Meeting with the Financial Planner – Some Conclusions

I have a lot to update. So there will probably be a few posts from here out, if I can get off my lazy ass to write.

I had a meeting with the financial planner again last week to go through the completed financial plan to meet my goal of retirement in ten years’ time.

The main conclusions of the meeting were:

-          Retirement at 45 is possible, but it would be very, very tough.

-          I will have very little margin for error if I really retire fully based on this plan at the end of ten years, hence the planner does              not advice that. However, taking up a lower paying job is definitely possible after 45.

The main thrust of the plan is to retire the bulk of my 1-million-plus mortgage on my condo in ten years instead of the original forty years tenure. The plan calls for additional mortgage payments of close to half a million on top of my normal mortgage payments in the next ten years. At the end of those ten years, I will have some existing savings endowments mature, which will take care of the balance. Once the mortgage is fully paid off, I will have access to the full rental income for my living expenses and hence can retire if I want.

The case remains even if I change properties midway, provided that the value of the properties remain the same. It also means I can say goodbye to any plans of moving out of my parents’ house for the next ten years.

I will also have pretty much nothing else in other savings and investments at the end of ten years since I will be throwing every cent available at the mortgage during the ten years. This is the reason why the advisor advised me to continue working and investing for at least five to ten years after 45 to build up my non-real estate investment portfolio. However, I can achieve this with a much lower paying (and less stressful) job.

I won’t go into the numbers in detail but it essentially means that I have to find about $50K to invest every year on top of my various existing savings vehicle. Bonuses and share options will contribute most of that. I’ll have to find the rest of it somewhere, somehow.

I had some reservations that I’ll be extremely undiversified at the end of ten years, with everything in the property, but unfortunately my pie is not large enough to try and distribute otherwise if I insist on so ambitious a plan. It will be somewhat scary for a year or two until I build up my reserves after paying off the large mortgage.

There is some buffer built into the plan though, since the planner used very conservative mortgage interest rates and investment returns to do the calculations.

The $50K a year will be invested in a short term portfolio of a mix of equity and bond funds as well as money market deposits. The portfolio will be liquidated every three years to pay off the mortgage.

The issue with investing the money myself is that I failed the CKA (Customer Knowledge Assessment) so I cannot invest in most ETFs on the stock exchange. I think the whole demarcation is a little stupid (I can buy individual stocks but not most index funds?), but it is what it is. So I’ll have to do my investment through others, and pay for the privilege as well.

I also found out that a number of good financial products that are available to laymen in other countries have limited accessibility in Singapore. Some of them of only available to high net worth individuals (e.g. min $250K investment) or are only available through certain companies. In such cases, it does help to have the advice of fee-based financial planners who are not commission based.

We didn’t spend any time on cash flow and expenditure management, because he said he didn’t have any advice for me on that front. He couldn’t find anything to cut further. J I take that as a back-handed compliment. We also discussed tax planning and estate planning etc, and I had a lot of different thoughts on the property front. I will share some more in my upcoming posts.

My final bill for the whole process? Just over $5K ($250 per hour for 20hrs of work). I think my net worth and my ambitious goals made it borderline worth it to pay for the service, but I am not sure I will recommend it for anyone with less than a net worth of $750K, especially if there are no special circumstances to consider (estate planning, tax planning etc) and if the individual has a modicum of financial know-how.

I am pretty much fired up from the meeting and looking forward to the challenge. Even if I should fail to meet the ten year mortgage pay off challenge, I’ll definitely  be no worse off than if I had never tried -reaching for the moon and landing among the stars and all that. I just hope I can keep this optimistic frame of mind going forward.

5 comments on “Meeting with the Financial Planner – Some Conclusions

  1. Hi there, I admire your courage, but i think with great leverage comes great responsibility. Hope you can finish paying the house in 10 years.

    Did the financial planner say anything about foreign estate duty payable upon deceased. US have 50% death tax and so is UK, 2 low cost Vanguard ETF countries.

    Couldn’t you take the test again?

  2. anon says:

    hi, will you care to share the rationale behind retiring the mortgage early?

    to me mortgages in general are an extremely cheap source of funds which can be used to purchase other investments. eg. instead of paying off a 1.5% or even 3.5% mortgage, why not invest the funds in stocks which give an average of 7% over the long run?

    also unique to singapore, a mortgage is the only way one can unlock CPF OA funds which represent 20% of income, a source of funds whose cost is 2.5%, a return that once again can be easily beat over the long run with a stock index fund. if a mortgage is not taken out, these funds will forever remain in the CPF OA earning a paltry 2.5% and can never be withdrawn till death. though they can be invested via CPFIS but that is subject to a minimum 20k in the OA this will give a lower investable amount as compared to an all out withdrawal via a mortgage.

    i am also sceptical of the financial planners advice for you to invest in bonds given your long 10 year horizon (stocks outperform bonds in the long run) and that bonds are relatively expensive now while sg stocks by any measure are not expensive at all (though not very cheap)

    i also question the advice to invest in ETFs given your large portfolio size as the main advantage of ETFs is that it allows diversification for small investors. i would assume that unless you are buying an international ETF, there is no point as in STI ETF performance can be closely mimicked without the added ETF costs via purchase of banking stocks as they are heavily weighted in the STI and their long run BETA (correlation with the STI) is approximately 1.

    i actually thought your original plan was a pretty good one. accumulate equity in your property while investing excess funds in the stock market. in 10 years (approximately 1 property cycle later) when you have accumulated enough equity in the property via principal repayments and price increases, sell the property, downgrade to a 3 room HDB and either buy another investment property or invest the balance in a stock such as Singtel which pays about 4.5% dividends. combined with your stock portfolio which you have been accumulating gradually over the years, they should be able to provide you with 3k income a month.

    reading your blog there does not seem to be much tax planning issues for you. the only thing i can think of is you could reduce your tax burden via SRS and use the SRS money to buy stocks/ETFs.

