June 8, 2021

Categories: Planning

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A good way to put the question to the test is to imagine this: If by some unexpected circumstance you will not be able to work from tomorrow onwards, are you able to survive on your funds with your lifestyle? How will you then sustain your basic and discretionary needs? And what if you are the family’s financial provider with dependents to take care of?

If you cannot or can only maintain your current lifestyle for a few months, then you probably fall in the first category of being “rich”. Being “rich” in this context just means that you are earning a high enough income to support your current living standards.

Being “wealthy” is a whole different ballgame. It means you will be able to sustain your lifestyle without a steady stream of income from employment; possibly for the rest of your lifetime and or even for the future generation.

To get started, you will need to create a long-term wealth-building strategy.

Above all, remember the 4% rule.

One frequently used rule of thumb for retirement spending is known as the 4% rule. It is relatively simple: You add up all of your investments, and withdraw 4% of that total sum during your first year of retirement. In subsequent years, you adjust the dollar amount you withdraw to account for inflation. By following this formula, you should have a very high probability of not outliving your money during a retirement period that could span 30 years.

To illustrate this further, let me use an example. Let’s say your portfolio at retirement totals $1 million. You withdraw $40,000 in your first year of retirement. If the cost of living rises 2% that year, give yourself a 2% raise the following year; withdrawing $40,800, and so on for the next 30 years.

Therefore, this works out to 25 times of what you need in the first year of your 30-year retirement. If you need $40,000 per year, then you will need to have $1,000,000 ($40,000 x 25) worth of investments.

In theory it looks perfect, but is actually easier said than done. The importance of this strategy is to build a sustainable investment portfolio. Asset allocation is key and I have seen how it has a big impact on portfolio ending balance.

Start building your wealth early and work towards your desired 4% yearly withdrawal. In my following article, you can look forward to useful advice you can apply to your whole portfolio including your CPF monies, as well as my personalised insights on asset allocation.

Stay safe and healthy!

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