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What if I told you today that retirement planning is not about sacrificing all of your current lifestyle? You don't have to hide at home and eat bread everyday just to save money for your old age. To me, that doesn't make sense at all. What I want is whilst planning for retirement, I can still dine out at restaurants, travel overseas to explore the world, probably own a car (maybe not one in Singapore) and even live in a moderate luxurious house. How do we do that?
You see, many people thought that they need to live a very cheap life so that I can have more money in the future. But to be honest, even though I plan for retirement, I still own smart phones like many other people out there (but I don't change phones that frequently now). I still eat at restaurants. I still travel overseas. I also wear branded clothes (not a lot though). I have a shirt from Levi's, jeans from TopMan, shoes from Pedro and a bag from Zinc. I'm definitely not living a cheap life. Although we should not spend too excessively, we don't have to sacrificing everything either. If you've read my previous article, you would remembered I mentioned that frugal and cheap is different.
I still could travel to Taiwan for an overseas trip:
I dine in at restaurants like every other person:
Dim Sum anyone?
Korean BBQ Yum Yum
Japanese Ramen. Love the thick soup base
Japanese Deserts. Green tea Ice cream
Deserts again
Sky Terrace. So relax...
Some weird looking food. Its actually chilli sauce inside the small syringe. Very smart idea.
As you can see, the life I live, although not too luxurious, is not too cheap either. Well, I didn't started out like this. I was saving excessively at the start. It was needed to get me on a head start. As time goes by, things got better and I could be less tight with money. But, I still eat at hawker centres and coffee shops everyday for normal meals. It doesn't make sense to eat at restaurants for every meals every single day. For young people, its ok to go clubbing and have drink to chill out but if you're doing it too frequently, then I can't help you if you got no money left at the end of the month. If you've read my financial goals page, you would know I've set myself a target to save 100k by the age of 28 which is less than 2 years from now. I am confident that I can still meet that target even while living a moderate life. What is the key to planning retirement while still enjoying life?
Here are 4 points to retirement planning without sacrificing too much of your current lifestyle:
1) Increase your Income
You've probably heard a lot of people tell you that you need to decrease your expenses to save more money for retirement. While saving money is important, we don't want to save every cent and be a miser or live a cheapskate life either. If we have all the money in the world but no friends or family to share it with, then there's no point in it.
We need to socialise. To socialise we need to spend money. A young person's greatest asset is he or she can increase income easily. Go for courses, upgrade your skills, get a degree, excel in your work and you can easily get a higher income.
You could even earn some side income by starting a part time business. Are you good in web designing? You could earn some money by promoting your skills and doing freelance web designing for other people out there. Are you good in drawing and art? You could earn some money drawing and selling your art pieces. Are you good in music? You could teach some music lessons for some side income. The ways to create more income is endless.
2) Create passive income
While active income is important, we don't want to work and work until we have no time to spend it or no time for our friends and family members. Creating streams of passive income through stocks investing and through creating products and intellectual property is a good way.
The key is to create money for your luxuries and enjoyments. These are your wants instead of your needs in life. Your savings goals cannot be changed. If you've set yourself a target to save 100K in 5 years, you know you need to save 20K a year. That 20K is non negotiable. Now if you want to have some luxuries, learn to create the money you need. Create passive income and let the passive income pay for your luxuries.
If you have 100k, invest it in a well diversified portfolio of income and growth stocks with an average dividend yield of 5% and you can get $5000 in dividends every year. This $5000 probably will be able to let you live a better life without affecting your financial plan.
For the whole of this year till now, my passive income came up close to $3000. This is not a very huge sum of money but it allows me to be less tight with money and I could use it to give my friends and family a treat. I could even go on an overseas trip and still come back in a good financial shape because of this extra passive income. That's the essence of having passive income.
3) Start early and you don't have to save too much
Retirement planning should never start when you're near retirement age. The reason is simple. The later you start, the more money you have to save and the more sacrifice to your lifestyle you have to make. I learnt this through my colleagues when I started working 4 years ago. Many of them are in their 40s and even 50s. Most of the time they will regret on not starting to plan early. Time lost can never be earned back. I know it sounds depressing for people who are older now but if you're really at an older age but still want to plan for retirement, then you have to catch up at a much faster rate. Its still possible to plan but its just harder.
Using numbers, we will be able to see and understand better why starting early is better. If you start saving $1000 monthly at the age of 24, you'll have $384,000 by the time you're 55. But if you only start saving $1000 monthly at the age of 35, you'll only have $240,000 by the time you're 55. Well, you may say $384K and $240K is still not enough for retirement in Singapore. You're definitely right. Which brings me to my last point below.
4) Invest as early as possible
All of us know we must invest early to see our money grow at a compounding rate. Even though all of us learnt the effects of compounding since secondary school days, most of us actually do not realise its significance impact on our money. Let's use the example of saving $1000 monthly again. If you save $1000 per month at age 24 and invest it at an investment return of 4%, this money would have grown to about $750,000 by the time you're 55. This is double of the $384,000 hardcore savings if you did not invest at all.
Investing seems complicated to a lot of people. When I tell my friends about the importance of investing, most of them know that but are clueless on how to actually do it. For those who are not into picking your own stocks for investing, you would be better off just investing in index funds instead of buying other funds or unit trusts with high management fees and charges.
I wrote an article on index funds investing here: Investing Basics - Low Cost Index Fund investing (Passive Investing)
Now, even POSB and OCBC offers index fund investing. Read the above link to know more about it.
The even more interesting part is $1000 per month savings invested at a 4% rate of return will grow to more than $1 Million before you reach age 65. 4% rate of return is not too difficult to achieve. I hope this will be enough for our retirement by that time.
