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Tuesday, February 4, 2020

The FI Checklist

You are on the verge. 

So close your ears are tingling with anticipation.  Your fingertips rattle across the keyboard. Your lips purse into a wry smile.

You can barely contain the pent-up ecstasy as the words appear on your computer screen:

"... I would like to resign my position with effect from.... "




WAIT A MINUTE. 


I know you have literally waited a decade to type this letter.  But hold your horses first.  Have you done the FI checklist?


The FI Checklist


1.  Have you set aside a cash buffer for income tax payments, which will persist for at least one more year in your unemployed life?  


Since you would no longer have an active income, it is pertinent that you have set aside sufficient cash reserves to meet your tax obligations. If your passive income level is high enough to cover your expenses plus taxes, good on you. If not, prudence dictates that you ring fence some money for Singapore's most powerful debt collector.



2.  Have you set aside a cash buffer for one year of expenses?


Why is this necessary you ask? In addition to the "usual" reasons, i.e., market downturns, stock market crashes, wealth-destroying emergencies, etc., another important but often overlooked reason is: it is a FI key performance indicator (or "Fik-pi" pronounced "phic-pee").

Ideally, in a steady-state situation, this cash buffer should increase Y-o-Y,  since the passive income inflow should (by right) be (significantly) greater than the cash burn rate. 

If you find this cash buffer slowly dwindling, implying that you are burning cash at a rate faster than you can replace it, then you are doing FI wrong. Either cut your expenses (bleh) or go back to working (double bleh). 


3. Is your passive income at a level which allows you to re-invest a fraction to defend against inflation?


Your 100k a year passive income will not be worth much in 40 years time if it remains 100k per annum.  To avoid outliving your portfolio, one needs to continually grow the investment portfolio and farm more passive income. 

In other words, having your passive income exceed annual expenses means a grand total of jack-shit. If you are not generating at least 150% annual expenses in passive, you are not ready. With lifestyle inflation, 150% might even be a tad conservative.

If you ask me, aim for 200% annual expenses before even contemplating hanging up your gloves.


4.  Is your passive income at a level which allows you to take on new debt if necessary?

It should come as no surprise that as you age, new and sometimes unforeseen financial liabilities appear.

COEs only last 10 years. 

Your kid might be too stupid   not be sufficiently academically inclined to enroll in a local U, necessitating in the application for a M&D bursary (proudly sponsored by the bank of Mom & Dad).

Your two bedroom condo, while presently cosy for a husband and wife duo, is starting to look like Hong Kong's public housing after your second kid arrives.  (insert joke about stupid games, stupid prizes).

When (not if) that time comes, would your passive income cashflow support the undertaking of new debt? 

FI-Readiness Review


Did you answer YES to at least three of the above questions?  If no, then please kindly stop deluding yourself and delete that career-ending letter saved on your desktop. Remember also to empty the Recycle Bin!  Please continue to grind for a couple more years. 


If you answered YES to all questions, then my hearty congratulations. You have won the race.  Your prize:  FREEDOM.


Onward to FI friends. 





2 comments:

  1. Hi

    Your passive income numbers are pretty impressive given your relatively young age. And it was thoughtful of you to share the FI checklist. It will serve as a good review / checkpoint for any would-be FI "practitioner" who have attained FI and mulling over whether to RE!

    RE (retire early) is not quite applicable to me as I am near to retirement age. We (wife an I) have attained FI a few years back where our passive income was more than enough to cover our expenses.

    From my experience, I would like to add one more checkpoint to your four check list questions. And that is:

    5) Is your passive income source stable? Or do you have a stable passive income source?

    We consider the stability of the passive income source to be very important, especially for us, wage earners who are used to having our salaries credited into our bank accounts like clock-work every month! When retired, not having this stable and regular income being credited into your bank accounts can be rather unsettling and distressing.

    How do we resolve this?

    First we established multiple passive income streams. Namely the following (with cash as reserves / emergency fund) :

    From now to 61 yo, we have:
    1. Interests from our OA & SA = $50k a year
    2. Dividends from equities & bonds = $78k (2019 figures)
    3. Rental income = $36K a year

    From 62 to 69
    1. Interests from our OA & SA = $50k a year
    2. Dividends from equities & bonds = $78k (2019 figures)
    3. Rental income = $36K a year
    4. SRS draw-down = $45K a year

    From 70 yo onward
    1. Interests from our OA & SA = $50k a year
    2. Dividends from equities & bonds = $78k (2019 figures)
    3. Rental income = $36K a year
    4. CPF Life payout = $56K a year

    From our years of slowly building up the various income streams, it was clear to us, only the CPF income source was stable. It gives us a lot of confidence as we approach our retirement.

    So unless you can establish another stable passive income source (eg. private annuity?) it is best you build up your CPF savings as one of your passive income source! Dont look down on the humble CPF.

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