This will be the first of a 4-part series which explains the different concepts covered in the Excel financial freedom template that I have created. I used ChatGPT to help with writing some of the excel formulas and macros.
The template allows me to project how much I would need to invest to achieve financial freedom, based on different assumptions on investment returns, volatility, saving rates, inflation and expected salary growth. There are also different scenarios built in to the template, which allows me to account for various market environment, such as stagflation, which has high inflation and lower returns, and easy money (QE), with low inflation and higher returns.
I was curious to find out the likelihood of an average income fresh grad ($4.2k SGD in 2022) achieving financial freedom. Thought it would be interesting to share the results here.
The FI targets for this person (25 years old today) looking to achieve Barista FIRE are:
$3k SGD in monthly passive income (2022 purchasing power, inflation adjusted during projections)
4.8% yield on investments via dividend paying stocks
The assumptions are as follows:
Salary and Expenses
$4,200 salary, take home of $3,360 (net of 20% CPF)
Expenses of $860 per month - I know this will be debatable, but let me kindly refer you to this article by Kyith's on Singaporeans spending <1k a month.
Person receives 2-3 months of bonus per year, which is used to pay taxes, travel expenses and one-off expenses
For the first 6 years, assume a +20% increase in salary every 2 years due to promotion / job change
For the following 6 years, assume a +15% increase in salary every 3 years due to promotion / job change
Salary increase set at 3% for all other years.
Savings rate kept constant over time - Monthly expenses expected to grow at the same rate as salary increases, from $860 to around $2k by the time the person hits their mid-30s.
Housing: Choose a reasonably priced one, where the monthly mortgage can be serviced by the CPF Ordinary Account contributions of the dual income couple.
Have received some preliminary comments that the salary increase appears unrealistic. Here are my further thoughts:
The projections include 3 promotions/job switches in the first 6 years, then 2 promotions/job switches in the next 6 years. A total of 5, 3 times of 15% and 2 times of 15%. The rest are 3% annually.
Based on this article on Seedly,
https://blog.seedly.sg/average-monthly-income-occupation-job-guide/
For Managers & Administrators the median salary for early 40s is 9.5k today (115k annual) and 7.5k for Professionals (90k annual). The question should be what would a person in their 40s earn in year 2038 for these roles?
If we apply a 3% adjustment for inflation per year, then in 2038 these people should be getting around 150k (Managers) and 115k (Professionals).In the example used, at 40 years old (i.e year 2038), the person would be projected to earn around 154k annually based on the assumptions above, so not too far off from the median expected salary for Managers/Professionals, if we adjust for inflation.
Investment Returns & Inflation
Projected portfolio return of 5% per annum, with 15% standard deviation (roughly aligns with the historical returns/std dev of MSCI ACWI)
To be conservative, max gain in a year is capped at +30%, while max loss is set at -50%
Returns are randomised with a normal distribution. This accounts for the sequence of returns which is often overlooked when projection investment returns. i.e, if you think you can get 5% returns yearly, people usually just compound this 5% directly without account for the sequence of returns. Real world returns don't behave like that.
Since we are investing consistently over a period of time, the sequence of returns matter. For example if the returns over a 5 year period are: +12%, +4%, +16%, +5%, -20%,The 5 year CAGR is 2.5%. Even if you swap the +12% and -20%, the CAGR remains the same at 2.5%.
But if you invest a fixed amount across the 5 years, your ending amount would be different. Thus randomising the returns accounts for this.
Note: real world stock market returns exhibit fat tail distributions, which were not accounted for here.
Inflation is set at 2.5% for the base case. In the template, inflation can be adjusted based on scenarios, e.g. 5% in a stagflation environment.
Results
Barista FIRE year determined when a portfolio yield of <4.8% can generate passive income of 3k/month, inflation adjusted.
Results based on running 200 simulations:
73% chance to achieve Barista FIRE by 2038 (40 years old, works for 15 years)
89% chance to achieve Barista FIRE by 2040 (42 years old, works for 17 years)
97% chance to achieve Barista FIRE by 2043 (45 years old, works for 20 years)
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