In this article, I am going to share my plan to achieve financial freedom. The FF in the title stands for financial freedom. This can also be considered as my retirement plan as my purpose is to stop working once the target is achieved.
How Much?
The first question that I had to answer is how much is enough. To answer this question, I had to ascertain my expenditure. As I have been diligently tracking my cash flow, this was not a big issue. To get the number, I exclude all the expenses that would not be incurred once I am not working and add in some foreseen expenses that I might incur after I stop working. So, my estimated expenditure is around RM 8,000 per month, equal to RM 96,000 per year. To provide a buffer, I decided to round it up to RM 100,000 per year.
Assuming that I can get an annual return of 5%, I need to accumulate a lump sum of RM 2 million. By having this amount, I will be able to get my annual expenditure of RM 100,000 in the form of passive income.
Accumulation Phase
Next, I have to select the investment instruments to accumulate the 2 million. Before I start to invest, I have made sure that I have my emergency fund ready. As my current income is relatively stable, I decided to keep 3-month expenses as my emergency fund, which is around RM 24,000. As an extra security measure, I set RM 30,000 as my target. My emergency fund is kept at relatively liquid places such as digital banks, money market funds, and also ASNB fixed price funds.
To accumulate the target amount, I have selected some investment vehicles. Fixed deposit is a no-no as the interest rate is not high enough. My choices include Employees Provident Fund (EPF), stocks, and exchange traded funds (ETFs). These are mostly high-risk high-return instruments, except for EPF. Although the volatility of these instruments is high, I think given my time horizon, I should be able to get a respectable return. My target return for my portfolio is 7% per annum.
Consumption Phase
Once I have accumulated RM 2 million, I will put most, if not all, of the money in EPF. The average return of EPF in the past 10 years is 5.90% (click here to view), the lowest being 5.20%, higher than my requirement of 5%. By putting my money here, I should be able to obtain my annual expenditure, and a bit extra too.
Nonetheless, there are a few uncertainties with EPF. No one can be sure that it will declare 5% dividend indefinitely. But it is required by current law to maintain a dividend rate of at least 2.5% per year. The second issue is the eligibility of withdrawal. Previously, as long as we have more than RM 1 million in our EPF account, we can withdraw the excess, even if we are not 55 years old. However, EPF is going to raise the bar and I am not sure if I could withdraw when my account has RM 2 million. For the time being, I think it will not reach this level for early withdrawal.
I might still choose to have exposure to the stock market even though EPF is my main instrument. Although the stock market is volatile, its long term return is higher than EPF. I would like to increase my return by investing part of my fund in the stock market. Besides that, I also enjoy dabbling in the stock market. Nonetheless, I will only allocate at most 10% of my fund to equity. As this fund is my retirement fund, I will not take too much risk with it.
Conclusion
My FF plan is divided into two phases and each phase has its own strategy. I did not take inflation rate into consideration as I anticipate my expected monthly expenses should be enough for at least 10 years into the future.
As the only constant in this world is change, my plan is not set in stone. The strategies might change in the future, depending on the development of the market condition and my own situation. Thus, I will review the plan from time to time and adjust it accordingly.
How can a financial planner help you?
If you want to create your own FF plan, I can help you to crunch the numbers. Besides that, we will explore the investment instruments that suit your risk appetite. Other than financial freedom, we could also look into other aspects of your finances to improve your financial health.
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Disclaimer: This post is for informational purpose only. You should use judgment and conduct due diligence before taking any action or implementing any plan suggested or recommended in this article.
