Now you understand what’s wealth, it’s time to set financial goals. This is the most crucial step as setting the right goals will lead you to the right path. I am not a professional financial planner, but I’d like to share the thought process I put into during my own financial planning. There are 6 questions to ask yourself first.
Your Current and Future Expected Lifestyle?
This is to understand what monthly expenses you need to plan in.
Your Accumulation Phase vs Semi-Retirement Phase vs Retirement Phase?
Typically, I split my adult life into 3 phases, regarding to the relationship with money. It is important to know how long each phase in your life is.
- Accumulation phase where you build your wealth.
- Semi-retirement phase where your tune down your accumulation but do not touch on your savings/investment yet.
- Retirement phase where you start withdrawing.
Phase1 (Accumulation Phase):
How much wealth do you want to accumulate? What’s your savings rate? How much risk can you accept and what investment vehicles do you want to use?
This phase typically starts from the moment you start working until post-midlife. In this phase, you will most likely earn more than you spend, and have extra money to save and invest to build your wealth. You need to find an investment strategy which fits your time horizon & risk appetite and meets your accumulation goal.
Phase2 (Semi-Retirement or FIRE Phase, An Optional Phase):
How much income do you need to cover your expenses?
In this phase you have already accumulated the wealth you need, had most likely paid off your mortgage and reserved kids college fund. You decide to tune down your 9-to-5 employment to pursue other passions or interests to increase your fulfilment in life. You could still work on side-hustle basis to earn extra income to cover your expenses, so you don’t have to start withdrawing your investment and savings yet; or you could withdraw less than annual growth of your net worth, so your total wealth doesn’t decline.
Phase3 (Retirement Phase):
What is your withdrawal strategy?
In this phase you will probably do not any more income, and start to withdraw your investment and saving funds including stocks/bonds/cash savings/SRS/CPF etc. Your net worth will start to decline (which is fine). You shouldn’t withdraw too quick to deplete your wealth before you pass away or withdraw too slow and leave most of your wealth behind and have some of your dreams unfulfilled.
Future Big Fnancial Commitment?
Gifts to children/grandchildren, a year-long world trip?
Once these questions are answered, it’s time to move on to actual planning! You can DYI by creating your own spreadsheet or finding an online financial planning tool. Remember to discuss with your loved ones so he/she is on the same page. You can also engage a professional financial planner who will be able to help you if you are not comfortable doing by yourself, or even if you are, they might be able to help you find blind spots in your planning.
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