Many of us attach a magic number that we will need in our retirement – $1 million. Whether this will be sufficient or not will vary from person to person and largely based on our current and future standard of living.
Being several decades away from retirement and already having to stretch our current salaries today, many of us neglect working towards our magic number or even implementing a basic plan for our retirement. However, with Singaporeans living longer as well as facing ever-increasing cost of living, our procrastination today will likely come back to haunt us in the future.
To work towards our $1 million retirement, here are five critical factors that will determine whether we succeed.
# 1 Your Monthly Contribution Rate
The amount we stash away for our retirement each month is obviously important to achieving our $1 million retirement goal.
If we start saving $500 each month, it would take us 166 years to reach our $1 million retirement goal. Doubling this to $1,000 a month would cut this time in half – to nearly 84 years. If we saved $2,000 a month, we would now take 42 years to reach our $1 million retirement goal.
While these are outlandish numbers to put into practice, we can see that the amount we save each month matters. Another take away is that while we may not be able to put away a large amount of money each month from the beginning, doing so as we climb the corporate ladder, and without raising our standard of living each time we receive a promotion or increment, will help us reach our goal much faster.
This also leads into our next point – how returns matter just as much as the amount we’re putting away for our retirement.
# 2 Investment Rate Of Return
As we save our money, we have need a plan to invest and grow it. By receiving a good return, we can start seeing more practical number of years taken to reach our $1 million retirement goal with just a $500 or $1,000 saving each month.
Depending on how we invest our savings, we can stand to receive a wide range of investment returns. Below are some investments we could make for our retirement as well as the returns we could potentially get.
|Investment Types||Investments||Estimated 10-Year Returns Per Annum|
|Bonds||Nikko AM ABF Singapore Bond Index Fund||2.36%|
|Singapore Savings Bonds (SSBs)||2.44%|
|Astrea IV Private Equity Bonds||4.35%*|
|Corporate Bonds ETF||~3.0%|
|CPF||CPF Special Account (SA)||4.0%|
|Stocks||Straits Times Index (STI) ETF||4.09%|
|Real Estate Investment Trusts (REITs) – Phillip SGX Dividend Leaders REIT ETF||~8.0%**|
|SPDR Dow Jones Industrial Average ETF||11.1%|
* The Astrea IV is a five-year private equity bond
** Based on 5-year returns
While past performance does not guarantee similar future performances, that’s really all we have to go on. We should also note that the higher the returns on an investment, the higher the risk we are bearing. This is why diversification and portfolio allocation are key investment concepts we have to understand as well.
Here’s how we can expect to grow our wealth over the next 35 years if we start today.
|Investment Amount/ Returns||2.5% per annum||4.0% per annum||10% per annum|
|$500 a month||$338,000||$460,000||$1.8 million|
|$1,000 a month||$676,000||$919,000||$3.6 million|
While putting more towards our retirement nest egg is important, achieving a good rate of return on our savings is equally important.
# 3 Investment Time Horizon
Another thing we need to appreciate is the fact that the earlier we start planning for our retirement, the more time we have to build our retirement nest egg. This includes setting aside funds for other big-ticket expenses as well as managing how we spend our money today.
Another aspect of this is that when we invest our money from a younger age, we get to compound our wealth over more years. This simple chart, extracted from an article highlighting why financial planning is a young man’s game, depicts just how powerful this can be.
In the chart, the blue line shows how an investor’s wealth may grow if he started investing $5,000 a year at 25 all the way to 65. It also highlights how consistently squirreling money towards our retirement from a young age can pay off in the long-term.
However, the comparison between the grey and olive-green line is actually more interesting. The grey line depicts how an investor’s wealth may grow if he invested $5,000 a year between the age of 25 and 35 ($50,000), while the olive-green line represents an investor’s wealth if he invested $5,000 a year between 35 and 65 ($150,000 in total). The chart shows that the investor who started earlier, following the trajectory of the grey line, achieved a better outcome at 65 even though he only put away $50,000 in the 10-year period from 25 to 35 compared to the investor following the olive-green trajectory, who put away $150,000 over a 30-year period from 35 to 65.
This was simply because he started earlier.
# 4 The Inflation Rate
Another thing we have to consider is the inflation rate in Singapore. The higher the inflation rate, the less our $1 million nest egg would be worth when we eventually retire.
In the past 20 years, the cost of everyday goods and services in Singapore have risen by close to 35%. This means that for every dollar we have today, we can only buy about two-thirds of what we used to be able to with that same dollar 20 years ago. If we extrapolate this to when we expect to retire in close to 30 years, a $1 million nest egg would only be able to purchase 50% of what it can buy today.
This is why planning and starting to save early, putting away a significant amount as well as trying to achieve a good rate of return via investments is so important to combat inflation.
# 5 Retirement Age
Lastly, the age we retire is going to be important. Today, 62 is the official retirement age; 65 is when we start receiving our CPF Life payouts meant for retirees to sustain themselves; and 67 is the recently updated re-employment age. There’s no guarantee that we, the next generation, will continue retiring in our 60s.
This is especially pertinent given that we are living longer, medical advancements are keeping us healthier and that the cost of living in Singapore is also ever-increasing. If we retire a decade later in the future, we will have that 10 years to continue earning and accumulating money for our eventual retirement.
At the end of the day, we should not see retirement as the point in life where we finally achieve happiness and get to do the things we’ve always wanted – like spending time with family, travelling or our hobbies. They should be worked into our daily lives from the beginning so that work does not seem unbearable.
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