Never Rely On CPF For Your Retirement?

In my previous post on "You Can Never Retire If You Only Save 10% Of Your Income", I said if we only save 10% of our income, it is impossible to retire. There was a comment in that post saying that since we can't retire on 10% savings, then maybe we can retire on our CPF savings which we contribute 37% of our salary on a monthly basis.

In case you didn't realise, yes we contribute 37% of our monthly salary to our CPF. This is quite a high savings rate to speak of. 20% is contributed by us and 17% is contributed by our employer. It goes into 3 separate accounts mainly the ordinary, special and medisave account.


Most of us use CPF to pay for housing loans and medical insurance

However, as we all know, most of us will use our CPF money to pay for our housing loans and also medical insurance. In most cases, young people now and in the near future will need to pay about $1200 per month for their housing loans base on a $300,000 price HDB flat. If we divide equally between husband and wife, each will need to pay about $600 for their housing loan. For a fresh graduate who earns $3000, $600 is almost all that he contributes to his ordinary account. Assuming if salary remains constant, this person would have close to nothing in his ordinary account when he reach 55.

It is a good idea to rely on CPF for your retirement? If we think that we don't need to have our own personal savings because there is CPF, will we be in big trouble?


How much CPF will we have after using it for housing?

Let's demystify how much CPF will we have after using it for housing. Many people say that the future generation of young people will have no money left in their CPF after paying for the high housing loans. Is this true?

I've done the calculation and here is the scenario and the result:

• Starts with $2500 salary and assuming it increases 3% per year 
• Buys $300,000 HDB flat ($275,000 after grant)
• Pays $556/month for housing loan from CPF OA (Divide by 2 with spouse)

From the above scenario, this person will have $580,978 in total from all 3 CPF accounts even after finishing paying for his or her housing loan. Doesn't sound too bad after all. 

From a chart perspective, here's how the CPF money will grow:

*Above figures are estimated and assumes no overflows from MA in excess of Medisave contribution ceiling

How much would we have if we did not use our CPF monies at all?

On the other hand, if we did not use our CPF money at all to pay for housing loans, how much would we have?

The number is......  $852,515

This is $271,537 more than the previous example of using CPF for housing. If you notice, the amount paid for the housing loan is only $166,800 per person ($556 x 12 months x 25 years). But, if the money is left inside CPF, there is about $100,000 more due to the interest compounded in the CPF accounts.

Here is the chart for the scenario of not using CPF money at all:

Look closely at the chart again. After age 55 to 65, the person who doesn't use his CPF money at all is a millionaire at age 65. In fact, he has more than a million dollars at $1,152,048. Just by a starting salary of $2500 and growing at 3% per annum, a person can become a millionaire by age 65 if he choose to leave his money in his CPF account.

*Above figures are estimated and assumes no overflows from MA in excess of Medisave contribution ceiling

Should we use or keep our CPF money?

Using your CPF to pay for your housing loans or keeping your CPF money inside to earn higher interest is a decision we all have to make. What I have done is simply to show you the difference between using and not using your CPF money. The example above is never perfect with various assumptions. Some may say a starting salary of $2500 is not realistic and a consistent 3% salary increment doesn't sound realistic too. What if we lose our job along the way? Yes, these are all valid concern but the model above is just to give you a rough guide base on the assumptions.

There are also instances where we will earn higher salaries which is even better for us. I have done the calculations before that if we save $1500 per month and invest it at 5% ROI, we will achieve a million dollars in 28 years. CPF gives us interest of about 2.5%-5% for us who are below 55. It is possible to accumulate a substantial amount of wealth through the CPF system alone. Never rely on CPF for your retirement? It really depends on how you use it. Most of us will not be able to rely on CPF for retirement if we choose to empty it early in our lives.

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Related Posts:
1. Changes to the CPF - CPF Focus Group Discussion
2. The affordability of housing in Singapore and the various housing grants available

You Can Never Retire If You Only Save 10% Of Your Income

Saving 10% of income is better than not saving any money at all? That's what a lot of people say. But, is it wise to save only 10% of our income? Saving 10% only means spending 90% of our income. If you earn $1000 and can only save $100, it is still acceptable as you may not have much money to spend. But if you earn $5000 and only save $500, it is a whole different story.

