Friday, July 28, 2017

Can You Afford To Retire At Age 50 In Singapore?

Some Singaporeans want to retire at age 50 instead of the usual 65. Here’s how to make a realistic estimate of how much you need to earn and save. Most Singaporeans expect to retire at 62 or 65. However, some Singaporeans are ambitious or have other goals. It’s hard to climb mountains at age 65! This means there are a few Singaporeans who aim to retire by 50 at the latest. But can you actually do that, and how much would you need? We take a realistic guesstimate.


 
First, Work Out the Income Replacement Rate (IRR) After Retirement
The IRR is, quite simply, the percentage of the income you have right now. The “correct” IRR is not the same for everybody, as we all have different goals. If you want a particularly lavish lifestyle at retirement, the IRR can be well over 100 per cent (that is, you want to have a higher income than you have now, when you retire). If you are content to live a simple life, with no travel and only home cooked meals, your IRR can be as low as 35 per cent (it is inadvisable to aim any lower, due to the hardship it would inflict). Most people would be comfortable at an IRR of 70 per cent (because even before retirement, most of us only have 70 per cent disposable income). This would more or less allow you to live at the same quality of life you have now. The median income in Singapore is around S$4,000 a month, or S$48,000 a year. Therefore, an IRR of 70 per cent for most of us would mean S$33,600 a year after retirement.
 
Work Out the Sum Total We’d Need to Last Till 90
It’s predicted that Singaporeans could live to the age of 90. It’s better to overestimate your lifespan than underestimate it. To be blunt, dying with excess money is not as difficult as living without it. Now assuming you retire at age 50, this means you have another 40 years to live. Your money has to last throughout that entire time. Earlier, we deduced that you need S$33,600 a year in order to maintain your lifestyle. Over 40 years, this would seem to mean you need around S$1.34 million. However, this isn’t enough because you also need to factor inflation. In developed countries like Singapore, the cost of goods tends to increase by around three per cent per annum. $1.34 million in the year, say, 2037 will buy you a lot less than it will today. So let’s say you are 30 years old today, and have 20 years to build up sufficient funds to retire at 50. The total you would need to accumulate over the next two decades is: S$1.344 million x (1+3) ^ 20 = $2.42 million
 
Now That’s Still Not Entirely Accurate
Remember, inflation still keeps going, even after you reach 50. This means your retirement fund of $2.42 million must – even as you spend it – keep pace with the three per cent rate of inflation. To do that, you’d need a balanced portfolio of different assets, which provides a regular income stream. You’ll have to talk to a qualified financial adviser for details on how to do that. But at least now, we have a ballpark figure as to how much we need to have by 50; and S$2.42 million sure seems like a lot.
 
The Bad News is, at S$4,000 a Month You Just Aren’t Earning Enough to Retire at 50
We’re going to exclude windfalls, like winning the lottery or inheriting a load of money. Let’s assume you have to do it the hard way. You have a target of $2.42 million, and you can reliably obtain a return of about four per cent per annum on your investments. Mind you, there are many products out there – such as Investment Linked Policies (ILPs) or stock trading algorithms – that will claim you can get much higher returns. However, these are risky, and we’re going with an amount that most people can safely manage. (It’s not our place to endorse financial products that give higher rates of return; you’ll have to decide which qualified wealth manager or financial planner to trust for that). At returns of around four per cent per annum, over 20 years, you would need to be investing somewhere around S$78,500 per annum, in order to reach S$2.42 million on time. This means that, at the very least, you would need to set aside S$6,541 a month to reach your target. Given that most people can afford to set aside 30 per cent of their paycheque for investment, this means you’d need a monthly income of about S$22,000 to retire at age 50.
 
That Sounds Really Hard
That’s because it is. Trying to retire 12 or 14 years before the usual retirement age is no mean feat. After all, there’s a reason most people don’t manage to do it. However, difficult is not the same as impossible, and there are ways some people have managed this. For example, you can lower some of the amount you need, by working less instead of not working at all, once you retire. You could also consider moves such as downgrading to a smaller house – given the appreciation of your property, this could cover a large portion of the retirement fund you need. Perhaps the most important consideration, however, is to stay insured and keep healthy. A chronic medical condition, or severe illness, is a common factor that could change this goal from being just difficult, to being impossible.


SingSaver.com.sgSingapore's #1 personal finance comparison platform by transaction volume, provides consumers with timely money insights and aggregates the latest credit card offers and up-to-date personal loan deals.

