Retirement

[karlmarx]

mobo has written a very good piece on the realities of the common man's financial situation.

The probability of being the top percentile of an income earner, saver, and investor (5% x 5% x 5%) is probably as small as winning big sweep or toto. But the former relies on effort, while the latter on chance. And so I guess the said course trainer -- who has achieved the former in spite of its great difficulty -- should be feeling more than qualified to instruct the masses who have the same goal.

Such courses are in fact a monetisation of the trainer's achievements. A kind of consultant, if you will. It is like Joseph Schooling teaching you how to swim, and telling you, that you, if you do what I do, you can be a world champ too.

But Schooling achieved his glory only after a period of 15 years. And said trainer took an even longer time, starting from the education that allowed for a good graduate salary, and then more years of frugality, financial education, investment practice, and finally investment success.

And so for those the majority of such course participants aspiring to $2m by 39 years old, they are probably too late. And a more realistic time line is probably 69 years old. If there is a course that teaches you how to have $2m by 39 years old, you should have enrolled when you were 6 or 16, not 26 or 36.

In any case, I don't think that what most courses, such as those by said trainer, can help you with what matters the most; how to be a top income earner. And even for what is mostly taught -- how to be a top investor -- the efficacy of learning over a period of 2-3 days is doubtful.

As ridiculous as it may seem, there always will be a market for 'how to get rich' courses/schemes/scams. Why is it that parents spend money on their children's tuition, over a long period of time, when instead they can save all that money, and just send them for '2-day courses?' Yes, the desperate ones do, but it is on top of all the weekly tuition.

Essentially, the '2-day course' market is one that offers hope, and not material gain which it proclaims. It has survived over so many many decades, in so many forms, because there is a market demand for it. People, from time to time -- as it is for yourself in the office, or for your subordinates -- need to be motivated and affirmed. So long as the buyers of such course have realistic expectations on what they can get out of the course -- a lot of hope, and not life changing material gains -- and believe that they are paying a fair price for it, they should not feel too bad about the transaction.

[specuvestor]

Very nice write up Mobo and thanks Porkbelly for sharing. VBs are similar breed: cautiously optimistic but skeptical when details are lacking 🙂

As ghchua mentioned, it could be leveraged returns. But my experience is that those who live by the sword, usually die by the sword. That’s why my question to management is usually simple ROA or payback period rather than IRR or yield

There was a VB Dividend Warrior who did extremely well but I doubt his numbers can match this 39 year old. It takes discipline and patience to invest in boring cash flow company over long periods for compounding to work. Generally people who talks a lot eg teach courses doesn’t fit this profile. I’ll trust those who talk a lot giving advice on start up or ideas.

And yes there were definitely people who I know can make those money by 39 by catching big booms (usually leveraged) and knowing to STOP, or having right career at right time eg stock or property brokers, Traders, dot com or hedge fund ie risk free agents or Other People’s Money . But to do that on purely an investment basis is very difficult.

NB would be educational for new VBs to read through this thread. Retiring at 39 means have to invest for income consistently for next 39 years. We are doubtful if FIRE actually works and 生命没NG

[BlackCat]

I think the numbers presented here are realistic.  It will have you financially independent in your mid-forties:
  http://sgyounginvestment.blogspot.com/20...dence.html

The caveats are:
  - Sometimes its hard to find a sustainable 6% yield.  Like now.  The only high yielders I am comfortable buying now are Netlink Trust (5.9% yield) and Manulife US REIT (6+%)
  - You will need to control yourself in a big, bad bear market.  You'll never know if you can do it till one comes around.
  - You will need to be single minded, almost obsessed, for 2 decades....to live on 2K per month.  I think you need to be single.

[brattzz]

Single? 😅 that’s not acceptable, we are not an one man island... 😅

[mobo]

Hi mobo,

I think you got to follow his blog posts closely in order to understand his strategy of generating that amount of passive income per year. You have ran a few scenarios here but none of it mentioned the main strategy that he is using - i.e. gearing. He is using a margin account of high dividend stocks and REITs to generate the amount of passive income per year. Therefore, the amount of investment capital might not be as large as what you have stated here to generate that decent amount of passive income.

Thanks for pointing out, I must admit I did not read through all that stuff as I wasn't interested in Christopher Ng as a person, but more of just using him as a starter to explain the implications of anyone hoping to retire early and rich.

Having said that, if it is indeed as you have said that the income generated consist of using a margin account with high levels of leverage, then I have to question the spirit of claiming such a setup as being retired and sitting back to just enjoy passive income. Let's say he's generating a 10k passive income with a leverage ratio of 70% at the age of 39, that would mean that with an average life expectancy of 82 in Singapore, he has to make sure this setup works with minimal effort for the next 43 years of his life.

If we do back testing for the past 43 years, we have seen the following major financial/economical crisis:

1987 - Black Monday
1997 - AFC
2000 - Dotcom
2008 - GFC

Every single one of those crises resulted in a drop of more than 30%, enough to wipe out whatever collateral left in the margin account, so in order for this whole system to work till the "retiree" dies, he has to somehow be able to evade at least 4 major crises if history is to go by. If there's someone who can do this, my question would be why bother with being a multi-millionaire when you can rub shoulders with Bezos and Gates? Also it's not just the major crises that will kill you, even mild drops of 10%-15% is enough to trigger margin calls disrupting the entire "passive" income stream. It is certainly not as effortless as it is made out to be.

