“Do I have the financial ability to support myself throughout retirement”? This is a question the forward planners amongst us would be asking, possibly at the early stages of their careers. Looking at the inflation rate in the past few years, the already high cost of living in Singapore, and the median income of Singaporeans, the earlier we start asking ourselves this question, the greater our chances of being able to achieve financial independence.
I have friends who plan on working till 62, or even 67, and I admire their drive to work. I am however not part of that camp and have one goal in mind – figuring out when I can reasonably retire while still maintaining my desired standard of living, and actively working towards it. It is not so much the thought of stopping work that is driving me to plan for retirement. Rather, it’s the prospect of achieving financial independence and exploring my interests freely without having to worry about life essentials. This is a topic close to my heart and I’ve developed a whole excel spreadsheet around planning for retirement. Through all this planning, I arrived at 5 key steps to take in your journey towards financial independence.
Step 1: Define your desired retirement age and lifestyle
The first thing you need to do is to figure out your target retirement age, both stretch and reasonable. This should be a personal target based on what matters to you, and not influenced by societal norms. For example, it is important that I have the energy to explore life and pursue my interests at retirement. With that as a key consideration, I have set age 50 as my reasonable goal, with 45 a stretch goal.
A sub-step to this would be then to define your desired lifestyle at retirement. For example, the number of holidays in a year, flying business class vs cattle class, frequency of eating out/ having drinks at a nice restaurant, owning a car etc. This should give you an accurate bottom-up estimation of how much you would need a year to maintain your lifestyle.
I recommend working out this out in today’s monies, using the rule of 72 to project that to future monies. The rule of 72 uses the formula no. of years = 72/X%, where X is the average inflation rate, with the result being the number of years for the value to double. For e.g., if you calculated $3000 to be the amount you want to be able to spend a month in 2024 value, you’ll have to cater for $6000 in 2048 assuming a 3% inflation rate. In Singapore, the inflation rate can vary significantly YoY.
Given that the average life expectancy in Singapore is 85 years old, and buffering for X number of years thereafter (your choice depending on your risk appetite), it’s simple math to work out the amount you’ll need in savings to sustain yourself from retirement till end of life. This sounds really clinical, but it is the most unbiased way of ensuring you are well prepared for financial independence. Of course barring any major surprises like a nasty health scare which brings me to my next point.
Step 2: Buffer for the unexpected
This can come in the form of health scares, unexpected big purchases/ spend that is out of the ordinary. If you’re familiar with the concept of CPF and Medisave, you should be quite well covered on the medical front. Particularly so if you are additionally covered by life insurance. Nevertheless, it’s good to buffer additional funds for emergencies, which are by nature unexpected and difficult to plan for. The amount of emergency fund to cater for then depends on your risk appetite.
Step 3: Identify big ticket spend from now till retirement
Your house will play an outsized role in this area, although you should also factor in smaller spends such as a car, children’s education (e.g., local vs overseas University, enrichment classes throughout their development years). I will expand on the house, although other spends follow the same thought process. I.e. figuring out what you want, understanding how much it will cost, and budgeting for it. If you haven’t already found your dream home, you need to stay current with the housing market prices through a high level market research. PropertyGuru is a good platform to give an idea of how much different property types and sizes vary across Singapore. Do not, and I cannot stress this enough but never assume a market price for a property in Singapore. You’ll find yourself getting priced out of the market rather quickly.
Define your desired property (flat, apartment, house), size and location and start your search. Very often you’ll have to trade-off amongst these factors, that’s normal. So figure out your priorities when it comes to searching for your dream home and stay current with the market prices. Raising children is potentially huge investment as well and could likely derail your retirement planning – be sure to consider that.
Step 4: Understand your earning & saving potential
You have worked out how much you need to support yourself from retirement, you are aware of your big ticket spend from now to retirement. The missing puzzle piece is to define your earning & saving potential from now till retirement. This involves knowing how much you earn a year and tracking your monthly expenses. Tracking your expenses has the added benefit of developing a self-awareness around your spending patterns, and building a habit around proper budget management.
Using simple approximation, and barring unexpected events (e.g., getting fired!), you can project your total savings from now till retirement. For example, if you’re currently 30 years old and plan to retire at age 50, and you save $100,000 a year, that gives you $2,000,000 savings by the time you are 50.
This is a very simple model and there is definitely room for improvement on accuracy. You could develop an excel sheet that considers compound interest from your investment and pay increments across the years. For the purpose of planning, I would recommend erring on the side of caution and assume a more conservative rate of return on investment and pay increment. I assumed a 0% return and flat pay and revised my excel only when a pay bump is confirmed.
Step 5: Put it all together & iterate your planning
You now have a complete view – projected savings on one hand, and projected spend (retirement sum + big ticket items) on the other. All you have to do is to optimise/ trade-off across various dimensions, which is arguably the hardest step. If your projected savings > spend, you should definitely celebrate as you’re well on track to realising your financial independence goals. If however, and this is usually the case, your projected spend > projected savings, you can start tweaking your plan by asking yourself 3 key questions:
1) Am I willing to compromise on my retirement age and/ or lifestyle? If you are, define your new target and revise your plan.
2) Am I willing to compromise on my spend from now till retirement, especially my dream home? If you are, define your new spend and revise your plan.
3) Is there any way I can accelerate my earning and/ or saving potential? Increasing your earning potential doesn’t have to be just from your job, in fact it shouldn’t be. Think about side hustles you can pursue, and investments you can make that fits your risk appetite. Also, is there anything you can do about your current spend?
Remember, planning for financial independence is a continuous and iterative process. Constantly re-validate your goals/ assumptions as it is natural for them to change over time. For example, are there plans to significantly reduce your projected earnings (e.g., taking a step back career wise)? Are there plans to significantly increase your projected spend (e.g., have a kid, home upgrade)? It might seem daunting at first but once you start thinking about it more seriously, one consideration leads to another and suddenly you find yourself developing a very detailed and robust excel sheet. So take the first step in planning and everything else will fall in place.