Saving 10% of our income takes us 51 years before we can retire. Even if you start saving since the day you start working, you still can't retire in your 70s. Many people may say they want to double their income so they can have a better lifestyle and don't have to sacrifice too much to save money.

The scary part about increasing your income to increase expenses is that it has a negative doubling effect on your life. It is the simple reason why people who earn higher salary can get into an even worse financial problem than another person who earns lesser income.

Credit: http://pixabay.com/en/percent-percentage-percent-sign-76213/

Percentage of Savings makes a difference

Previously, I wrote that there was a report on Asiaone which showed how people in their 30s got into financial problems. Below shows 2 of the cases:

Case 3  

The third person is a 33 year old who earns $4000 monthly. Has credit card debt totalling $15,000 which was accumulated since 2007. 

The lifestyle:

• Go to the spa every week for massages, mani-pedis and hair treatments

• Take cabs everywhere

• Eat at expensive restaurants twice a week

• Always treating friends to drinks when outside

There were several instances where she was flat broke and has to walk one and a half hour from her office back home because she doesn't even have money to take a bus or MRT home.  

Case 4
The fourth case is a couple of age 34 and 36. Both are lawyers and have a combined income of $17,000. This amount of salary is an envy for many but they still can get into trouble. Currently has debts amounting to a couple of hundred thousands dollars.Their lifestyle:

• Spent $100,000 on wedding

• Pay six figure sum for a condo in a prime district

• Spent even more money on renovating and expensive furnitures for the house

They said the debts will probably take them 3 years to clear. 

In case 4, the couple had a combined monthly income of $17,000 but has debts amounting to a couple of hundred thousands dollars. This is more than the $15,000 debt which the person in case 3 who earns only $4000 monthly.

The most important thing to note is that cutting your spending rate is much more powerful than increasing your income. The reason is that every permanent drop in your spending has a DOUBLE effect:

1. it increases the amount of money you have left over to save each month
2. and it permanently decreases the amount you’ll need every month for the rest of your life

If you ask a person who spends $5000/month how much he needs for retirement, he'll probably say about $5000. If you ask a person who spends only $2000/ month how much he needs for retirement, he'll probably say about $2000. It is very very hard to change your "upgraded" lifestyle once you're up there. Some people may say that they can downgrade their lifestyles when they are older but how many have actually done it? 

Creating income for retirement is better than saving for retirement. If you spend $5000/month, you have less money saved per month and it takes a longer time to create a $5000/month income for your retirement. You need $1.5 Million dollars to create a $5000/month income base on a withdrawal rate of 4%. If you earn $10K per month and spend $5K, it takes about 17 years to do it. That is a 50% savings rate invested at 5% yearly compounded returns to achieve $1.5 Million dollars in 17 years. 

If now you earn only $6K and still spend $5K, it'll take you 41 years to create an income of $5K as compared to 17 years in the above example. In this case, this person only saves 16% of his salary. It really is just simple maths, saving 16% will mean spending 84%. 

How Much Should We Save?

10% savings takes 51 years before we can create an income that surpasses our expenses for retirement. If we do that, we will never be able to retire at all unless you have other alternatives. This is the hard truth of life and the reason why many people cannot retire today. 

If 10% savings is a no no, how much should we save then? I've done the calculations and here's the verdict:

Savings Rate (Percent)	Working Years Until Retirement
5	66
10	51
15	43
20	37
25	32
30	28
35	25
40	22
45	19
50	17
55	14.5
60	12.5
65	10.5
70	8.5
75	7
80	5.5
85	4
90	3
95	2
100	Zero

Look at the savings rate and the working years until retirement. If we want early retirement in our 40s, probably a 50% savings rate is good. If we want to retire before 60, we should save at least 25% of our income starting from our 20s.

It is really not that hard to retire if we can see the road ahead and plan accordingly.

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Related Posts:
1. Save 75% of your income to retire in 7 years
2. How an Average Family Can Retire Within 10 years of Working?

Saving For Retirement or Creating Income For Retirement?

Let me tell you the truth, saving for retirement no longer works in Singapore. If you're living in another high cost of living city like Singapore, most likely your money saved up for retirement isn't going to last you a long time too.

