With Singapore being one of the world’s most expensive country to live in, this also means we have to start planning for our retirement latest by our early 30s!
Stop waiting for a ‘good time’
There will never be a ‘good time’ for us to start our retirement planning, as there will always be concurrent immediate and medium-term financial commitments that are also competing for our attention (see Figure 1).
Due to present bias^2 , we are guilty of prioritizing near term commitments over long term ones (our retirement). But we all know that choosing to address all these other commitments first before starting to plan for our retirement, is clearly not the solution. Because these commitments will be lined up back-to-back until we are age 55. And if we hope to retire at 65, it will be impossible for us to successfully save up for retirement in just 10 short years!
5 is the Magic Number
Adulting comes with a steep learning curve since it is a delicate balancing act of allocating our salary towards the different goals we have. It is recommended for us to make our first step in retirement planning after we have worked full time for 5 years. Because by then you would have had enough time to:
Reward yourself for finally stepping into the working society,
Set up your emergency fund for rainy days,
Paid off most of your tertiary or other loans, and
Built a sizable nest for your nuptials and purchase of your first home.
The Power of Compounding Interest
Suppose you graduate university around 24, this means 5 years later you will be around 30 years old. Even if you assume your basic expenses (food, transportation, bills, medical insurance) are only $1,200 each month (most of us spend more than that), you will still need to have $500,000 if you plan to retire by 65!
Assumptions:
Retirement Age: 65
Years to live: 20
Annual inflation rate: 3%
Assume your basic expenses at age 30 is $1,200 per month
For first 10 yrs of retirement from age 65
Future cost of the same basic expenses: ~$3,300 per month
$$$ you need per year: ~$40,000
$$$ you need for a 10-year period: $400,000
Balance shortfall*: $200,000
For first 10 yrs of retirement from age 75
Future cost of the same basic expenses: ~$4,500 per month
$$$ you need per year: $54,000
$$$ you need for a 10-year period: $540,000
Balance shortfall*: $270,000
*Assume 50% of the retirement $$$ you need, is covered by your CPF Life
If you start saving for retirement, and save for the next 20 years, you will need to save $7,500 per year. If you start 5 years later at age 35, even if you also save for the next 20 years, you will need to save $9,100 per year instead.
If you start saving at age 30, annual savings needed (@ 3.75% p.a.) from age 30 – 50 is:
To save $200,000 by age 65: $4,000
To save $270,000 by age 75: $3,500
Total annual savings needed: $7,500
If you start saving at age 35, annual savings needed (@ 3.75% p.a.) from age 30 – 50 is:
To save $200,000 by age 65: $4,800
To save $270,000 by age 75: $4,300
Total annual savings needed: $9,100
Why will you need to save more at age 35? Because you will only have 30 years instead of 35 years (if you start at age 30), for your savings to accumulate to age 65. So procrastinating for a mere 5 years may seem insignificant when you are just 30 years old, but the effect of this 5-year delay is very significant. Because $9,100 is 20% more than $7,500!
Furthermore, starting our retirement planning early, gives us more flexibility:
We can extend our period of savings beyond the example of 20 years that has been used in our calculations. The longer we extend by, the lesser we will need to save per year.
We can make adjustments along the way. E.g. At age 30 we can start with saving $4,000 a year so as to receive our first pot of gold ($200,000) at age 65. We can then commence Phase 2 at age 35 by saving an additional $4,300 a year to receive our second pot of gold ($270, 000) at age 75.
It is easy to think that saving for our retirement from the age of 30 sounds very ‘kiasu’. But is it really? If you refer to Figure 2 below, every 1 year of income we earn must sustain around 1.5 years of spending. That means for every $1 we earn, we can only spend 66 cents now, and save 34 cents for our retirement! It might be doable for a few years, but is quite impossible to sustain for all 35 years of our working lives.
The solution is to allow compounding interest to work its magic, and generate the bulk of the money that we will need to spend when we retire. So the sooner we begin, the longer the time the interest has to growth, and the greater the magnitude of the compounding. If you need some tips as to how to start, Chloe and her team will be happy to be of service!
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