One of the most common challenges as a financial advisor is to help clients see the value of starting retirement planning early. Very often, people in their 20s to late 30s are not interested in this topic because they have other priorities to worry about. Some of the common priorities include purchasing a house, housing renovations, family planning and even car purchase.
In view of these expensive purchases, the idea of setting a portion of their income aside for retirement which happens at the end stage of our life cycle FEELS very unappealing. Ironically, most people in their 40s and 50s often make the remark, "wish I started earlier..." If hindsight is 20/20, it's probably true.
In this article, I'll help you navigate through the emotions and rationalize the reason how retirement can be done concurrently with your other priorities.
Have you ever calculated how much you need when you retire in your preferred lifestyle?
Most likely the answer is no. You see, the average Singaporean is earning an income that can pay for basic luxuries. Paying for simple luxuries like bubble tea, Starbucks, an annual holiday to Bangkok or taking Grab to most places is fairly achievable. It is thus unlikely one is able to visualize a life where we might eventually need to compromise on these basic needs if one has also been saving money every month.
Frankly, I can't even envision how my life would realistically look like if my income suddenly triples. Let alone, envision life when my income stops. In fact, I once asked myself, "is inflation really scary? I still buy McDonald's without thinking twice despite the price increasing over the years."
If our earning power creates a false sense of perpetual affordability, why would we bother to calculate the amount we need to maintain our lifestyle during retirement?
Now, let's look at the math...
Imagine John's monthly expenses to be $2,000 today and he spends the same amount all the way. His future monthly expenses would be $5,627 when he turns 65. In fact, a lot of people forget that inflation continues after 65 even when they stop working. Hence John would need an inflated adjusted average monthly amount of $7,896 if he expects his life expectancy to last till 85!
This means that if John only saves enough money to spend $2,000 - $4,000 in the future, he probably would need to cut back on his lifestyle considerably. Potentially this might translate to taking MRT and bus instead of calling Grab. This might mean hanging out at hawker centres and hiking in the parks instead of paying for restaurant or entertainment. He probably also needs to ensure he remains healthy and fit because there won't be financial flexibility to hire a maid.
One important consideration is also life expectancy. There's an increasing number of centurions in Singapore. As our quality of life improves, we live longer, we will need more money!
Starting a little now versus starting later
So central to today's discussion is our priorities. The younger we are, the more life stages we have yet to conquer and hence the less willing we are to allocate resources to retirement planning.
Imagine John earns $56,000 a year (incl of bonuses). He allocates 50% to his regular expenses, 30% to his wants and immediate goals and 20% to protection & retirement. Now, let's suppose John allocates $500/month to his retirement planning. He could either do investments targeted to perform at around 5% or savings instruments targeted to perform around 3%.
On the flip side, John could have decided not to allocate that $500 into retirement planning and allocate it to his short term goals. He might decide to start retirement planning at 45 when his kids are more grown up and he finishes his financial commitments to his family. Of course, he is likely to earn more then and perhaps have a bit of savings to work with.
In the graph above, I've put together 2 scenarios.
The first one is the one where John starts doing a little retirement planning while concurrently working on all his other goals that comes with his various life stages. If John started doing a little at 30, he has a smaller gap of $1,450,000 - $1,650,000 to cover when he is 45 assuming a future average monthly expenses of $7,896 from 65 - 85. Of course, inflation is gradual, hence if John succeeds in setting aside the $7,896 monthly expenses, it's likely his funds can last him beyond 85 assuming his life expectancy is longer.
The second scenario is one where John does not cater to his retirement planning at 30. He opts to fully set aside this funds for his housing, his family planning, kid's education needs. He only starts at 45 and intends to cover the entire $2,000,000 shortfall within 20 years. John would need to set aside $60,000 ($5000/month) annually at a rate of 5%pa compared to $48,000 ($4000/month) annually at the same 5% rate if he didn't get started on his $500/month retirement savings at 30 based on the examples given above. Naturally, the numbers drop the more John commits earlier.
Retirement has to be achieved gradually
Regardless whether the shortfall is $60,000 or $48,000, the figure still looks intimidating. Some of us might even give up trying. The crux to retirement planning lies in stacking the effort. In John's example, he started with $500/month at 30. The expectation is for John to start more $500/month contribution towards retirement as he ages such as when he is 32, 35, 38, 40, 45, etc. The number will look a lot less intimidating when we address our retirement efforts in bite size. This is why financial planning is an ongoing process and not a miracle once off solution.
How realistic is doing retirement planning concurrently with our other priorities?
It's actually very do-able. The truth is, most of us sensible adults are already doing so. Think about it, most of us save money every month. As our incomes increase, our savings grow in our bank accounts. Even as we pay for our holidays, our house renovations, our children expenses, we still have money left in our bank accounts. This figure grows. If it doesn't, we can't even stop working. There won't be a need to even dream about retirement.
Most of us who save money have this thing called a baseline. This means it's the amount of savings we definitely won't spend beyond because it gives us a feeling of security. This amount will grow as our incomes increase. Most of the time, this amount is pretty substantial. This is why we believe we can retire or at least retire if we are willing to downsize our lifestyles. It is definitely more than our 6 months emergency funds. What a lot of people are currently doing is to keep this money in the bank account. Psychologically, we feel secured only when we can SEE the money.
Now, if we can overcome this psychological barrier of having to see the money, we can actually put these funds into instruments that can work harder for us. Above all, it does not affect our short term goals because this money won't be spent even if it wasn't set aside for retirement. To put it more bluntly, the baseline figure IS for retirement. We just haven't realised it yet.
Summary
To wrap up today's discussion, retirement planning is highly encouraged to be done concurrently with our other priorities in life. Unlike other life events like marriage, having kids or even buying a house, retirement is a definite event. You are unlikely to avoid it unless some freak accident takes you away from earth before you reach retirement.
Going by the psychology of baseline theory, we all definitely have the means to plan for retirement along with our other goals. The earlier we begin, the more achievable our ideal retirement becomes. The later we start, chances are we will end up compromising on our retirement lifestyle and learn to be happy with a watered down version.
I'm not sure this is really what you would want and if it really makes you happy though. Ask yourself this question, what advice would you give your friend if they sought your advice on a similar situation. Would you arrive at the same outcome if you detach yourself from the situation and assessed your needs unemotionally?
After reading this article, you may have some questions or wish to get started on retirement. 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.
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.
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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