1 Million dollars isn't going to last very long for a lot of people. During the national day rally by our prime minister last year, a poll was conducted to ask the audience how much money do they think they need a month for retirement. Most agreed on the sum of $3000 on average. If we were to spend $3000 per month during retirement, 1 Million dollars is only going to last us about 27 years. This means, if you stop working at age 55, your 1 Million dollars will run out by the time you're 82. With longer life expectancy now, most of us are going to be still alive at the age of 82. If you have less money to retire, retirement is probably going to be painful for you.

Fortunately, there is always a workaround for every problem. If we know that we can't follow the traditional way of saving up for retirement, then its time to explore other ways.

Let me illustrate to you the difference between saving up for retirement and creating income for retirement.

We as Singaporean love durians. So, let's use durians as an example in this illustration.

If we save for retirement, its like we are accumulating durians all throughout our lives and consume it only when we stop working.

How long can the durians we accumulated last us? 1 year? 3 years? 10 years?

Now, how about we rack our brains a little and instead of accumulating durians from other durian trees, we plant our own durian trees?

How long will the durians last this time round? Unlimited and perhaps infinity?

Don't Just Accumulate Money, Create Money

A durian tree produces durians that can possibly last a lifetime. You might be thinking a durian tree can die so what happens to the fruits later? The trick is we can keep planting durian trees and if one dies, we still have others to rely on. As with multiple durian trees, we can also have multiple streams of income.

Most people accumulate money from other money trees. This money tree is probably from your company which pays you everytime you work. However, most people do not know that it IS POSSIBLE to plant their own money tree. By doing that, we have created money (fruits) for ourselves that can last a life time. 

If we save $1500 per month and invest it at a 5% rate of return, we would be able to create a passive income of $3000 per month after 26 years, base on a 4% withdrawal rate.

If we save $3000 per month and invest it similarly at a 5% rate of return, we would be able to create a passive income of $3000 per month after 17 years, base on a 4% withdrawal rate.

The 4% withdrawal rate means we invest in a stable asset which gives us a consistent yield of 4%. This rate is known as the safe withdrawal rate which is the maximum rate at which you can spend your retirement savings, such that you don’t run out in your lifetime.

Most of us, if we start planting our money tree in our 20s, will be able to enjoy an unlimited flow of $3000 per month in our 50s. You need to save at least $1500 per month and invest it at a 5% rate of return for it to become a reality. You either save more or increase your rate of return to accelerate the process. It can even be achieved in your 40s.


Insurance products for retirement?

If you're depending on the insurance you bought for retirement, you'll regret when the time comes. Most insurance products are for INSURANCE. That is the sole purpose of buying insurance. Some people use endowment policies as a form of savings but if you realise, even after putting your money inside the endowment policy for 25 years, you still don't get much money back.

The reason is because endowment polices mostly generate only an average 3% yield and there is also an insurance element in it which is paid as expenses. For example, assuming every $1 you pay for an endowment policy, 80 cents goes into a life fund as savings which yields on average 3% and 20 cents goes into paying for the insurance coverage. The 20 cents paid can never be retrieved back. It is expenses paid. This is similar for a whole life plan.

What happens when you get that lump sum back in your retirement years? That lump sum is just like the basket of durians in the earlier example above. How long can it last? If you draw out $3000 monthly on a $250,000 lump sum, it can only last you less than 7 years. The question is, will you even get back $250,000 on your insurance policies?


The Creation of CPF life

Knowing that Singaporeans are living longer and a sum of money cannot be enough for retirement, the Singapore government introduced CPF life as a form of annuity which pays us monthly income during our retirement years (65 years old) for the rest of our lives. This is as if a durian tree has been planted for us. It provides the money we need for our monthly expenses for life. Previously, Singaporeans could draw upon their CPF savings for only 20 years.

However, there will still be limitations of this scheme. The maximum amount of monthly income we can get now is $1750 to $1900 if we put in the maximum allowed enhanced retirement sum of $241,500. If you want a monthly income of $3000 for your retirement, you still have to find other alternative ways to create that extra $1100 of income for yourself.

That being said, if we want a stable flow of income of $1900 per month during our retirement years, we should definitely utilise the new CPF life enhanced retirement sum. $241,500 is not a lot of money to get $1900 for life. If we want to create a similar amount of monthly income on our own, we need to save up about $580,000 to get $1900 per month, base on a 4% withdrawal rate. It is more than doubled the amount required as compared to CPF life.

