Friday, September 05, 2014

Retirement thoughts

I was thinking about retirement income recently, especially after reading a click bait post from a magical blog. I felt cheated because I was baited into it, so that set me thinking. It's not the same topic however, but certainly in the same general area of personal finance.


To get a retirement income, we have to settle a few variables. Once those variables are thought of, we can perhaps (roughly) solve this question of getting the monthly retirement income. The factors are:


1. When are you going to retire?

2. How much income do you need when you retire?

3. What is your life's expectancy?


Your solution to this question is going to be as good as your inputs and hence your assumptions involved. We might not be able to know all the answers to the 3 questions exactly, but a rough idea is better than none.




Let's apply it to myself. Let's say I'm 35 this yr and I'm going to retire by age 60. Assuming life expectancy of 85 yrs old, I'll still have another 25 yrs to work and another 25 yrs after retirement to ration my money so that I'll have enough for money to last my life. Let's assume that all the medical bills are taken care of by insurance to make the situation cleaner and less cumbersome, so that the retirement income is purely for spending and consumption.


My expenditure is about 3.5k per month, but that includes my mortgage of 1k (split between wife and myself) which no longer needs to be paid by age 60. There are things that no longer need to be paid when I'm 60, like my limited whole life plan and the mortgage insurance. But let's just take it conservatively (in fact, very conservatively) that my expenses is going to be 3.5k.


3.5k per month over 25 yrs after I retired at 60 works out to be $1,050,000. That's on today's terms, inflation of about 3% not inclusive.  How long do I have to save up that amount?


I've 25 yrs of years after retirement and 25 yrs of work years to save up, so that means I've to save 3.5k per month, every month of my working year, in order to retire with enough income to have 3.5k when I retire till I'm 85 yrs old.  Wow, that means I've to earn 7k per month from now till age 60 in order to get that amount. The 7k is split up into 3.5k for living expenses now and 3.5k for living expenses for my future self.


Of course, that's just pure savings alone. It'll be a lot better with some investment returns, so I can accumulate more with lesser savings per month. But the problem is made worse by the fact that we begin with -3% 'investment return' to begin with. That's because of inflation. Just to break even, we need to get 3% per year AND save that much to get 3.5k per month upon retirement.


Not exactly easy eh? So what can be done?




Firstly, lead a simple life and reduce your expenses. If you can live with 2.5k per month, you just need to save 2.5k per month for every working month. The idea is simple. If you want $500 per month in the future, save $500 per month while working. If you want $1k per month, save $1 k per month for every working month.


Secondly, start earning money and start saving early. The good thing is that if you live a simple life now, you probably will be leading a simple life in your retirement too. If you don't reduce your expenditure and spend the exact amount during your retirement years, you'll need a savings ratio of 50% to reach there (3.5k to save for retirement on an income of 7k means 50% savings), based on my 25 yrs of working years and 25 yrs of life after retirement.  I think if you are a conscious spender, and include your CPF contribution in your retirement plan, saving 50% is not a problem unless you are earning below 2k. If that's the case, you really need to find ways to boost up your income first. Unfortunately, you'll have more pressing issues at present to think about than to think about retirement in the future, I believe.


If you start work earlier, you can save for your retirement earlier. Think of it this way. For my situation, I've 25 yrs to work to earn 25 yrs of retirement income. If I start working towards this goal earlier, I might have 35 yrs to work to earn 25 yrs of retirement income. It'll be much much easier and less stressful. Conversely, if you started late and you have 10 yrs of work to earn 25 yrs of retirement income, I seriously don't know how it's going to be done without suffering a drop in standard of living.


Thirdly, retire later. If you push back the retirement age, you boost your chances of retiring better. How so? Pushing back your retirement age shortens the amount of funds needed for retirement because you have lesser years to plan for. At the same time, you increase the number of working years to save up more. This is like a Krav Maga move where you counter and attack simultaneously. If the Israeli martial arts can be used surviving in real life situations, this move of pushing your retirement age certainly increases your chances of surviving retirement, so to speak.




Fourthly, you have to keep on working and be employed. To do that, you need to keep yourself updated and retrained if necessary in order to stay employable. If that's not possible, you'll have to engage in some small business or become self employed. Nobody owes you a living, so start planning for your own business or self employment when still at your prime, while you can.


Lastly, it's taboo but it still must be said. Just live a shorter life. Shorter life, less retirement funding needed. Period. But we can't really control that without resorting to the final solution, can we?




