Plan to retire at 55? You need at least S$720K (in today's dollars)

This article was recently published on http://sgbluechip.blogspot.com/ and is reproduced with permission. Currently managing a personal portfolio of more than SGD $450,000, the blogger (aka Cedric) aspires to have an average cash flow of a minimum $2500 per month either through realised capital gains or dividends. He is in his early 30s and has been passionate about investing since 2003. He lives in a 4-room HDB flat and dreams of becoming a millionaire - and is now pursuing a Masters in Applied Finance. He invests in a variety of instruments such as unit trusts, stocks and foreign currencies -- mainly Australian dollars and Japanese Yen.

"In my workplace, I see many people earning high 4-figure salaries but do not have much savings." Photo: Internet

Many close friends often label me as a salty man. This has a negative connotation because in Hokkien context, it is “kiam” or scrooge in English.

However, when I explain my rationale to them, suddenly they realize they either be prepared to work past 55 or be better off being more salty.

In today’s competitive workplace, there are not many people willing to work past 55, even if they are able to. Perhaps it is due to the increased pace of life and work pressure, many people just find it too stressful to cope beyond 55.

The problem is exacerbated if one has ailing parents, growing kids and mortgages to repay monthly.

Most people don’t retire at 55 simply because they cannot afford to do so, not because they choose not to.

Let’s work some simple figures. Most Singaporean men with university degrees start work at 25. If they aim to retire at 55, they have 30 years of working life. 

Assuming life expectancy of 85, they have another 30 years of income-less life to sustain after retirement.

For the retirement savings we put aside, we need to grow it at least at the prevailing 5.7% inflation rate in order to sustain the same kind of lifestyle when we retire.

CPF savings only grow 2.5% per annum, which is grossly not enough to cover inflation. Even if it is enough, most likely it is depleted to purchase HDB homes which easily cost $500,000 today.

Let’s assume again a modest lifestyle of $2,000 per month for a single person at age 55. This works out to be $2,000 x 30 years = $720,000 cash balance in today’s dollars. The amount will balloon to $900,000 if the single person requires $2,500 a month for the next 30 years.

If we factor a conservative 4% inflation, today’s $720,000 will be worth $2.34 million (future value) in 30 years time.

The same 4% inflation will make $900,000 today’s dollars worth $2.92 million.

It simply means that you need $2.92 million in 30 years time to buy something worth $900,000 today if inflation is 4%.

In order to enjoy the same modest lifestyle of $2,000 to $2,500 per month, the individual who retires at 55 needs to set aside between $2.34 million-$2.92 million for him to call it quits at age 55, 30 years later.

What if the individual lives beyond 85 and what if he can't invest his retirement funds at the prevailing inflation rates? Then, he probably needs to sell off his house.

Most Singaporeans who buy houses today stretch their loans to 35 years. This means that a 30-year-old couple will need to service their loans till they reach age 65 before they finally own their homes.

There are no prizes for guessing why the government is stretching the retirement age.

If you have a spouse, the savings required for retiring at 55 would be $720K x 1.5 (or 2). NextInsight photo

Some other observations I made are as follows:

(1) Most singles probably spend more than $2,500 a month, even if they earn just this much.

(2) Most people at 55 now do not have $720,000-$900,000 to lead a worry-free life up to age 85. What makes you think we can achieve the equivalent amount in future value 30 years later?

(3) Medical costs and inflation rates are at higher than 4%.

(4) You need to earn a minimum of $5,000 a month, save $2,500 a month and invest this sum at the prevailing inflation of at least 5% consistently for the next 30 years in order to retire at 55.

(5) The sums required may increase 1.5x to 2x if you have a partner. If you have kids, you need to pray that they give you some allowance if you have not achieved the required sum by age 55.

(6) You cannot afford to be retrenched or your retirement age has to be stretched even further.

(7) You cannot depend on your CPF savings for retirement if you have bought a house.

In my workplace, I see many people earning high 4-figure salaries but are known to not have much savings. They take for granted that their health, wealth and career will always be smooth sailing.

Let’s not be pessimistic about life but admit the fact that we can’t afford to retire if we are not prepared for it.

And I am not kiam, just getting prepared :)

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