Now, assuming that the retirement sums in the CPF life scheme will go up over the years, we could possibly put in more money to get a $3000 or more monthly income in the future.

Earn more, save more, plant the money tree early. That's the formula for creating income for a lifelong retirement.

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Related Posts:
1. CPF Advisory Panel's Recommendations - 3 Basic Options You Need To Know
2. Make Money Investing For Passive Income

401K versus Indexed Universal Life

In the past few decades, people have fallen prey to the myth that risking everything is far more valuable than safety, steady long-term growth and predictable income. Wall Street firms had much to gain by supporting this contrarian belief. Since the advent of the 401K, the stock market has almost quadrupled in total assets. This was a huge payday for Wall Street firms, but was just as much a loss for working class Americans. Prior to this, it is estimated that as much as 50% of people's savings went into High Cash Value Life Insurance.


The possible losses from market risk has to be taken into consideration. The larger this investment grows, the more you have to lose in a down market. In 2008 alone, the average employee lost 14% of their account's value. That may not seem like much to a young person just entering the workforce, but people that were near retirement and had more money invested, suffered a a disproportionate loss. Accounts for these individuals saw a 25% loss. This certainly affected some people's retirement and some either had to continue to work or accept less money during their retirement years.


In addition to market risk, tax risk could be even worse. With our National Debt on the rise, government spending, Social Security and Health Care costs, raising taxes is the only way for our government to to pay for pay for these costs. In addition to higher taxes, you will have less writeoffs and deductions. You will not have your mortgage interest, 401 tax deduction, or child credit/exemptions - inflation alone could bump you into a higher tax bracket. In coming years, taxes could consume as much as 50% of your income, or more.


It doesn't have to be this way...


America's large banks, corporations and super wealthy don't put their money where everyone else does. They use a wealth concept that has been able to stand the test of time, even during our country's most darkest hours. High Cash Value Life insurance is used for it's Tax-Free cash accumulation, liquidity and the Tax-Free, probate free death benefit.


An Indexed Universal Life (IUL) allows withdrawls of your money at anytime with no penalty, there are no losses in a down market and there are no RMD's (Required Minimum Distributions)  to consider at age 70 1/2. Also, there is no maximum limit on the amount that can be contributed.


Only a professional should be trusted to assist you with properly structuring an Indexed Universal Life policy for Tax-Free Retirement. There are many ill-informed and untrained agents when it comes to this product. Selecting the appropriate death benefit, payment amount, indexing strategy are what make this the most powerful tool to build retirement income as well as leave a legacy for your family for generations to come.


Our agents at Family First Life are trained directly by our Annuity and Retirement Division and are skilled in this concept. Contact us today to meet with a professional that can show you how much money you can retire with, TAX-FREE!



Michael Pfeil
Licensed Agent
Family First Life
mpfeil@familyfirstlifemd.com

Tax-Free Retirement Basics

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Current Retirement Figures

A survey conducted by financial-services company, Allianz, found that of people in their late 40s, 77 percent worried more about outliving their money in retirement than any other issue!

At Age 65:

56% Need Help Financially

11% Still Work

25% Have Passed On

------------------------------

92% Are Either Dead or Broke

Of the Remaining 8%:

3% Are Ultra Wealthy

3% Have 50K or More

2%  Are Comfortable

We have a Tax-Free Retirement solution and a Wealth Accumulation vehicle to help you in your retirement years.  Contact Family First Life of Maryland for a FREE consultation, today!

Michael E. Pfeil

Family First Life
www.FamilyFirstLifeMD.com
mpfeil@familyfirstlifemd.com

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Gift Of A Lifetime

SITUATION

SOLUTION

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HOW IT WORKS

WHAT DID WE ACCOMPLISH

Michael Pfeil

Family First Life of Maryland
www.familyfirstlifemd.com
mpfeil@familyfirstlifemd.com


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Changes to the CPF - CPF Focus Group Discussion

Few months ago during the national day rally speech by the Prime Minister, it was announced that there may be possible changes to the CPF scheme to allow for more flexibility. A CPF advisory panel was appointed by the Ministry of Manpower in September 2014 to study possible enhancements to some key aspects of the CPF system, to make it more flexible to meet the needs of more Singaporeans and provide additional options in retirement.

