I’ve recently come across this book called “Early retirement extreme” by Jacob Lund Fisker and in it, he has some very interesting insights with regards to retiring early. His book is a basically a more organised collection of posts from his blog, so you can head over to his site for a relatively unsorted version of his ideas. (link here)

Most of the book sets up a paradigm shift that one would require in order to retire early. One may or may not completely agree (for the record, I think he makes a lot of sense but I’m pretty sure I won’t be following completely in his footsteps) with his philosophy but one cannot argue with the mathematics of having enough money to retire.

Two of the mathematical ideas that I find particularly interesting are (1) the equation used to find the number of years that one’s money will last them and (2) the equation that finds the number of working years needed to attain a fund big enough to last you forever.

I’m not reproducing the equations here (go get Fisker’s book) but anyway both equations depend mainly on two factors- (a) the savings rate and (b) the rate of return on the initial sum. The first equation basically comes to the conclusion that a 30 year fund (fund with starting sum equal to 30 years of expenditure) will likely last 70 years (or most of one’s expected lifetime after we start working).

As for equation (2), stripping inflation of say 3.5% per year, one can use a rate of return of 4-5% (depending on how optimistic you are) as a reasonable guess to do the calculations and the conclusion one will come to is that the higher the savings rate (i.e. the less one spends), the faster it is to reach retirement.

In fact, Fisker did it in 5 years with a savings rate of 75%. I’m skipping the details but Fisker did it by keeping his annual spending to around US$7,500 per year (That’s right, no typo here. A YEAR and NOT a month).

I tried to recreate a schedule of the time needed to obtain a 30 year fund for various rates of return and you can see the results below.

Number of years required to work vs. Savings rate

Number of years required to work vs. Savings rate

The main point is that if we use a very conservative real rate of return of 4% and what some might consider a good savings rate of 25%, it’ll take about 39 years of work in order to obtain a 30 year fund. Coincidentally, this translates to a retirement age in the early 60s regardless of gender.

Of course, as one’s career progresses, one’s income will increase. What the above exercise illustrates is that we need to increase our savings as our income increases, otherwise, the savings rate drops and the number of working years required increases. This is logical because if one spends all of the increase, then the required 30 year fund must also increase in size as compared to before. 30 years of an increased amount of expenditure is of course, a bigger number. The best case is if one can channel even more of the increase into savings and therefore, lower the required number of years of work.

Now, in Singapore we have the CPF system which basically forces us to save 37% of our income (including both employers and employee’s contribution). This sounds like a good thing because a savings rate of 37% , going by the equation, means that at a rate of return of 4%, you would need only 28 years before the 30 year fund is obtained. The problem with our CPF is that most of us spend it on housing so please don’t count your CPF towards this 30 year fund. The other problem is that even if we counted our CPF monies towards this sum, the rate of interest earned on the sums is far less than our assumed real interest rate of 4%.*

So, what’s a good Singaporean got to do? Well, the only solutions I see is to one, drastically simplify one’s life in order to bump up the savings rate (which in effect reduces the size of the 30 year fund) or two, maintain one’s lifestyle even as one’s income increases.

I’ll probably fall into the latter camp. Right now, my savings rate is around 23% and I need to bump this up. For those who think that saving even 10% is a stretch, good luck!

*So in fact, the well-meaning system fails because 37% of your income^ goes into accounts that you can’t really touch until the specified age. That means that one has to cut back on expenses even more or retire a lot later. This is terrible for middle-income and above earners who would otherwise have a decent shot at retiring early. On the other hand, it works spectacularly for people who would otherwise blow all their money on current consumption.

^I’m aware that the CPF contribution rates have some sort of wage ceiling which means that the 37% contribution rates apply only to those that earn $5,000 per month or less. However, last I checked, the median monthly income of a Singaporean resident was only $3,770 so I believe I speak for the majority.