It sounds counter-intuitive. The younger phase of our lives entails a lot of financial commitments. How can it be that life is easier?
Yet, the common problem I've encountered meeting so many people to help them with their retirement planning is meeting the financial shortfall required if they wish to maintain their lifestyles, when they eventually stop work.
This problem gets bigger the older they are when they first meet me.
Interestingly, I've also had the opportunity to help a few young adults plan their retirement and they can meet their full retirement needs projected in the future with a much more affordable contribution to their retirement. This is simply because they start much younger and have the time to compound their money.
The best part?
As they are young, their salaries have a lot of room for growth. Given that they are meeting their full retirement needs or a huge portion of their retirement needs at a figure they can afford today, it only means they have more and more breathing space as their salaries increase.
Most of the time, this translates to the eventual best of both worlds where you can have a decent retirement and also a fairly comfortable lifestyle while working. After all, we don't want to play too much and suffer during old age... neither do we want to scrimp and save for 40 years so that we can retire comfortably.
Do we need a 5 figure income to plan for our retirement early?
The short answer is no we don't. However, you need to live prudently. Let's take a look at a person's living expenses today and potentially what he needs in the future...
Let's assume Louis needs about $2,707 for his living expenses today. *The Private Integrated Plan is calculated based on his total lifetime cash outlay and then averaged out to calculate the cost he needs to set aside for future premiums when his plan cost increase. If Louis does not wish to factor in future cost of his hospitalisation insurance, he can factor in the insurance cost as his protection and a portion of his wealth accumulation needs.
When Louis retires at 65, his lifestyle would cost him $7,617 and potentially an average of $10,600 as things get more expensive overtime. Now it may seem very intimidating however, let's see how much effort does Louis need to meet these needs if he starts at 30 compared to when he is 45.
If Louis needs $10,600/month for 25 years so he needs about $2,544,000 by the time he reaches 65. Based on this illustration, we can see that Louis will have a good head start if he invests his money at an estimated 6% growth. If he starts another regular investment at 45 when all his commitments are done, he is likely to achieve his ideal retirement figure.
Now, is $15,000 a year an overwhelming figure for Louis? At the beginning it may be a little stretch however, if we calculate an average wage earner profile similar to Louis, $15,000 is merely 2 months bonus with AWS. Louis need not even touch his monthly disposable income for his retirement planning. Naturally, as his income increase, he would be able to save his surplus for other aspirational wants. He would still be able to save $1293/month and all his initial savings accumulated before 30 based on his current salary for safe keeping.
What happens if we start retirement later?
Now imagine Louis did not start his retirement at 30 and only started at 45. Firstly, even if he increase his annual contribution to $24,000, he would have a massive shortfall of $1,600,000.
Louis needs to increase his contribution to $65,000 per year at a 6% return in order to meet his short fall of $2,500,000.
Let's compare further...
If Louis starts retirement planning at 35, he only needs to invest $30,000 per year till 65 assuming a 6%pa return. On the other hand, if he choose to delay 10 years, he would need to invest $65,000 a year till 65 assuming the same 6%pa return. This 10 year delay is a whopping $400,000 difference.
How long do you take to save $400,000?
Naturally, for safer instruments, the amount required to be contributed would be more. However, the idea I want to communicate is the power of compounding and also that we should start what we can afford as early as possible.
Why is it worth the effort?
In Singapore, too many prudent individuals hoard too much money in their deposit accounts. There's a psychological comfort in having more than your emergency funds on hand. If this is done on a prolonged period, the opportunity cost in achieving an ideal retirement becomes an issue. This is probably validated by the huge number of priority banking account holders in the country as well as why property purchases are so popular.
Read also: 5 Retirement Strategies Common In Singapore
In other words, sometimes the end result of having a stressful or discouraging retirement planning process is self-inflicted. More often than not, it is not a result of a lack of resources to get started!
You might spend the money!
One danger of having too much surplus funds in the savings account is the false sense of wealth. Very often, people end up with impulse purchases when they see a huge account balance in their bank accounts.
Especially since retirement happens at the end stage of our lives, we may overestimate our ability to remain discipline and potentially over-pamper ourselves. Very often, we cannot even predict our bank balance at the end of the year. Let alone at the end of our working years!
Achieving more aspirational wants
In the example above, Louis saved $400,000 in contributions and achieved the funds required for his ideal future lifestyle. When we plan for our retirement early, we use lesser resources and our surplus money is really surplus. In Louis's case, he could have spent $400,000 on his dream car or contributed the $400,000 to his dream home. $400,000 goes a long way in investment returns and the income generated might enable Louis to finance 1 or 2 holidays each year.
Maybe Louis isn't so hedonistic and would prefer to help build schools in third world countries. He can do that too!
The point is, while we don't want to short-change our retirement, we don't want to put ourselves in a situation where we keep hoarding our money but are afraid of spending them too.
Summary
In short, planning our retirement early does not derail our lifestyles. In fact, sometimes planning our retirement late does! More often than not, it creates more breathing space for us as our income grows and empower us to dream of more possibilities. More importantly, planning early frees up our resources and gives us a peace of mind to pursue other hobbies without reservations.
After reading this article, you may have some questions or may want to get started on retirement planning. 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.
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. 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'.
留言