I was at the first CPF focus group discussion last Saturday. I got to meet and interact with a few other people and know what were the concerns they had with regards to the CPF system. CPF was not a topic of interest to me until somewhere this year when I started to hear a lot of negative things about it. I had no idea what is the Minimum Sum or what it means. What I only know was that a portion of my salary is deducted every month into the CPF.

Because of the negativity spreading around, I decided to look deeper into what was going on. Writing a financial blog at that time also spur me to produce an article on the CPF system which I wrote here: All about CPF minimum sum and CPF life. My conclusion is, CPF is a social safety net that is for our basic retirement needs. Without it, our society may be in chaos with people having no money for even the basic necessities such as food during retirement.

But, as with every system, there will always be more improvements to be made. Many feedbacks were given and I personally heard from readers who emailed me as well as friends, family and colleagues who discussed about the CPF. As a young person living in Singapore, I see some of my older colleagues regret that they did not plan for retirement earlier in their lives. They had to continue working even when they don't like it. They do not have a choice to do what they like in life rather than just working in something they don't like.

During the focus group discussion, we formed into groups of 6. My group had only 5 person with 2 of the advisory panel members sitting in to listen. We could interact and discuss relatively well with the small group.

The 3 questions that we discussed were:

1. “How much of your retirement expenses should be covered by payouts from your CPF savings? And how much will you need to cover your basic expenses?”
2. “How much should be allowed to be withdrawn at a lump sum at 65, bearing in mind that withdrawing this amount will lead to lower CPF payouts?”
3. “If there was a CPF LIFE plan that had lower payouts at the start, but increased every year to help with increases in the cost of living, would you opt for it?”

I shall not elaborate further on what the general answers were during the discussion as you can probably read from news report by the media. They did quite a good job capturing what was being discussed during the focus group discussion.

For myself, here are my personal views to the 3 questions:

1. “How much of your retirement expenses should be covered by payouts from your CPF savings? And how much will you need to cover your basic expenses?”

I would like CPF to cover all of my basic necessities such as food, utilities bills, transport etc. In today's dollar value, a figure of $1000/mth would be quite comfortable. This is just for basic expenses


2. “How much should be allowed to be withdrawn at a lump sum at 65, bearing in mind that withdrawing this amount will lead to lower CPF payouts?”

Withdrawing a lump sum at age 65 is not needed if we have adequate money for retirement. I would choose not to withdraw any lump sum unless I really have no savings left. The money in the CPF still earns a 4% risk free interest in the retirement account. Moreover, having $155,000 inside the CPF at age 55 would give us an estimated $1200/mth for the rest of our lives starting from age 65. At 4% interest rates, the $155,000 in your RA account would grow to an estimate of $229,437 when you reach age 65 (assuming there are no further contributions). If we calculate, this would mean a 6.27% annual draw down rate (($14,400 divided by $229,437)*100%). This is not a bad draw down rate at all considering you get payouts for the rest of your life under the CPF life scheme.


3. “If there was a CPF LIFE plan that had lower payouts at the start, but increased every year to help with increases in the cost of living, would you opt for it?”

This question is tricky. I think starting to draw down at age 65 is already late and if we still get lower payouts at the start, then the amount becomes very little. With a fixed payout, there would be a worry of not having enough in later parts of our lives but I guess who still cares about increase cost of living when they are in their 70s?


I don't really like the idea of only drawing down our CPF at age 65. Since there're considerations to make the CPF more flexible, perhaps there could be an option to draw down earlier but of course with lesser payouts. An example would be to draw down maybe $900-$1000/mth at age 60 instead of $1200/mth at age 65. This is just my suggestion.

I did ask around and I always hear that draw down age at 65 is too late. Perhaps age 60 would be a good age to starting drawing down their CPF. A concern was that those who are above 60 risk losing their jobs more than anyone else.

There will be more focus group discussions organised for the next few months. If you are interested to participate for the subsequent focus group discussions, please refer to this website for more information: www.cpfpanel.sg. You can sign up for the discussions through the website directly. Information on the next available sessions are also listed on the website itself.

You can also send in your views and feedback on the CPF by emailing to cpf_panel@mom.gov.sg

I did talk to some of the advisory panel members and they were sincere in listening to feedbacks so they can make better informed decisions. We can all do our small little part to give our ideas and suggestions.