Below shows how a person's wealth will grow if he saves $1000 per month and invest at a 4% rate of return:
| Age | Income | Expenses | Additional Yearly Savings | Total Savings | Investment returns |
|---|---|---|---|---|---|
| 24 | $36,000.00 | $24,000.00 | $12,000.00 | 4% | |
| 25 | $36,000.00 | $24,000.00 | $12,000.00 | $24,480.00 | 4% |
| 26 | $36,000.00 | $24,000.00 | $12,000.00 | $37,459.20 | 4% |
| 27 | $36,000.00 | $24,000.00 | $12,000.00 | $50,957.57 | 4% |
| 28 | $36,000.00 | $24,000.00 | $12,000.00 | $64,995.87 | 4% |
| 29 | $36,000.00 | $24,000.00 | $12,000.00 | $79,595.71 | 4% |
| 30 | $36,000.00 | $24,000.00 | $12,000.00 | $94,779.53 | 4% |
| 31 | $36,000.00 | $24,000.00 | $12,000.00 | $110,570.72 | 4% |
| 32 | $36,000.00 | $24,000.00 | $12,000.00 | $126,993.54 | 4% |
| 33 | $36,000.00 | $24,000.00 | $12,000.00 | $144,073.29 | 4% |
| 34 | $36,000.00 | $24,000.00 | $12,000.00 | $161,836.22 | 4% |
| 35 | $36,000.00 | $24,000.00 | $12,000.00 | $180,309.67 | 4% |
| 36 | $36,000.00 | $24,000.00 | $12,000.00 | $199,522.05 | 4% |
| 37 | $36,000.00 | $24,000.00 | $12,000.00 | $219,502.93 | 4% |
| 38 | $36,000.00 | $24,000.00 | $12,000.00 | $240,283.05 | 4% |
| 39 | $36,000.00 | $24,000.00 | $12,000.00 | $261,894.37 | 4% |
| 40 | $36,000.00 | $24,000.00 | $12,000.00 | $284,370.15 | 4% |
| 41 | $36,000.00 | $24,000.00 | $12,000.00 | $307,744.95 | 4% |
| 42 | $36,000.00 | $24,000.00 | $12,000.00 | $332,054.75 | 4% |
| 43 | $36,000.00 | $24,000.00 | $12,000.00 | $357,336.94 | 4% |
| 44 | $36,000.00 | $24,000.00 | $12,000.00 | $383,630.42 | 4% |
| 45 | $36,000.00 | $24,000.00 | $12,000.00 | $410,975.64 | 4% |
| 46 | $36,000.00 | $24,000.00 | $12,000.00 | $439,414.66 | 4% |
| 47 | $36,000.00 | $24,000.00 | $12,000.00 | $468,991.25 | 4% |
| 48 | $36,000.00 | $24,000.00 | $12,000.00 | $499,750.90 | 4% |
| 49 | $36,000.00 | $24,000.00 | $12,000.00 | $531,740.94 | 4% |
| 50 | $36,000.00 | $24,000.00 | $12,000.00 | $565,010.57 | 4% |
| 51 | $36,000.00 | $24,000.00 | $12,000.00 | $599,611.00 | 4% |
| 52 | $36,000.00 | $24,000.00 | $12,000.00 | $635,595.44 | 4% |
| 53 | $36,000.00 | $24,000.00 | $12,000.00 | $673,019.25 | 4% |
| 54 | $36,000.00 | $24,000.00 | $12,000.00 | $711,940.02 | 4% |
| 55 | $36,000.00 | $24,000.00 | $12,000.00 | $752,417.62 | 4% |
| 56 | $36,000.00 | $24,000.00 | $12,000.00 | $794,514.33 | 4% |
| 57 | $36,000.00 | $24,000.00 | $12,000.00 | $838,294.90 | 4% |
| 58 | $36,000.00 | $24,000.00 | $12,000.00 | $883,826.70 | 4% |
| 59 | $36,000.00 | $24,000.00 | $12,000.00 | $931,179.77 | 4% |
| 60 | $36,000.00 | $24,000.00 | $12,000.00 | $980,426.96 | 4% |
| 61 | $36,000.00 | $24,000.00 | $12,000.00 | $1,031,644.04 | 4% |
| 62 | $36,000.00 | $24,000.00 | $12,000.00 | $1,084,909.80 | 4% |
| 63 | $36,000.00 | $24,000.00 | $12,000.00 | $1,140,306.19 | 4% |
| 64 | $36,000.00 | $24,000.00 | $12,000.00 | $1,197,918.44 | 4% |
| 65 | $36,000.00 | $24,000.00 | $12,000.00 | $1,257,835.17 | 4% |
Retirement planning isn't as scary as what we think. Some people assume that they need to live a extremely cheap life and forgo their lifestyle if they start retirement planning. That is absolutely not true at all unless you are living a lifestyle of luxurious houses and cars that is far above your means. The first step you need to take is to determine the amount of money that you want to save. Be ambitious. Go ahead to plan for a savings of 1 Million. Then work downwards to determine how much you need to save each year to achieve that amount.
If you find that your current salary is impossible for you to reach 1 Million, then you need to start the 4 steps which are: "Increase Your Income", "Create Passive Income", "Start Early" and "Invest Early".
No matter how old you are now, start planning right away. Even though the older you get the harder it is, starting late is better than never. For young people, starting early makes the process less painful. Put aside the notion that you need to sacrifice and live like a cheapskate just for retirement. It doesn't work this way. If you plan later, you might have to become a cheapskate but not if you plan early.
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