According to an AIA study conducted between January 2021 and June 2021, 92% of Singaporeans preferred mode of saving instrument is their bank accounts. Given the high volumes of priority account holders across Singapore banks, high income individuals (earning 5 figures a month) are equally susceptible to this behavior.
In fact, for lower income groups, it can be attributed to a lack of resources for this over reliance on bank savings. However, the same excuse cannot be used for high income groups. The only logical explanation would then be that most high income individuals guilty of this believe that their superior income power and responsible savings habit can be a replacement for a lack of financial planning. The multi-million dollar question would then be, 'is this really the case?'
Can we really save our way to retirement?
Imagine Jackson saves $96,000 in a year. At 35, it's a 70% savings rate based on his income. Let's just imagine a flat savings (despite salary growth & bonus) because of growing expenses like housing loan, family planning, etc... Over 30 years he would have saved $2,880,000. Pure savings lying in the bank. Now, to a lot of people (who doesn't earn a high income), this amount is sufficient for retirement. Jackson's savings might be higher than some individual's yearly income. However, having done retirement planning for a decent number of high income individuals, I have the average figures of how much this group spends as well.
It looks something like this. We took out children expenses and outstanding loans with the assumption it would be fully paid by 65. With an inflation rate of only 2%, Jackson would need $4,846,668 based on his expenses.
Now, this figure is debatable. People like to argue they won't spend so much post retirement. People also might argue that some expenses will reduce as one age. What people neglect is a few factors.
The assumption that people will really be happy that their lifestyle quality decrease during retirement. How do you know you will be happy? You haven't even lived it out yet.
Perhaps the car can go. You have all the time in the world, you won't even Grab. Some entertainment and hobbies can go. In its place, you might end up paying for more expensive medication born out of new found health issues and a maid. Are you sure the figures won't go up?
Read also: 5 retirement strategies common in Singapore
Overlooking life expectancy possibilities
One reason why high income individuals believe they can manage retirement is because they believe they will die by 85. Ask any financial advisor and I'm willing to bet all of them have encountered people who tell them they won't live so long.
I'm not sure how these people know...
If we go by the assumption that we will only live till 85, then suddenly a high savings rate might become sufficient if we go by the previous example. The next question is, does inflation only go up by 2%? A 3% inflation rate would balloon the number into insufficient territory again at about $3,500,000.
Frankly, living till 100 might also be an optimistic projection if we are currently in our 30s. In today's context, there is a growing number of people who are still alive beyond age 100. Assuming medical advancement and our knowledge to take care of ourselves continue to get better, living till 120 might become the new normal.
Isn't it frightening to be still alive but broke?
Overlooking Psychological Security Needs
Another gap high income savers overlook is their own psychological security well-being. When you are drawing from a well, it basically means you will see the well deplete.
How does it feel when your full well starts getting lesser and lesser? To a large extent, it is probably scary. What would most likely happen would be tightening of the spending way earlier than needed even though you might actually have sufficient funds to fund your expenses in your lifetime.
Above all, a potential risk of people who save their way to retirement is that they have no room for unforeseen hiccups.
Say for instance, a family member requires them to support a huge medical bill or their home has to undergo major repairs, their savings will not have the time to be saved back.
Furthermore, who is to guarantee there won't be more unexpected major cash outflow during the retirement period? Psychologically, this would be very stressful when we become aware that our calculations are thrown into disarray.
Don't end up missing out on a high quality retirement
Another assumption that is probably false is the belief that most high income individuals see themselves working till 65. Increasingly, there's more and more individuals with the aspiration of earlier retirement. To achieve this, the money reserve needs to be sufficient or there has to be passive sources of income.
What this means to those who over rely on their savings would be the lifestyle mustn't cost a lot and the savings rate must be incredibly high. Otherwise, one can't afford to be lazy and need to invest their money to ensure the funds grow.
The other aspect of high quality retirement is the assumption that the quality of life would either remain the same or be lowered during retirement. In reality, there's a huge likelihood that high income individuals' retirement lifestyle actually inflates. Here are a few considerations:
When you are working, you only get to spend the most on weekends or when you are on leave. Once you stop work, everyday is a weekend.
When an high income individual nears retirement age, it is likely their friends are similar in social class and is also near retirement. Hanging out with friends is likely to cost money.
What if your friends planned their retirement well with multiple income streams? Would they try to invite you on holidays and other activities? Would you be disappointed to turn down these invitations?
Wouldn't travelling to exotic places be top of the list especially when you can't getaway for such a long time while working?
Summing everything up
High income earners who believe they can save their way to retirement typically is balancing on a very thin line. Sometimes, the comfortable income simply makes a person too lazy to plan ahead. Other times, they are simply too busy earning the income.
Whichever the reason, this article challenges the common assumptions people have about their retirement and has pointedly shown that relying on savings to safely retire requires a fixed outcome to happen during old age. (You can't live too long, you need to have a high savings rate, your savings can't deplete due to unforeseen circumstance, etc)
At the crux of the whole discussion, it is perhaps worth considering whether a lifestyle compromise makes sense given that high income individuals already have a head start compared to lower income groups and a freedom to control their retirement outcome.
After reading this article, you might be keen to have a discussion on retirement planning with me. You can reach me by dropping me a message.
Be sure to share the article if you feel this information is helpful. You will enable a lot more people to learn about retirement planning.
About Janice
I specialize in portfolio optimization (ensuring you get maximum value for every dollar you put in) and retirement planning. I am also building a team of financial advisors who are committed to help responsible individuals attain their goals without misallocating their resources. Do reach out if you would like to explore a career with me.
Clients look for me primarily to outsource their retirement planning needs so that they can focus on other aspects of life that interests them. Many of whom are very good in earning their incomes in their respective professions and wish to ensure their monies continue to work harder while they focus on what they are good at. Refer to client testimonials here.
I've helped many clients who are referred to me reduce the costs they are paying for their insurance or help provide solutions when they deem they are stuck with huge commitments bought when they were younger but unsuitable for their present life stages. You can reach me at 94313076 or my social media accounts on Facebook and Instagram.
Disclaimer: The content created are based on my personal opinions and may not be representative to everyone or any organisation. If you have any doubts or queries pertaining to insurance or investment, please seek professional advice from a trusted adviser in an official setting. You may also reach out to me if you do not have a present adviser using the message box under 'Let's Talk'.
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