So let’s say you’ve already accumulated a certain pot of money. You’re in your 50s and you want to work out, “How much can I take out of my pot of money for the rest of my life, knowing that I won’t run out of money”. Now at Providend, we would use cash flow software. So we do this in a lot more detail. We would load up all of your assets, your income, what you’re spending, and we’ll project it forward until you’re 90 or 100. And we will work out where you are on track. But you can do some simple high-level numbers yourself.

So the 4% rule says that if you took 4% a year out of your capital and spent it, and remained invested, theoretically, you would never run out of money. So if you got a $1 million and you spend $40,000 per year and that $1 million was invested, in theory, you would never run out of money. If you withdraw 3% per year, then that would be considered quite conservative. And if you were withdrawing 5% per year, that would be considered a bit more aggressive. And the risk is that you would run out of money, which is not what you want to do. So in the resources on the podcast page for this, I’ll put some tables so you can go and lookup.

So let’s use that $1 million example again. Whether it’s USD $1 million, GBP $1 million, AUD $1 million, 4% rule would say you can spend $40,000 a year. If you were spending $30,000 a year, that would be considered conservative. If you’re spending $50,000 a year, it would be considered a bit more aggressive. If you’re spending 6% or 7% or 8%, that would be considered very aggressive. You have a much higher chance of running out of money.

So let’s say you’ve got $5 million across all of your assets. Then the 4% rule would say that you could spend about $200,000 a year. So if you were doing that vision exercise I was talking about, you could use that as a starting point and say,” Right, I think I can spend $200,000. Does that cover everything that I want to be able to spend my money on?” And if the answer came out yes, actually I only need $150,000. Okay, well $150,000 is 3%. That’s pretty conservative. That should be a credible starting point. If actually you got $5 million and it turns out you want to be spending $400,000 a year, let’s say. That looks like it’s on the upper and the higher range of what would be considered prudent in the financial planning world.

So I think that’s a really good useful rule of thumb is what have you accumulated already? If you took out 4%, what’s that number? Does that feel right for you? Do you feel that you could spend that for the rest of your life? And what’s your upper and lower range?

So just taking out 4% per year, let’s say it’s that $40,000 a year, out of your $1 million. That would be classed as a fixed withdrawal strategy. So then you would say, “Right, I’m going to take $40,000 out per year”. You might adapt it for inflation. You might take out slightly more each year. But you are going to take the same amount because what happens to the stock market.

There is an alternative which is doing a variable withdrawal strategy. So depending on what the stock market did or depending on what you’re invested in. If it is a very good year, maybe you can take out slightly more. If it’s a bad year, you are able to rein in your expenses a little bit. And there’s some evidence that your pot of money is much more likely to last longer. But let’s not get bogged down in details. As a rough rule of thumb, it can be quite useful. So if you’re coming up to retirement or you think you’re coming up to that financial independence mark, then that table can be quite useful.

Let’s say you are younger and you haven’t accumulated all your assets yet. You are still on that trajectory. You haven’t got into that $2 to $20 million trajectory and you want to work out how much you need to accumulate to have the lifestyle you want. So let’s say you got an idea of what you want to spend on. So I’ll also put a table in to show you this so you can look it up. So the other rule I want to show you is the rule of 20 and 25. So very simple. Let’s say you want to spend GBP $80,000 per year. You multiply $80,000 by 20 which would give you $1.6 million. And you multiply by 25, gives you $2 million. Why those numbers? When you multiply by 20, that is the 5% rule. If you multiply by 25, it’s the 4% rule.

So what I mean by that is if you want to spend $80,000 a year, if you had between $1.6 and $2 million GBP or USD, then you could use the 4% to 5% rule. So it gives you a rough idea of what you need to accumulate.

Let’s go back to that example of if you think you want to be able to spend $200,000 for the rest of your life, then you would need to get about $4 to $5 million, using the rule of 20 and 25. So that can be another good way of if you’ve got an idea of what you think you might want to spend, you’re not really sure how much you need to accumulate, multiply by 20 and 25 and it gives you a rough idea.

Now, I want to point out that this is not financial advice specifically for you. So don’t go make any life-changing decisions off the back of this. These are just to give you some high-level rule of thumb that you can apply to yourself.

So I think it’s useful when you’re in your 30s and 40s to maybe do the multiplication up. I think as you get older and you start to see what assets you got, you start to think about what can I safely withdraw out. And so hopefully, using those two bits is useful.

Now let me give you a warning. You need to read the fine print on this rule. So even though it’s a simple powerful rule, there are some specific things you need to know which I’ll cover in later podcasts. But let’s say you are happy with the 3% to 4% rule and you’ve worked out what you want to spend. You think that is a good range for you then hold your horses. Don’t start spending that amount of money yet. We need to look at what the assumptions are.

So the first assumption for the 4% rule is your capital must be invested. It can’t be sat in cash. So you need to go and add up all of your assets and split them into what’s investable and what’s non-investable.

So if you own a home and you live in that home, that is not an investable asset. We can’t include that in this 4% rule. Also, non-investable assets would be, say, your everyday cash account or your emergency cash buffer. So your home is not an investment. I’m sorry to tell you. We can’t include it. So it has to be invested. Otherwise, it doesn’t work.

Secondly, you need to be getting an annual investment return that’s about 0.5% to 1% above your withdrawal rate. If you decide that the 4% withdrawal rate gives you roughly the amount of money that you want to spend or you think you can accumulate enough assets to use that 4% rule, you would need to be getting an investment return of 4.5% to 5% per year.

If you are using a more conservative withdrawal rate like 3%, you need to get 3.5% to 4% a year. I’ll talk more about that in one of the future podcasts. But I think this is a really useful framework for you to go and look at your current investments and your potential options. And work out if they are suitable for the lifestyle you want to get to.

So go and have a look at the tables in the show notes and think about where you want to get to. Go and sit somewhere and write down what it is you want to achieve. And go and cost that up. What kind of holidays? What kind of lifestyle you want? What country are you going to be in? Because that would be really useful for you to gauge whether the amount of assets you need to accumulate looks eye-wateringly high to you or not. And that will give you an idea whether you need to scale back your ambitions or maybe you’ll be pleasantly surprised you’ve already built up assets and that will give you an idea of what you can spend. Maybe that will give you some comfort around where you need to start on your financial planning journey.

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