Monday, July 17, 2017

Is Investing Better Than Saving Money?

It’s important to know the difference between investing and saving. Each serves different functions, and one isn’t always better than the other. Investing and saving can seem like two different worlds sometimes. However, it’s important for Singaporeans – even if they aren’t in the finance industry – to know the difference between the two. The key thing to note is that they serve different functions.


What’s the Difference Between Investing and Saving?
Savings are monies that you set aside for emergencies. These need to be liquid – that is, you must be able to get the cash from savings on short notice. An example would be some extra cash stored in a current account, which you could grab whenever you want. Savings ensure that you have money to cope with immediate financial difficulties, such as medical costs or getting retrenched. When you have savings, you don’t need to borrow money or use personal loans to deal with these situations. Investments serve a totally different purpose. Investments help you to hedge against inflation (i.e. grow your money to match the rising cost of living), and to increase your wealth to last throughout retirement. This means investments are not meant to be fiddled with, except for tasks like portfolio rebalancing. If you get into an emergency, one of the worst things that can happen is having to cash out your investments. If you have a lot of units in a unit trust fund, for example, you don’t know how much they will be worth if you cash them out during an emergency. If you happen to be in a market downturn, you may lose money by having to sell the units at a lower price than you paid for them.

Is Investing Better Than Saving?
No, but this is a common misconception. The reason some people believe investing is better than saving is that savings don’t grow your money. In fact, savings can cost you money. For example, a typical savings fund is capped at six months of your income. This is considered financially prudent for most people. So if you make S$4,000 a month, you should aim to save S$24,000. However, this S$24,000, because it’s not invested, will not grow. Inflation will eat into it every year. We can calculate the real value of S$24,000 with the following formula: Future value = amount /(1+inflation rate)^number years. Assume an inflation rate of three per cent, which is common in developed countries like Singapore, and a period of 15 years. By the end of that time, your S$24,000 in savings would only have real purchasing power of around S$15,404.

Does This Mean You Can’t Rely on Savings Alone to Retire?
Well, yes and no. You can rely on savings alone to retire, but you’d need a lot of money to be able to do that. You need to stash aside enough money that, even with inflation, rising medical costs, diminishing income as you age, etc. can be overcome. For example, let’s say you want at least S$500,000 in real purchasing power, by the time you retire in 30 years (that’s not a lot at all; remember this retirement sum may have to last you around 25 years or more, assuming retirement at 65). You don’t want to invest, and you intend to do this by just literally hoarding money until you reach this amount. Now reversing the above formula*, we find that real purchasing power of S$250,000 in 30 years means you’d need to accumulate about S$1,213,630 in today’s dollars. You’d be setting aside almost S$3,371 per month, every month for the next 30 years. Remember you’d have to set aside this amount on top of paying all your bills, such as your home loan, and using the same money to deal with emergencies. It’s not impossible if your income is to the tune of S$15,000 a month or more. But it’s hardly an easy or comfortable way to live, even if you have an income that high. *amount x (1 + inflation rate)^number years

Investing is Better Than Saving for Retirement Planning
As you can see, using savings alone to build a retirement fund is possible, but not probable for most people. The average Singaporean will need something like an endowment plan, CPF Special Account, or unit trust funds in order grow wealth. However, if savings are not the best tool for retirement, remember that investing is not the best tool for emergencies. Investments are seldom easy to convert to cash, as they tend to be committed for the long term. For example, if you invest heavily in a house, you are hoping it will appreciate in value. You may want to sell it at retirement and live off the returns. But if a loved one gets sick next today and urgently needs cash, how will you get it out of your house? Property is not something you can sell on the spot, and you’re not guaranteed to get a good price selling in such a hurry.

Use the Right Tool For the Right Job
It’s important to both save and invest. If you feel it’s a struggle to do both at once, then focus on saving alone until you have a fund of at least three months of your income. After that, split the money you set aside between your savings and your investments. Once your savings have built up to six months of your income, you can safely shift the money you set aside to more investment related products. Speak to a financial adviser for more help on this, as everyone’s situation is a little different. You may be able to invest a little more or less, based on your own needs.


SingSaver.com.sgSingapore's #1 personal finance comparison platform by transaction volume, provides consumers with timely money insights and aggregates the latest credit card offers and up-to-date personal loan deals.

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