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Planning For Retirement Isn't About Sacrificing All of Your Current Lifestyle

The word retirement in itself sounds old. It seems like only old people talk about retirement. You may ask "Why do I have to plan for retirement when I'm so young?". Some may say "Retirement planning means sacrificing my lifestyle now. I have to save money and spend lesser to save for retirement". Sacrificing their current lifestyle is probably not what young people would think of. Come on, its at this young age that we should enjoy life to the fullest isn't it? If we're old, we won't be able to enjoy that much already.

Credit: pixabay.com

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

I even had a VIP experience at the Singapore F1 this year (It was free!!):

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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Related Posts:
1. How an Average Family Can Retire Within 10 years of Working?
2. CPF as an asset that generates income
3. Going from working middle class to rich with a simple tweak

How an Average Family Can Retire Within 10 years of Working?

Retirement! It's a word that many people use in their old age. To stop working and not having to worry about money is a dream come true for many. But retirement don't have to happen only when you're old. It can happen when you're young too. When we talk about early retirement, its known as financial independence. This means you don't have to rely on your job for an income to survive any more. Imagine the freedom to do the things you love, the unlimited amount of time you can spend with your kids and see them growing up. Imagine not having to put up with your unreasonable boss and don't have to go through the frustrating mid year and year end appraisals. Then imagine you can pursue what you really like or always wanted to do.

In my previous article, I wrote on how if we saved 75% of our income, we can actually retire in 7 years. Here's the article: Save 75% of your income to retire in 7 years I also wrote that with Singapore's high cost of living, it seems impossible to retire at all with our average household expenses at more than $3600 per month. But, there's still hope for us if we plan it out diligently. With the help of an excel spreadsheet to visualise the numbers and stir up our imaginations, early retirement is certainly within reach. Yes, its early retirement and not late retirement.

So how can an average family in Singapore retire within 10 years of working?

The ideal scenario to retire within 10 years is as follow:

• Household expenses maintain at $2500 per month
• Household income at around $7000 per month
• Invest savings at 5% return after inflation
• During retirement, passive income at 4%

Here's the numbers that shows how your life will unfold each year:

Click image to enlarge

With a household income of about $7000 and expenses at $2500, this household saves about 65% of their income which enables them to retire in 10 years. The age above is only for illustration purposes only so tweak it according to your age currently.


Is $2500 per month expenses enough for a family?

Now, some of you will probably be thinking will $2500 per month for household expenses be enough at all? Am I crazy or something to suggest $2500?

In that case, let's look at higher household expenses of $3000, $3500 and even $4000 with the same level of income at $7000 per month. How long will it take to retire then?

For $3000 expenses, it'll take the household 14 years to retire.

For $3500 expenses, it'll take the household 17 years to retire.

For $4000 expenses, it'll take the household 20 years to retire.

The more expenses you have, the longer time it'll take for you to retire.


Another point we need to take note is that most Singaporeans use their CPF to pay for housing loan instalments. In this case, we can exclude some of the housing cost that we pay monthly using CPF. Since I did not factor in CPF as savings, we should also exclude housing loans paid by CPF as expenses.

$2500 may be enough for household expenses if we take the effort to live a frugal and simple lifestyle.

Is 5% investment return realistic?

For the scenario to work, the investment return must be at a minimum of 5% after inflation on an annualised basis. With inflation at an average of 3%, our investment return needs to be at around 8%. Is this achievable?

If you've invested in the STI ETF in 2002, you would have achieved an annualised return of 9.2% (with dividends) for the year ending December 2013. Here's an article by Shares Investment which reported on it: Instrumental Returns Of The STI Over The Past 10 Years

Just by investing in the STI index fund, one will be able to achieve that kind of return and retire in 10 years. See for yourself whether its achievable?


Is 4% passive income realistic?

For the scenario to work, the passive income must also be reinvested in the first few years before retirement. Thereafter, we assume a 4% withdrawal rate from passive income to sustain our lifestyle. You may be thinking is 4% passive income achievable? Unfortunately, there's no way I can prove that a 4% passive income is achievable. This rate is debatable but I guess if you ask most people who do invest their money in stocks, a 4% dividend yield for passive income is not hard to achieve. The question is will these dividends be sustainable. There needs to be some active managing and rebalancing of investment portfolio involved. When you're retired, I'm sure you'll have lots of time to do that.

