The Additional Areas My Friend Should Consider in his FIRE Plan other than the $1.8 Million portfolio. – Investment Moats

One of my friend posted that his company is to be taken over by another company.

There is likely to be uncertainty in such a situation. He voiced the uncertainty in his work environment even before this. Those who was retrench or left was not replaced and those who are left have to pick up the load and it is more stressful.

The good thing about this takeover is that the process is likely to be concluded over a couple of years and that those with company shares would see their shares appreciate in value. If my friend is being asked to go, there would be a severance package and that adds to the net worth that he can prudently allocate to.

This is a good time to revisit the notion if he is financially independent and be able to take off work for a while. He has build up a portfolio of individual stocks (not funds) worth about $1.8 mil and has invested for about 20 years at least. The HDB flat is also fully paid off. Investment experience is important because if you have seen a wider spectrum of general market, and the outcome of individual stocks, then you are more aware of the challenges, complexities but also what could work out over time.

This is financial advice.

Many would skirt around and say this is not financial advice but if I know the person’s situation well enough, including the numbers, then this is advice. It is just that I am not paid for it. Doesn’t make the advice less meaningful or valuable.

In his mind, he plans for an income of $80,000 yearly, based on a 4% p.a. rate of return from the portfolio.

His main retirement spending is $70,000 p.a. so that gives a $10,000 p.a. buffer for any unforeseen circumstances. But likely his current spending is $4,000 monthly or about $50,000 yearly. Between $70k and $50k there is buffer for about $10,000 can be for travel and expenses like computer electronics which is less than $20,000.

Even if he keeps his spending below $60,000 yearly , based on $1.8 mil this is a 3% withdrawal rate.

My main advice to him is it is better that you work through each of the line items that you account for instead of assuming your money can buffer for this and that. That is how I do it personally and asked most to do.

The opposite is think of a number, usually based on their current income or spending, plus a buffer and assume the buffer is enough.

In my mind, I am quite sure based on today’s dollars, his spending even with family is going to be less than $60,000 yearly for a few reasons:

1. Most of the basic spending can’t amount to that much.
2. One kid’s cost will go away in 17 years time.
3. You stop working, you may not want to travel so much and in the last 20 years of your life, you might not be able to travel that much.
4. Don’t have a car.
5. You don’t pay income tax
6. You don’t exchange money for time when you are not work which you are now.
7. Don’t have one side of parent’s allowance to give.

My basic spending is barely $10,000 a year and if you expand that a little it really doesn’t cost that much.

I asked him to consider a few lump sum spending which usually result in sinking fund ideas:

1. What is the kind of private shield and rider plan he wish for his old age. Most of the hefty part of the premiums comes later in life, which he doesn’t feel it today. He can capitalized it. If he doesn’t then he has to hope that his buffers is enough. I think it is enough, but how much would this shave his buffer to be left for something else?[Crafting a $80,000 Portfolio to Fund My Future Health Insurance Premiums from 43 to 100 years old.]
2. A medical sinking fund for medical crisis after 65 years old. [$50,000 Portfolio to Supplement Lifetime Critical Illness Coverage.]
3. He can capitalize the lifetime education cost of the kid. [Estimating the Lump Sum Value of Your Child’s Lifetime Education Cost for Financial Independence.]
4. Does he want to think about some legacy money?

He should also consider, aside from CPF FRS, Medisave, how much he has left and that could supplement that $1.8 mil.

Honestly, I think if he capitalized some of these things to about $300,000, and his spending should be below $36,000 a year, based on $1.5 mil its a 2.4% Safe Withdrawal Rate.

It is a plan that builds in a lot of sensibilities, covers most of the line items that needs to be considered and the income is likely to be perpetual.

Can The Individual Stocks of Your Portfolio Survive Challenging Sequences not Seen in the Last 2 Decades?

Now comes the portfolio.

I think we can be optimistic if we have manage our portfolios for a long time and don’t have much portfolio drawdowns. I am sure he has experience a 18% annual drop in the portfolio at least.

But there are a couple of critical questions:

1. If it comes a really challenging sequences, say persistently high inflation, or great depression, how well do you think those companies will survive?
2. How willing are you going to re-allocate constantly in an active manner?

I think this is critical question because many felt that in last 20 years, we have lived through all the volatility there are.

