Since our parents’ times, retiring with a $1 million dollars has always been seen as the benchmark of success. $1 million dollar is a lot of money and most people expect it to be more than enough for their retirement.
There are plenty of finance articles that have been written about how you can achieve this sum. We ourselves are guilty of that, having written our fair share of articles such as Can An Average Singaporean Couple Have Net Assets Worth A Million At Age 55 By Using CPF and How Long Will It Take To Become A Millionaire With A $4,000 Per Month Salary.
With inflation constantly eroding our spending power, one question we don’t ask ourselves enough is just how much this amount would buy us when we finally reach our own retirement.
This is a tricky question because the answer really depends on how old you are right now.
Core Inflation Rate
To help us determine how quickly our spending power will erode over time, we decided to use MAS Core Inflation Rate.
As compared to the more commonly used Consumer Price Index (CPI), the Core Inflation Rate excludes the cost of private road transport and accommodations. This makes more sense for our calculation because most retirees in Singapore would have their own homes, and do not necessarily need their own cars.
You can read up more about MAS definition of Core Inflation here.
Since 1990, core inflation rate has been an average of 1.7% per annum. You can download the excel file with this information on the MAS website.
Based on this core inflation rate of 1.7% since 1990, we then measure what $1 million dollars would be worth by the time each cohort of Singaporean reaches 65. This can be measured by finding out the present value of a future amount.
For example, if the inflation rate is 1%, then $100 next year should have the same spending power as $99 today.
How Much Would $1 Million Be Worth During Your Retirement?
How much $1 million will be worth during your retirement depends largely on how old you are today. If you are 55 years old today, then a million dollar during your retirement (at age 65) is likely to be worth a lot more than if you are 25 years old today.
|Your Current Age||Year You Turn 65||How Much $1 Million Is Expected To Worth (Based On 1.7% Core Inflation)|
When you look at the numbers above, it should be clear that having $1 million dollars for retirement in the future isn’t going to be worth as much as having $1 millions dollars today, or having $1 million dollars in the past. Due to inflation, money in the future is going to be worth less than money today.
Of course, there are some limitations to our calculation above. The biggest of which would be assuming that future core inflation rate is going to be similar to the past.
Due to the long period that we are calculating based on, a small change to the actual core inflation rate can become a significant difference in the long run. For example, if the core inflation rate goes up from 1.7% to 2.7%, then the purchasing power of $1 million dollars for a 25-year old today will drop from $509,521 to $344,496 in 40 years.
The good news however is that $509,521 (which is what $1 million will be worth in 2057) is still a lot of money, especially if you no longer have any debt and know how to manage your finance well.
For example, $249,000 will buy you the CPF LIFE Enhanced (Retirement Sum), giving you between $1,860 to $2,000 in guaranteed payout each month, and leaving you with another $260,000 to invest or spend as per your preference.
Read Also: Is The CPF Life Scheme Really That Bad?
Bonds and Fixed Income