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Are you financially on track for retirement?

Monday, October 20, 2014

I chanced upon this over the weekend and think it is interesting enough to share.


Source: JP Morgan Asset Management

So, according to this, if we are 40 years old and making $75,000 a year, we should have $120,000 put aside for retirement by now.

By putting aside, it doesn't mean just stashing the money in a mattress or a mooncake tin, it means having money in investments which are producing a 7% annual return.

I thought of tweaking this so that it takes into consideration CPF savings. After all, a Singaporean who is 40 years old could have been working for 15 to 20 years already. There could be quite a bit of savings in his CPF account.

Then, I decided not to bother because most Singaporeans will use their CPF savings to pay for their home. How much of their CPF would they utilise and whether they would monetise their home now or in the future is hard to say.

Anyway, this table also assumes that there is a 2.5% annual wage increment (and no chance of any job promotion). There are also the assumptions that the retirement age is 65 and that the accumulated money must last for 30 years of retirement (i.e. till age 95).

In case you are wondering, Singaporean females have a life expectancy of 85 years and males have a life expectancy of 80 years. So, 95 seems to be generously realistic.


Of course, there are probably quite a few holes we can poke in the table above. However, I feel that this table is useful as a wake up call for people who do not have at least what it says we should have in liquid assets at this current point in time earmarked for retirement, excluding CPF savings and emergency funds.

They are probably not saving enough and should take action to improve their financial health quite rapidly. The earlier they realise this, the better. The longer they have to save and invest, the better. If we know of such people and if we could give them a nudge in the right direction, the better.

Related posts:
1. To retire by age 45, start with a plan.
2. How to have a comfortable retirement?
3. IPS Forum on CPF: Housing and the CPF.
4. 5 points you ignore at your own risk.
6. SRS: A brief analysis.

15 comments:

jonathan said...

Hi AK,

Sorry but I dont quite understand the table.

What exactly do the numbers in the table mean? 0.4, 0.6 etc

AK71 said...

Hi Jonathan,

I gave an example in the article of a 40 year old:

"So, according to this, if we are 40 years old and making $75,000 a year, we should have $120,000 put aside for retirement by now."

That is $75,000 x 1.6 = $120,000

If the person were 30 years old with the same salary, then, he should have $75,000 x 0.6 = $45,000 put aside for retirement at this point in time.

Sorry if I wasn't clear enough. :)

jonathan said...

No need for apologies! Should have thought deeper. Nonetheless, great article as I have a target now to work for!

Thank you so much and great blog :)

twinhills said...

Hi AK,

thanks for sharing. however I am not able to make sense of the numbers - how come a person with higher income needs to put aside more money for retirement?

Wee Teck Wong said...

Hi AK

Is there a way to buy corporate bonds ?

Unknown said...

Hi Ak,

Do you know why there is any reason that the higher income earners are expected to have more (in multiples of income) than the lower income earners?
I.e. at 65, those earning 50k should set aside 5.7X, while those earning 250k should set aside 14.1X?

My thoughts would be that those who engage JP morgan have to have a much higher buffer to afford the losses incurred by JP morgan's asset management.

Those who engage AK's free thinking out aloud can save less, but return much higher on their investments
HAHA XD

jojo said...

Hi AK,
Just want to thank you for doing a great service to SGporeans by highlighting financial literacy, importance of saving, CPF, insurance ... the list goes on. I hope many young SGporeans follow your blog, be alerted to such important facts of life, and set out their young life with the right frame.
In other words, thank you for talking to yourself .... out loud. Hey, we are not eavesdropping! :)

AK71 said...

Hi twinhills,

I wondered about that myself. Then, I decided that it could be a matter of wording.

Compounding takes time and the more we have to start with, the more amazing is the effect of compounding.

So, if we save more from the start and the rich are probably able to do this better than the less rich, their money will grow much faster. So, they will end up having more money put aside. It might not be that they need so much to retire on.

I also wondered if it had anything to do with rich people maybe having a desire to have a more upscale lifestyle in retirement which they are in a better position to afford.

Well, like I said, this table is probably full of holes and is in need of some table salt. ;p

AK71 said...

Hi Wee Teck,

I am not the best person to talk about this. So, I found a link for you:

Asian Bonds Online: Singapore.

:)

AK71 said...

Hi Unknown,

That is something that I did not think of. Aiyoh, don't get me in trouble. -.-"

AK71 said...

Hi jojo,

Oh, dear. You mean people are listening in to me talking to myself? I must be more careful from now on. I don't want my blog to be gazetted. -.-"

Actually, I think I am too talkative for my own good. I must reflect upon this flaw. :(

Don't encourage me but kamsiah. ;p

tt said...

Hi Ak,

Thank you for sharing this post. It is nice to have general markers like this along the way.

i find it very difficult to achieve 7% returns + inflation rate. Guess while i am putting aside enough per my income, i am not working hard enough or rather smart enough at investing.

Thank you =)

AK71 said...

Hi tt,

Well, like you said, these are general markers and depending on our assumptions, we would have different markers. ;)

It is more important to know what kind of lifestyle we would like to have in retirement and have a realistic estimate of how much things could cost by then.

See:
How much do we need or what do we need?

Plan early for retirement. :)

Steven said...

if we have only limited resources, how would u suggest to allocate between cpf-sa & srs?

AK71 said...

Hi Steven,

It is for the individual to decide really.

Money in the CPF-SA cannot be withdrawn (unless there is more than is required by the MS at age 55) but it pays a decent risk free rate of 4% to 5% per year. It is building wealth for a lifelong annuity, CPF Life, which pays us monthly from age 65. To me, this is the stress free option.

Money in the SRS account should not be withdrawn until we hit age 62 but early withdrawal is allowed in case of emergency, with penalty. Interest income from SRS account is pitiful. So, we must put the money to work.

Both options will give tax benefits but if a person is quite savvy at investing money for higher returns, the SRS could be preferred.

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