18 comments :

Createwealth8888 said...

It is very tough to retire on saving alone.

Kyith said...

thanks this is a good article to share it around. it covers all the important points

la papillion said...

Hi bro8888,

Indeed it is tough. It's just tough to accumulate 1 million though hard savings alone.

But I'm trying to make it easy to see the big picture without worrying about different yields and draw downs.

That's actually one last factor we can do, but I'm reluctant to write it in the blog article. It's improving your investment skills and hence returns. Not everyone can improve their returns, but everyone can delay their retirement, make themselves more employable, spend less, save more etc. I prefer actionable pointers :)

la papillion said...

Hi Kyith,

Thanks for your encouragement :)

Singapore Man of Leisure said...

LP,

50% of CPF members who invested with their CPF money I guess must be wishing they HAD NOT done so - their portfolio still very much under water...

Some times its better to do what you have done - leave blank spaces for others to fill in themselves ;)

la papillion said...

Hi SMOL,

The thing about investment is that it's possible to lose capital. If you save hard, spend less, push back your retirement age, you can't lose. Perhaps not doing anything to offset inflation is also considered losing money, but it's a loss that is not active, so the feeling of the loss is not as great as participating actively and losing money.

Not easy to advice people to invest lol

caprichososhuz said...

Only if you didn't have to spend 1k on your mortgage every month you might have been able to save more. The house is your asset, use it to your advantage when you're older!
Rent out, or downgrade and exchange it to boost your retirement fund lor.
Nice article there though.

Sillyinvestor said...

Hi LP,

Of all the solutions you offered, the one that I am resigned to is the second last one.

Work till we drop.

I just hope to work at half the pace at 65.

I maybe last another 10 years without contributing to retirement fund but not drawing on it either.

Then maybe, I will just have another 10-15 years left

But if u ask me, the money number while taunting for a spender like me, is not really the scary part.

I am really scared that as one aged, they lost there competitiveness slowly, like a slow death.

Then physically and mentally, we are not as sharp, and that in turn affect self esteem, elaborate it longer, I think it can really changed a person.

Old age is more scary than retirement. If I dun retire, I would most probable work and die earlier due to stres or exhaustion, and the last 2 "plans" will be in placed.

If we lose our competitiveness earlier, either due to sickness or relative competitiveness and lost the drive to stand and fight ... Then...

Such a coincidence, I am thinking about old age and retirement when I blog about the old sailor story.

Anonymous said...

Focus more on the present...and dun regret when u are old and cant even move around even if you have money to spend...

SGYI said...

Hi LP,

My dad said he can retire with less than 1k per month. That's how simple he lives his life. He's just happy with the little things which I'm really amazed.

Createwealth8888 said...

SGYI,

Is $1K just for personal expenses excluding common household expenses and out-patient medical expenses that are not covered by medical save, medishield or medical insurance?

SGYI said...

Hi Uncle CW,

1k includes common household expenses but excludes out patient medical expenses. The company my dad works in has medical coverage so its covered as of now.

temperament said...

i always believe we tend to be over anxious about our future.( Me included. ) It's O. K. but not over stressed. After all we really can't control our future. Though we think we can by doing what we are doing now and planning to do next. The outcome may not be usually within your expectations. At least never 100 %.
The basics for a "bare minimum" survival in Singapore in future (retirement stage) , i am quite sure for all who blog here have no problems to achieve.
After all, you only need 2 meals (yes not 3 meals) and a simple roof over your head.
Nb:
i only need 2 meals/day and an occasional beer yet still need to fight the "battle of the bulge"
O. K. beer may be a "luxury" to some people at retirement.
"Don't worry, be happy".





























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la papillion said...

Hi caprichosohuz,

It's alright lah. I treat the home as a business cost because I work at home, so it serves two functions for me :)

Thanks for your encouragement :)

la papillion said...

Hi sillyinvestor,

Actually I might be inspired by your sailor post :) I read it, didn't do anything about it and the next day I came up with this. It must be inspired by your post ;)

la papillion said...

Hi anonymous,

Indeed. I never dwell too much in the past nor the future. This planning stage is just that..planning. The next thing to do is to actualise it :)

la papillion said...

Hi SGYI,

1k is really low. Well, I would rather overplan a little than to fall short. It's kia su lah haha

la papillion said...

Hi temperament,

I would like to enjoy life if possible. If really cannot, then bo pian must cut what I need and change it to a want. I want to live a life rather than just to survive lol!