One may say perhaps then as the person gets older, he should try to pare down his debts and slowly reduce leverage ratio to a more manageable level. But as a retiree without any work income, it isn't really possible to pare down significant amounts of debt without using a significant portion of the dividend income for principal repayment. That will jeopardize the $10k passive income. If the retiree is going for instrument yields of 4.5% - 5.0% as I have analyzed earlier, the gaping opportunity assuming an EIR of 3.5% (that's the most common share financing rate I see cited among major institutions) is at best 1.5%. 

Let's run some real numbers to get a sense then. Our Singaporean male start off at age 39 with a leverage ratio of 70% in the margin account. As you can see the equity required to generate the same $114k dividend income will drop to $1.344 million which will help ameliorate the 3 levers - career income, savings rate and investment return needed but it is still very challenging for an average Joe. When I have time, I might try to re-run Scenario 1 & 2 simulations to see what the numbers look like for a targeted equity of $1.344 million instead of $2.28 million. For a start, let's just assume this is doable and our Singaporean male starts off his retirement at 39 years old with a margin driven dividend income of $114k. 

As he recognizes that going margin is dangerous and there is a high chance he will kaput before he dies, he decides to try and slowly trim down his debts every year by apportioning some of the dividend income into principal repayment.



Conclusion - In order to slowly reduce his leverage ratio, his dividend income will suffer a massive drop next year to only $5,917 monthly followed by a very gradual climb back before recovering to the original number of $9.5k  at the age of 68 and leverage ratio of 41%. Thereafter, it will progressively go upwards as the effects of the interest savings more than offset principal repayments. This is a very conservative approach that probably will not past real life test as something very negatively disruptive will likely happen before he can bring leverage under control. The underlying idea is the faster he tries to reduce risk and leverage ratio, the greater a sacrifice in dividend income he will have to make in the early parts of his retirement life.

Regardless of the options taken, this is a sobering reminder of how a highly leveraged retiree's 9.5k passive income at 39 years old looks like in reality. Very different from the sales slogan which seems to imply that the students will thus far sit around and do no work for the next 43 years while income is auto-generated every month for them to pursue their passion.

[Temperament]

Ha! Ha!

Use leverage to to retire early?

Must be God of fortune?

Or American Road Runner?

i always think to use Leverage must be very good at "Hit and Run".

How many times can U time it so well to "Hit and run"?

Hee! Hee!

Why share the goose that lays the golden eggs?

[opmi]

"If we do back testing for the past 43 years, we have seen the following major financial/economical crisis:

1987 - Black Monday
1997 - AFC
2000 - Dotcom
2008 - GFC"

To put in perspective: before every crisis, there was a big bubble. Bubble is how most people can get rich or retire early. The key is how to STAY rich/retired.
See my signature below.

Yet to see, how many FIRE people still be around after the next downturn...

[dreamybear]

Thanks mobo for your very comprehensive posts - didn't expect my post to spark this level of discussion. I enjoy reading the narrative but struggle at the technicalities of your calculation due to my lack of finance knowledge. Nevertheless, do allow me to share my simpler thoughts on what I guess the strategy is.

Hypothetical Example / Assumptions :
1. Fresh graduate worked for a few years, and managed to save $200k.
2. With the $200k, borrow another $400k with borrowing costs at 3%.  
   Total : Own capital $200k + Borrowed capital $400k = $600k
3. With total of $600k, invest primarily in counters(e.g. REITs) which yield abt 7%.
    Net Yield : 7% - 3% = 4% or 0.04
4.  $600k * 0.04 = $24k which is ard $2k a mth for passive retirement income.

Of course, if own capital is higher, the borrowed capital can be higher too => more mthly income.

Reference that I found (do note that I hv not used KE before & my understanding of its product may not be correct) : https://www.maybank-ke.com.sg/products-s...-facility/

If my hypothesis is somewhat close, I think to be able to come out with an idea like that is very impressive & refreshing - it is more credible than those who teach you to analyse stocks and tell you that you can be financially independent thru' investing. There wld of course be risks since it's using leverage, unexpected events like govt policy changes, etc but I think young working adults may afford to take higher risks esp if they want to F.I.R.E.. Also, I think the trainer had backtested his strategies to factor in recessions, etc.

[Temperament]

Have survived in the market from 1987/88 till now.

If i have used any leverage, i don't think i can survive until now.

Almost 99% Zero debts all the way.

i read in the beginning of my journey, without leverage it is already so hard to make any money from the market, with leverage must be "Hit & Run" case. No other ways.

[ghchua]

Dear all,

The trainer certainly uses leverage in his portfolio. This could be seen in one of his blog posts:
http://treeofprosperity.blogspot.com/201...e-and.html

And his back testing efforts seems to favour REITs with weaker sponsors
http://treeofprosperity.blogspot.com/201...-good.html

All in, it looks like he is employing leverage, and with smaller REITs and maybe business trusts and high yield stocks as a strategy, I think his portfolio might yield higher than 4.5%-5%pa that what mobo had cited here. Maybe closer to what dreamybear had stated at around 7%pa. As for financing costs, yes, some brokers are offering around 3%pa, a lower number than what mobo had cited here.