1. But we never went through a period where equities in general only recovered after 14 years.
2. Inflation that is persistently higher.

For the readers who have majority of their portfolio in individual stocks, they can consider this question as well because would your DBS, iFast, Mapletree Industrial not cut the dividends when the market fell 70% at least?

In such an environment everything so sturdy?

This sounds like a bit doom mongering, but I would rather put this consideration then at least you can tell me, “Kyith, I take this risk, this would not happen to Singapore one. Or that I don’t think it will ever happen during my retirement lifetime and if it did I would adjust my spending.”

And you then have to wonder if the dividend cuts is just 5%, 10% or 50%.

A lot of what I work on is on a basket of diversified securities.

I don’t really know what were the main 100 stocks in different time of those basket of securities, but the history of data shows me a couple of important features:

1. The portfolios rejuvenate without me managing it.
2. The data shows that it can survive challenging sequences.

These are the two features that I asked if your investment portfolio has built in.

I used my Income Planning Software Gilgamesh to simulate a portfolio with the following index returns:

1. S&P 500: 60% allocation
2. Dimensional US Small Cap Value: 20% allocation
3. US 5-Year Treasury: 20% allocation

A built in recurring cost of 0.50% p.a. This is a 80% equity 20% fixed income portfolio.

Don’t ask me what is the significance of this allocation because I just anyhow throw one there as the allocation doesn’t matter. The only significant part is putting in the small cap value because the deepest drawdown in Great Depression was 91% (from the highest point it went down 91% for a basket of securities).

Between Jun 1927 to Apr 2024, there are almost 97 years of data.

I simulate if we start with a $25,000 yearly or $2,083 monthly income and spend from a $1 million portfolio for 60 years, over and over for the 97 years, whether in all 444 60-year period, the portfolio can survive.

This is about a 2.5% withdrawal rate.



I think you can see the result here that in all 444 60-year period the portfolio survive.

The left meter shows the lowest to highest ending portfolio value. The lowest the $1 million portfolio grew to is $52 million even after spending.

Let me zoom into the worst sequence:



The Sept 1929 to Aug 1989 sequence if poor because

1. It starts immediately in depression.
   • S&P 500 went down 86%
   • Dimensional US Small Cap value went down 91%
2. It went through the 1966 period where inflation was 5.5% p.a. for 30 years

It is brutal in that even a basket of stocks can go down that much.

The thing we know now is that the portfolio survives.

But that is because:

1. Some stocks died and never recovered.
2. Some stocks died and recovered.
3. Some stocks probably thrived.

The question is: How would you know if your company end up being in the 2nd and 3rd group?

The portfolio value chart shows the growth of the portfolio and the lighter blue line on the same chart shows that if the portfolio value is above the lighter blue line, the portfolio preserve its original $1 million in value.

Well we know that the portfolio survive and end up having even more.

The $2k monthly income eventually became $15k monthly income at the end in 1989.

But I can zoom into the deepest part of the $1 million portfolio because you cannot see clearly the carnage:



After 34 months the ending portfolio value is $201,584.

So the portfolio fell like almost $800,000 after 3 years.

But it survive.

You could adjust your spending, but would your Mapletree Industrial or DBS or iFast survive that kind of 80% carnage?

The key positive feature of having a diversified portfolio is you are not sure which stocks will do well or not do well.

It is positive because the worst case is successful despite so much uncertainty.

I am sure that he is aware about the benefits and the negatives of a systematic portfolio so this is something to think about.

I think end of the day, given what I know, I am less worried if he gets retrenched immediately he is in a worse position.

1. Most likely he won’t stay without work.
2. Even a $4,000 a month job will solve the issue. He doesn’t need to save already.

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I invested in a diversified portfolio of exchange-traded funds (ETF) and stocks listed in the US, Hong Kong and London.

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Kyith is the Owner and Sole Writer behind Investment Moats. Readers tune in to Investment Moats to learn and build stronger, firmer wealth foundations, how to have a Passive investment strategy, know more about investing in REITs and the nuts and bolts of Active Investing.
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Kyith worked as an IT operations engineer from 2004 to 2019. Currently, he works as a Senior Solutions Specialist in Fee-only Wealth Advisory Firm Providend. All opinions on Investment Moats are his own and does not represent the views of Providend.
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