Calculating how much you will need for your retirement can be complicated. You have to think the kind of life you want to lead in your golden years. Having spent so much of your life working so hard, it may be tempting to want to splurge on travelling and luxuries when you finally get to wind down.
Focus On Spending Less
The problem with this mindset is that it forces you to work harder and put additional stress on you today. This will also not mean that you’re saving more because people tend to want things today rather than tomorrow. This just means your spending will not necessarily be curbed to fund the travelling and luxuries you think your retirement should be.
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 and stashing away more money today, it will give you the freedom of spending a little more on luxuries when you retire, or better still, retire slightly earlier in life.
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, the average life expectancy today is about 80.6 years-old for males and 85.1 years-old for females, there’s about 23 years of retirement for Singaporeans.
If you spend $1,500 a month for 23 years, you’ll require $414,000 in your retirement. 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 into account inflation that we surely be saddled with. A bowl of noodles in the 1980s was really cheap compared to today, so a bowl of noodles when we retire would be way more expensive! However, we think we can work this out by not taking any investment return in consideration. Thus, we assume any investment return 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 only spend $1,500 a month today. This is actually $3,000 if you take your spouse’s contribution.
By doing this, you will spend close to $18,000 a year and have $15,000 to save. 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, you would have to save $10,350 a year or $862.50 a month. This still means you have discretionary funds of close to $4,650 a year to play with. You can choose allocate more to savings, put some aside for your child’s education or even spend some of it on a little luxury today. You still have the flexibility to play with any excess cash.
Also, even if you’re earning below the median wage, this shows you can still be prudent with your money and 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 compound over the years, you could be left with close to $288,664 at 65 years-old. This will allow you to withdraw up to between $2,207 and $2,448 monthly once you hit 65. Providing more than necessary buffer for any spending on luxury that you intended to in your retirement years.
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