This is the golden number that people should be aiming to save for their retirement. While it may not mean a luxurious lifestyle, this sum will provide for a relatively comfortable lifestyle in retirement.
How we came to this target figure is based on a median income of $3,949 in Singapore. The take-home pay of an average Singapore should be close to $2,700. Considering withdrawing this sum during retirement will afford Singaporeans a relatively comfortable retirement, we would need $648,000 to last us 20 years. We use 20 years to live in retirement as Singaporeans’ life expectancy, at the top end, is 84.9 years old.
So we’ve established that having $648,000 should afford people a relatively comfortable lifestyle in retirement. The question many people would ask is the feasibility of saving such a sum. Here’s how you can do it.
Save $100 Every Week
The first thing people need to do is to start saving. Your ultimate aim of saving $648,000 may be daunting, but if you do not start, you will never be able to achieve it.
By saving $100 a week, you would have $5,200 a year. Before you punch in this number into your calculators, we can tell you that you would not reach the target sum in 35 years, or by 65 years old. This is because you need to invest your money to grow it rather than to let it sit in the bank.
How To Invest Your Money
Here, we are going to assume a person invests his or her savings equally in two different investments. First, an investment into the Straits Times Index (STI) and second, an investment into the CPF Special Account (SA). These are two very basic investments that all Singaporeans should have access to.
The SPDR STI ETF (Exchange traded Fund) delivers an average return of 6.5% per annum. And the CPF SA delivers an annual return of 4.0%, at the minimum. For simplicity sake, this does not take into account the addition 1.0% interest CPF pays members for the combined balances on the first $60,000, and an additional extra 1.0% for the first $30,000 in their Retirement Account after they turn 55.
In Graph 1, we take a yearly investment of $2,600 (or 50% of your yearly savings) and put it into the STI ETF. After 35 years of consistent and diligent investing, this should yield more than $333,725.
In Graph 2, we take a yearly investment of $2,600 (or half of your yearly savings) and put it into the CPF SA. After 35 years, this amount will grow to $195,613.
As you can see, the combined amount of $529,338 ($333,725 + $195,613), falls short of what we said was meant for us to lead a comfortable lifestyle in retirement.
What we haven’t taken into account is that while working for 35 years, we would also have been contributing to our CPF SA accounts. Bearing in mind that some people may use money from their Ordinary Account (OA) for other purposes such as buying a home while Medisave Account (MA) is meant for medical cost, we will add only savings from our SA into our calculation for our retirement nest egg.
After 35 years of working, a substantial amount would have accumulated in your SA. Singaporeans would be contributing 6.0% of their pay to their special account until age 35, after which the contribution amount grows to 11.5% until age 55, and finally reduces to 2.5% at age 65. For simplicity, we will assume a 7.0% contribution rate.
For people earning the median wage, this will amount to a contribution of $236 into their SA every month. After 35 years, this amount will compound to $213,075. Adding this to your combined total from investments, you will have $742,413. This is higher than our target.
One other thing we are not factoring in is that we do not require our entire retirement savings upon turning 65. Our SA balances will continue to earn interests and if we do not fully cash out our investments, it will also continue to earn returns.
Maintaining A Lifelong Commitment
By saving just $100 a week for our retirements today, we can achieve a tidy nest egg that will allow us to continue living a reasonably comfortable lifestyle tomorrow. Commitment and diligence is vitally important to achieving this sum though – 35 years is a long time for us to stray from our plans.
We also need to understand that $648,000 will not be worth what it is today as inflation continues to raise the standard of living in Singapore. In our calculation, we may have achieved more than our target sum, but we should not think we can go ahead and use this amount or save less, as we should always aim to surpass our target savings rather than fall short of it.