Another way is to have an investment property which you can rent out. If you're able to achieve the desired monthly rental to offset your expenses, you also can stop working indefinitely.


Is $7000/month household income possible?

Income is also important for the scenario to work. $7000 household income means $3500 per person for husband and wife. If you don't have this kind of income, not to worry. You can either reduce your household expenses or try to increase your income.

Just remember, to retire in 10 years, you need to save about 65% of your income. If you save 50% of your income, it'll take 17 years to retire. By now, you should be familiar with the formula of how it all works out.


What if I'm single? Can I retire in 10 years?

Now, here's the truth. If you're single like me currently, then it's actually easier to retire as most probably your expenses will be lower. The amazing thing about the formula is that it works for a family and it works for a single person too. It's all in percentages. If you're single and can save more than 75% of your income, then it'll take less than 7 years for you to retire.



Retirement is not about doing nothing all day everyday

Contrary to the believe that retirement is filled with images of old people idling around aimlessly, true retirement is actually the ability to find your own passion and pursue it. It is the ability to do what you love without worrying about money. This is called financial freedom. When you don't have to work, you can actually have more time to think about life and create products which will be beneficial to people and our society as a whole. You can do volunteer work, do part time teaching to help others or maybe write a book. Some of these will still generate income for you but the gist is even if it doesn't, you're still happy doing all of it.

Early retirement aka financial independence is possible. Numbers show us how it can be done and it will become a reality as long as we can see it. 10 years to retirement for your family? Watch and see how things can unfold for your life.


Image credit: s.jfch.net

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Related Posts:
1. Save 75% of your income to retire in 7 years
2. The 3 Big Decisions in Life - Marriage, Buying a House and Retirement
3. Will we have enough CPF savings to retire on after using it for housing?

Save 75% of your income to retire in 7 years

"Retirement is hard in Singapore." That's what we've heard before from a friend, a colleague or even your own family members. But, it can be easy if we know how to. How about being able to retire when you're young? That's what we call financial freedom.

I've been reading a couple of financial blogs based in the US and one which particularly stands out was the blog called Mr Money Moustache. Oh yes, I like reading other people's blog too even though I own and write one. The owner of the blog retired in his early 30s and he was also featured in an interview with Yahoo! where he explained how he did what he did. This really captured my attention.

In his blog, there's an article titled: "The Shockingly Simple Math Behind Early Retirement". The maths was if you saved 75% of your income, you'll be able to retire in 7 years. How was this number derived? Being curious, i decided to create my own spreadsheet to visualise how it will all work out. True enough, indeed if we save 75% of our income, we can retire in 7 years.


The scenario to retire in 7 years

Here's the scenario:

Let's say if you earn $30,000 a year which is about $2500 a month. I think this amount should be quite achievable for most of us in Singapore. If we save 75% which is $22,500 or $1875 per month, we'll be left with $625 to spend per month.

Next, we must invest the $22,500 savings and assume a 5% investment return, after inflation, for the next 7 years compounded. By the end of the 7th year, this amount would have grew to $204,301.70

The last part of the equation is this:

If the $204,301.70 invested generates a 4% dividend yield, the dividend income will be $8172. This gives us about $681 to spend per month. That's it, you can now retire and stop working. The dividends will continue to provide income for you for the rest of your life. According to my spreadsheet below, if you start working at the age of 24, you'll be able to retire by age 31. Sounds good?

Click to enlarge

Is it achievable in Singapore with our high cost of living?

Now comes the problem. The problem is in order to retire in 7 years, your expenses have to remain the same after 7 years. That means you can only spend $681 per month. Is this enough in Singapore? It may be enough if you're single but if you got a family, then it would certainly not be enough.


How much do you need to retire in Singapore?

An average household would already be paying about $1200 for their housing loan instalment. The above scenario of only spending $681 is certainly not enough. Adding up other miscellaneous bills and daily expenses, the average household expenditure would most likely be about $2500-$3000 per month.

But wait, some of you may say $3000 is still not enough for a household expenditure. Straits times just reported recently that "the average household spends $1,188 a month on food, $811 on transport, $154 on package tours and holidays, $138 on other recreational and cultural pursuits, and $156 on clothes and footwear." This amount is not even inclusive of the housing loan. So if we add up the $1200 housing loan, this amount would be $3647.

