Planning for retirement
Retirement is about being able to choose whether to work. You are in a better position to make that decision if you start retirement planning early.
Here are some indicators of whether it’s time to consider the retirement option:
- Have a roof over your head (that is fully paid for)
- Are free of debt obligations
- Have adequate health insurance cover for medical expenses
- Have enough savings or passive income to pay for your retirement lifestyle
When should I start?
For many people, retirement is regarded as a life event that’s too far away to start planning for. But this mindset hinders the goal of being able to retire.
Those who do not act early on planning for retirement say it requires too much discipline and sacrifice. Or that it is still early. Some point to their CPF savings to provide for their retirement needs.
Those who do, however, may be saving too little, or know too little about how to go about accumulating and preserving their wealth.
Many people are uncertain of achieving a comfortable retirement, because of these common doubts:
- How much would be enough?
- What happens if I outlive my savings?
- With inflation, will the retirement funds I have amassed be enough for the lifestyle I want?
Why it pays to start early
While it is never too late to start saving and planning for retirement, the earlier you start, the better. Starting earlier means more time for your savings to benefit from the effects of compounding returns.
Conversely, the longer you wait, the less time you have for your money to grow and the harder you’ll have to work to reach your retirement goals.
Just how much of a difference does it make to start early?
Example: Andy started saving $250 a month 30 years ago while Bob started saving $400 a month 20 years ago. Assume that their investments both grow at 4% a year:
| Andy | Bob | |
|---|---|---|
| Savings per month | $250 | $400 |
| When they started | 30 years ago | 20 years ago |
| Total saved | $90,000 | $96,000 |
| Value today | $174,000 | $147,198 |
Despite saving less per month and less in total, Andy ended up with a significantly greater amount of savings than Bob because he started out earlier. That’s the power of compounding and having time work for you.
The effects of inflation
All of us have to cope with the impact of inflation. Consider how inflation affects your cost of living:
- If the inflation rate is at 3%, the cost of living would double every 24 years
- If the inflation rate increases to 4%, the cost of living would double every 18 years
If inflation grows faster than your retirement savings, it could mean that:
- You’ll need to adjust your expenditure
- Your present retirement funds may not last throughout your retirement
- There is a chance that you may outlive your savings
Rule of 72
To get the approximated number of years it takes for the cost of living to double, divide 72 by the inflation rate. This is one easy way to compute how much you may need to save up in order to fund your retirement.
Example: Assuming an inflation rate of 3%, the current cost of living would double in 24 years. If you wish to retire in 24 years’ time, how much would you need to have then in order to be able to fund your retirement for 20 years?
| Current annual cost of living | Annual cost of living 24 years later (with inflation) | Amount needed to retire |
|---|---|---|
| $12,000 | $24,000 | $24,000 x 20 = $480,000 |
| $18,000 | $36,000 | $36,000 x 20 = $720,000 |
| $25,000 | $50,000 | $50,000 x 20 = $1,000,000 |
| $36,000 | $72,000 | $72,000 x 20 = $1,440,000 |
Building a retirement plan
What does it take to draw up a retirement plan? Here are the steps you’ll need to go through:
Step 1: Define your retirement goals
When do you plan to retire?
Step 2: Assess your current situation
Review your finances to see if you are on track to reaching your retirement goals.
Step 3: Close your savings gap
- How can you accumulate funds for your retirement?
- Cut spending and save more.
- What should you invest in?
- How can CPF help?