    Estate planning wise singapore has no estate taxes so perhaps all that is for you to draw up are your will and CPF nominations.

    sorry if my comment seems aggressive. was rooting pretty hard for you and the original plan. i thought it was cool! haha. guess the only problem is that it is very concentrated in property but i think in the long run property will do ok so perhaps i dont see it as that much of a risk.

  3. Miss JJ says:

    Hi Kyith and Anon,

    Thanks for your comments. To address a few points brought up:

    To be frank i am still thinking over matters in my head after the meeting and I have not committed to the plan fully yet.

    1) Even with my original plan, I am looking at two paid off properties (1 HDB and 1 private studio/1 bedder) at retirement in ten years. Therefore regardless of which plan I go with, I am definitely sinking in 1 million plus into property at the end of the ten year cycle if I go the property/rental income route. In this sense, I do not see much difference between the planner’s way and my way.

    2) You sound like my mentor. He’s been remortgaging in his various properties due to the low interest rates and investing the money in other vehicles. Personally I am not able to stomach the risks of such major leverage, especially when I have been seeing my interest rates increase every three months for the last year, though it is still very low. I like the idea of being debt free and having free and clear income, even though I do recognise the opportunity costs of investing the money in an all stocks portfolio as opposed to the mortgage. I accept that opportunity cost trade off (for now). I suppose it is all a matter of different perspectives?

    3) That said, I am not about the stick with the plan through thick and thin. The government is changing the property rules every couple of years at whim, so whether I will release the equity earlier to carry out investments in other areas and abandon the rental income route a few years down the road is hard to say.

    3) Regarding ETFs, I see your point. The planner’s recommendation is a Vanguard global ETF and an Fidelity emerging markets ETF. I probably will want to keep my existing investment in a couple of local blue chips. My current portfolio is pretty small (only about 80K in value), so perhaps I qualify by definition as a small investor?

    4) The planner’s suggested portfolio is pretty conservative, because he was planning to release the equity every three years for mortgage pay off. To be frank, the returns he is using in calculations is about 2-4%, which is very low, but he is hesitant to take risks with the principle given the short time frame and intended use. Hence stuff like the bond funds and money market components in the portfolio. I am still digesting this, and may want to discuss with him further though.

    5) Yep, not much tax planning issues or estate planning issues. I only mention them for a complete picture.

    6) Kyith, the CKA has main questions pertaining to education qualifications in financial areas and working experience in the same. I don’t see how most people without formal qualifications and/or already working in the finance sector can pass it to be honest.

    Anyway, thanks for all the comments. I definitely still have a lot to think about and plan for. You know, I am an inherently lazy person, and all this work to retire early really goes against my grain. :) I wish I could just be in charge of earning and saving the money and give it to someone and just say, “Give me my retirement in ten years!” Haha.

    • Ben says:

      Hi Ms J

      Different person has their own perference of allocating the invested money into different assets. Just be yourself and invest as per your perference.

      The best person to do the investment is yourself. There is no other person who can invest the money on your behalf.

      Ben

  4. anon says:

    hi miss jj

    its nice to hear your response. i guess everyone has the way that they are comfortable with and that is probably the best way for them as they will stick to it and not have many sleepless nights. they are all in the same general direction anyways…. (p.s. also you have numbered point 3 twice. i have followed you in my response)

    1) yes i guess in this way they are the same.

    2) actually my advice to you is not to remortgage. it is just to pay off the mortgage as slowly as possible due to low cost of capital and ability to unlock CPF. but yah tomato tomato. i.e. use leverage to help haha.

    i am not sure if it is really a difference in perspectives. THEORETICALLY not paying off the mortgage is definitely the way to go and will be supported by calculations using average long term returns. however, theory assumes the rational human being but we are not rational in real life.

    how risky an action is also depends on what you define risk as. i will leave you with something to think about on this point with comparison between cash and govt inflation indexed bonds on REAL and nominal terms.

    cash can be thought of as a risky long term asset as its future REAL value is unknown. a govt inflation indexed bond (not available in sg) though is a riskless long term asset as its REAL value is known and predictable.

    Definitely with cash there is no possibility of losing money in NOMINAL terms though it is possible to lose money in NOMINAL terms with the inflation indexed bond if inflation turns out to be negative (or rather less than the expected value of inflation implied by the bond purchase price).

    3) our government does not change rules at whim though it may seem that way. they are actually very methodical and responsible. just that sometimes what we dont understand will seem confusing to us. it will be difficult to explain this here (and i am also uncomfortable in talking about politics online) but in my humble opinion, in the long run, our governments plan for a gradual, steady property price increase has not changed.

    3) yes. agree. for global investing 80k is small. ETF is good choice. just beware of the fees and sales charges and FX as they will eat significantly into return.

    4) conservative vs accurate. we must make a choice. conservative assumptions may make us feel secure but can end up doing us in as they may guide us to taking on less risk than appropriate and thus cause us to be inefficient as risk in theory is correlated with return. as an engineer i am sure you are familiar with the concept of redundancy and perhaps this is why you are comforted with conservative assumptions but there is a flipside too.

    if you are conservative on estimating returns (low returns) and conservative on your cost of capital (high interest rates) you may end up with an accurate forecast.

    5) no comments

    6) i am not familiar with CKA but is it possible to lie? i dont think they really check. really not sure about this point though.

    more food for thought! and all the best on your journey towards early retirement!

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