Aladdin’s Choice: Superior Saving Rate Or Superior Investment Return?

Agrabah had fallen on hard times and Aladdin* decided to leave in search of better pastures for him and his wife, Jasmine. He decided to come to Singapore since he knew that he would have little problems qualifying for Permanent Residency (PR). After all, he is a famous celebrity like Jackie, Jet and Gong Li. It also helped that the wages were relatively high for an officer worker in Singapore.

After a few months, Aladdin slowly settled into his $5,000 a month office job. Having the good fortune to stumble on this great blog, he also started to have dreams of an early and comfortable retirement. Aladdin agreed that Mr Average was indeed setting a low bar and he knew he was more than that. He vowed to reduce his expenses and also read up more to gain knowledge on investing. In the end, he was able to save 20% of his income and invest it in some shares and ETFs that provided real** returns of 5%.

One day, he bumped into The Genie and they started catching up. The Genie was sympathetic to Aladdin’s plight but was also heartened that amidst all his difficulties, Aladdin had started planning for his retirement needs. The Genie wanted to help Aladdin with his goal since Aladdin had previously aided him in his freedom.

After staying in Singapore for a few years, The Genie understood the importance of principles like “you can’t have your cake and eat it too”. In Singapore, it was all about trade-offs. “You want to increase salaries for low-wage workers, but are you prepared for hawker prices to increase by 50%? You want to have a 4-day work week but are you prepared for a 20% pay-cut?”

So instead of giving him 3 wishes again, The Genie was going to give Aladdin a choice. He would have to choose between these 2 Retirement Boosters:

1. The ability to derive the same utility as he was having now in spite of tripling his savings rate

2. The ability to triple his investment real returns

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If you were Aladdin, which option would you take? To help you with the comparison, let’s crank some numbers like what most typical personal finance books do (I am sorry. I am just done with Math tuition and I am on a roll with regards to calculations***!).

Without The Genie’s help, Aladdin would have saved $1,000 a month and invested this amount to achieve a real return of 5% per annum. After 30 years, he would have accumulated almost $800,000. If he’s 35 now, that amount of money (in today’s dollars) would have secured a pretty comfortable retirement at the official retirement age of 65 in Singapore.

Taking The Genie’s 1st option, he would have amassed $2.4 million by 65. That’s 3 times the difference! But that’s nothing really magical since under that scenario, Aladdin would have saved and invested $3,000 every month, which is exactly 3 times more if he did not receive any booster.

On the other hand, pursuing the 2nd option would have enabled him to amass an even larger $5.2 million on his 65th birthday instead! That’s more than 6 times of $800,000 even though we only tripled the investment returns. And this is indeed Einstein’s 8th wonder of the world at work: The Magic of Compounding Returns.

“It’s really a simple choice. In fact, it’s a no-brainer! Aladdin should really have no qualms about going for the better outcome, which is plunking for Option 2. A 15% real return? That’s likening it to Warren Buffett’s achievements. A 60% saving rate seems amazing too but if we really had to choose between them, who would really opt for Mr 15 HWW’s gifts over the legendary Warren Buffett’s?!”   

I have little doubt that most typical personal finance books would have offered the same advice above to Aladdin. However, if Aladdin had approached Mr 15 HWW (I really like this new moniker), I would not hesitate to offer Option 1 as the superior choice.

And that’s not because Mr 15 HWW is able to save 60% of his income (see expenses) or he isn’t a huge fan of Buffett. You see, the problem with most of these authors is that they like to assume at least 30 years of full-time working in our lives and it takes considerable time for compounding to work its magic But over here at this blog, we are looking at a maximum of 10 years grinding it out in the office in a dead-end job(Actually after working for almost 3 years, I am beginning to think that 10 seems a bit long too.)

