Calculating how much you will need for your retirement can be complicated. You have to think about the kind of life you want to lead in your golden years. Having spent so much of your life working hard and being productive in a job, it may be tempting to want to splurge on travelling and luxuries when you finally retire.
Focus On Spending Less
The problem with this mindset is that it forces you to work harder and puts additional stress on you today. You have to try to earn more and spend less in order to achieve the ideal retirement that you want.
Another hurdle you have to overcome is instant gratification. People tend to want things today rather than tomorrow. This means that if you’re already planning for such a lifestyle in the future, you may be tempted to live it today.
The real solution is finding contentment in spending a lower amount. We’re not telling everyone to become misers or live insipid lives. What we’re trying to say is that if you are able to focus on spending less today, you will be inculcated a prudent financial habit, as well as giving yourself the freedom of spending a little more on luxuries when you retire by saving more today.
How Much Would You Need In Your Retirement If You Only Spent $1,500 A Month?
The math here is going to be pretty simple. If you retire at 62 years-old (the official retirement age in Singapore) and live to about 85 years-old, there’s about 23 years of retirement for Singaporeans. Do note that the average life expectancy today is about 80.6 years-old for males and 85.1 years-old for females.
Spending $1,500 a month for 23 years of retirement equates to requiring a sum of $414,000. At this point, we note that there are two flaws in the calculation which we will address.
- This is a rather simplistic calculation that takes into account you earn the median wage, of $4056, from the day you start working, which is obviously not true. However, we also assume that you never get a raise from the day you start working, thus evening itself out over a person’s working life.
- It also does not take inflation into account. A bowl of noodles in the 1980s was really cheap compared to today, similarly, a bowl of noodles when we retire may be way more expensive than it is today! However, we work around this out by not taking any investment returns into consideration. Thus, we are assuming any investment returns should negate the effects of inflation.
Setting Aside $414,000
The Ministry of Manpower puts the median income of Singaporeans at close to $50,000 a year. This roughly translates to a take-home pay of $33,000. The best way to be able to retire on $1,500 a month when you’re 65 is to adopt a habit of spending only $1,500 a month today. This is actually $3,000 for your household if you take your spouse’s contribution into account.
By doing this, you will spend close to $18,000 a year and save close to $15,000 a year. This method of calculation also allows you to pay for your mortgage without affecting your lifestyle as you can plan to pay down a reasonable home loan with only the money in your Central Provident Fund (CPF) accounts.
Working backwards, if you require $414,000 in 40 years’ time, you would have to save $10,350 a year or $862.50 a month. As calculated above, this is feasible for someone earning the median income in his lifetime.
This will also mean you have discretionary funds of close to $4,650 a year to play with. You can choose allocate more to savings, contribute to your child’s education or even spend some of it on a little luxury today. The bottomline is that you will still have the flexibility to play with any excess cash.
Also, even if you’re earning below the median wage, this buffer allows for you to reach the target by being a little more prudent with your money to save up to the $414,000 goal.
CPF Life Can Supplement Your Lifestyle
CPF Life is an annuity scheme providing a regular payout to Singaporeans in their retirement years to supplement or fulfil their monthly expenditure requirements.
Remember you would have an additional $4,650 every year to play with. You can also contribute part of it to your CFP Special Account (SA) or Retirement Account (RA) to earn between 4.0% and 5.0% in interest depending on your age.
If you have fulfilled the Basic Retirement Sum (BRS) of $83,000 by the time you turn 65, you will receive a monthly payout of between $700 and $750. If you fulfil the Full Retirement Sum (FRS) or the Enhanced Retirement Sum (ERS), you can receive a higher payout of up to $1,380 or $2,000 respectively.
Letting your CPF SA and RA balances compound over the years, you could be left with close to $288,664 at 65 years-old on the median income. This will allow you to withdraw up to between $2,207 and $2,448 monthly once you hit 65. Providing a supplementary income to cater for any spending on luxury that you may want to indulge in your retirement years.