With an expenditure of $3647, how much do you need to earn in order to save 75% of your income and retire in 7 years? The answer is $14,588. Yes, you need to earn $14,588 to save 75% of your income in order to retire in 7 years!


I don't want to save 75%. I can only save 10%

Some of you may think that saving 75% of income is too much. How about just saving 10%? If you save just 10% of your income, you'll need to wait 51 years before you can retire base on the earlier assumptions. Do you want to wait 51 years before you can actually retire?

If you save 50% of your income, it'll take you 17 years to retire. It's all about the numbers and numbers can tell you the story.

Saving 50% of your income to retire in 32 years

Click to enlarge

How to solve the problem and retire earlier?

As readers of SG Young Investment, most of you would already know that we can increase income or decrease expenses to have more savings. However, in this case, its the savings percentage that is important. If you increase your income and at the same time increase your expenses at the same proportion, then your savings rate would still remain the same. If your savings rate don't increase, you'll never see a difference in your wealth.

If you're able to increase your income but still maintain the same level of expenses as before, then you're in for a great future. If we earn $2000 now and can only save $400, its just 20% savings rate. But if we manage to double our income to $4000 and still maintain the same level of expenses as before, then savings rate get bumped up to 60%. Young people have the potential to make more money in time to come especially in Singapore where opportunities are plenty while older people may already be making quite a substantial amount of income right now. We can start planning for retirement no matter the age we're at. You just need to know the numbers and see your future. The percentage of your savings plays a big role in retirement planning.

In my next post, I'll show you how an average family in Singapore can retire within 10 years of working. Stay tune.

P.S: Here's the video by Yahoo of how a man retired in his early 30s as what I wrote in the beginning of this post. Watch it here: http://finance.yahoo.com/video/retired-30-144216321.html

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Why it is hard for most Singaporeans to retire early?

I was about to publish some of the post on early retirement which I wrote over the weekends until I saw an article by business times today which shows how much Singaporeans are saving? These statistics was from the recent household expenditure survey which was published last week. Most of us would already have read that average monthly household income increased to $10,500. This number was met with many sarcastic remarks on social media. We would think how can this be true when most of us do not have that kind of household income? Is their average really average?

The purpose of my post today is not to debate on whether the income figures were correct or not. Rather, it is all about the report by business times which showed another angle of that report. How much are Singaporeans saving?

Here are the saving figures:

• The 41st-60th percentile, who are essentially the middle class, are saving about 44%. 

This 44% seems to be a good savings rate but if we look closer, this savings include employer and employee CPF contributions. This is essentially not cash savings which we have in our bank. If we deduct away those CPF savings, we're left with about 9% to 15% cash savings since most of our CPF contributions is around 30%-36%. 9% savings is quite a low amount. If you calculate, saving just 10% of your income will probably take you 51 years to retire.

Credit: http://www.aag.com/

Furthermore, the figures do not include non consumption expenditure such as income taxes and house purchases. We know that house purchases make up a big chunk of our expenditure. This makes the figures rather distorted.

It is no wonder Singaporeans find it hard to retire in Singapore. Most still rely on their CPF savings but the problem is most of us also use the CPF for housing purposes. If we continue to do that, we'll always realise that we can't meet the minimum sum and can't retire comfortably.

If we want to retire early at age 55 or even earlier, then we need to have more cash savings. It is no use depending on the CPF for savings and then realise you can't take most of your money out at retirement age. CPF was structured as a social security or safety net. It is not for us to take the money out in lump sum for enjoyment in old age. If we want some enjoyment and not having to worry about not enough money, then we need to plan and save up in cash.

In the next few posts that I'll be publishing, I'll show you how most of us can retire early. Early retirement means in 10 years and possibly within 7 years. I've done up some calculations which will show you how exactly it is done. Watch out for the next posts soon.

Once you reach that stage, you can continue working but you don't have to work for money any more. You can start to work on the stuffs you love, spend more time with your family and kids and even contribute more to society. People who have enough money to retire don't usually sit there idling around. In fact, they become more motivated to produce things which are beneficial to the society as compared to when they are just working for money.

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