If Aladdin hadn’t met The Genie in Singapore, he would only have accumulated $150,000 by age 45. Actually, this is no small sum, but not enough for him to quit or even downsize his job. Assuming a 5% dividend rate ($7,500 of passive income a year), he would likely have to continue in his current job to supplement the remaining $40,000 of his expenditure needs. Following the advice of typical personal finance book authors, he would have amassed $240,000 from adopting the 2nd booster. Assuming the same dividend rate, he would receive $12,000 a year. It’s a big improvement, but still not enough for him to even semi-retire since he still requires $48,000 a year for his expenditure needs. (Theoretically, he could take two days off per week though since he only needs another $36,000.)

However, if Aladdin had listened to Mr 15 HWW’s advice and pursued Option 1, he would have a total of $450,000 by the end of year 10, yielding a passive income of $22,500. Since he only spends $24,000 a year, the passive income enables him not to report to the office for the next 20 years. He’s free like The Genie and could immediately get on the Magic Carpet with Jasmine and begin their adventures!

What I am trying to say is that the saving rate is a wonderful lever. Although the amount one accumulate rises only proportionally to the increased savings, the time to the breakeven point^ will be accelerated. That’s because the passive income required will become lower and lower. For example, if you were able to save an even more extreme 75% of your income, you could retire in a short 5 years.

And seriously, one does not need a genie’s help to reduce our expenses in affluent Singapore. You are also not going to lose much utility if you practise some smart choices. Why not have a meal at Tian Tian Chicken Rice at Maxwell instead of patronising Chatterbox. If you’re meeting your friends at the beach, why not cycle there? Actually, you might even gain more utility since you could easily have a more frustrating time flagging a cab.

To conclude, it doesn’t matter if you’re 25, 35 or even 45 and it’s also ok if you’re starting out with nothing. To semi-retire or even retire in 10 years, all you need is a high saving rate.

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*If you didn’t have much of a childhood like me and struggled to understand Aladdin’s and The Genie’s relationship, it’s time to refer to here to know more about this amazing story from Disney.

**The opposite of real is not fake. It’s actually nominal. Real returns mean that inflation (maybe 3%) has been accounted for. Eg. A real return of 5% implies nominal returns of 8% (Inflation at 3%)

***You could email me if you want a copy of the calculations, although they are really simple!

^Breakeven point is when your passive income exceeds your expenses. The 15HWW household is still more than 80% away at this current time though!

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8 thoughts on “Aladdin’s Choice: Superior Saving Rate Or Superior Investment Return?

  1. B

    Hi HWW

    I am now focusing much more on increasing income and minimizing expenses so I can still save a huge percentage of my income after marriage life.

    But I would agree with you that being frugal is the base that can make one go very far, coupled with increasing earnings.

    1. My 15 HWW Post author

      Hi B,

      Yes, increasing income goes a long way, especially if one is actually earning less than $2,500 a month. The saving ratio would definitely improve, ceteris paribus.

      If I don’t remember wrongly, you and your gf/fiancée/wife’s monthly expenditure of $1,400 is really a good example of frugality! A post on that perhaps? 😉

  2. Cory

    My thought is being frugal is the first step before being financially enlightened. Once you have that, need to loosen the bolt a little because our lifespan is limited. 🙂

    1. My 15 HWW Post author

      Hi Cory,

      Interesting comment but I can’t really get the financial enlightenment part. Care to enlighten?

      I am actually hoping (Mrs 15 HWW doesn’t quite agree currently) we reach a stage of voluntary simplicity where there isn’t a need to increase our expenses (much) to make ourselves feel better even after achieving financial independence.

    1. My 15 HWW Post author

      Hi Alex,

      Yes, I am a big fan of Mr Money Mustache and Early Retirement Extreme.

      I also chanced across your blog for the first time. Amazingly, we are using the same wordpress theme!

  3. Cory

    Financial enlightenment will start you the right first path to try to achieve better investment returns in a more sustainable way. The larger the initial sum through frugal saving, the larger the returns later when you do your investment.

    1. My 15 HWW Post author

      Hi Cory,

      I really doubt that I am financially enlightened although I am rather frugal, knows something more than the average about investments, and have started blogging about it.

      And I agree that when one is just starting out, savings matter more than returns.