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An average HDB household and $1 million.

Monday, June 12, 2017

Some might remember that I talked about an article written by Cai Haoxiang in The Business Times in 2013. He wrote about what an average household's monthly expenses could look like in 2042, using the Household Expenditure Survey 2007-2008 from the Department of Statistics as reference.

1997-1998, an average HDB household's expenses was S$2,681. 2007-2008, it was S$3,138. That was an increase of 17%. By 2042, if core inflation is 2% a year, that number would hit S$6,400. In 3 decades, the number doubled and then some. 

If we were to assume that costs would increase steadily, monthly expenses for an average HDB household could hit S$7,500 by 2052.

Many people say they need $1 million in savings when they retire at 65. I don't know if they know this for sure or if they are just saying it because $1 million sounds like a big deal.

OK, let us look at how long would that $1 million last?

Hold on to your seats.

At a draw down rate of $7,500 a month, about 11 years, assuming that the banks did not pay interest on savings and that there would be no further inflation. 

The money will run out at age 76.

Alamak, how like that? Many people are expected to live till 85 or older these days.



That is 35 years away.

So, if you are 30 years old this year and you are from an average HDB household, this could well apply to you. 

Aiyoh. Stress.

OK. Before you run around doing a Chicken Little, an average HDB household was assumed to have 3 to 4 members. So, if your household size is smaller, then, expenses should be lower. 

Single or DINK at 65, anyone?

Of course, even for married couples who have children, at 65, their children should be financially independent of them. So, again, expenses should be lower than what is assumed here.

I am going to stick my neck out here and say that, in 2052, $4,000 of spending money a month could probably give most people who are 65 and retired a comfortable life.

If you are 30 this year, have $1 million in savings by age 65, you should be able to fund a $4,000 a month retirement easily into your 90s.

If we max out our CPF contributions annually and top up our CPF SA to hit the Full Retirement Sum (FRS) earlier, we could have this magical $1 million in our CPF account by the time we are 65.

Don't believe me? Read this:

From an average HDB household? If you do not have the temperament to be an investor, this is something to seriously consider.

Singles and DINKs will find this easier to achieve than those who are married with kids, everything else remaining equal.

Some might have to try harder and some might take more time but if this is important enough to attain, then, do the right thing. Start today.

Related posts:
1. Retiring a millionaire is not a dream.
2. A cornerstone in retirement funding.


csky said...

Hi AK,
Do you mind sharing why you are so positive on our CPF scheme?

I feel the CPF is sort of a giant mutual fund with zero transparency on the performance of the fund manager. What if the fund manager has been losing money all these years and the fund could collapse one day?

Technically no existing fund now can guarantee a 4% return (except Warren Buffet in his early days), so why would CPF be so bold as to promise a 4% return? Is it because CPF money is locked in for such a long term (20-30 years) as compared to mutual funds where money can be withdrawn at anytime, hence you are willing to put your faith in it?


csky said...

Hi AK,
Do you mind sharing why you are so positive on our CPF scheme?

I feel the CPF is sort of a giant mutual fund with zero transparency on the performance of the fund manager. What if the fund manager has been losing money all these years and the fund could collapse one day?

Technically no existing fund now can guarantee a 4% return (except Warren Buffet in his early days), so why would CPF be so bold as to promise a 4% return? Is it because CPF money is locked in for such a long term (20-30 years) as compared to mutual funds where money can be withdrawn at anytime, hence you are willing to put your faith in it?


AK71 said...

Hi csky,

There are choices aplenty as investors and we have to decide where to park our money. If Singaporean investors believe that there is a place for a AAA rated sovereign bond in our portfolios, then, for most of us, there is no better choice than the CPF.

Granted that we cannot withdraw our money anytime we want but that is also because our CPF savings will ultimately become an annuity that pays us for life. For an annuity to work, we should not terminate it when we feel like it. If we do not believe in having an annuity, then, the CPF is less attractive.

I have many blogs about the CPF by now. Use the "search" function at the top of the blog and you will see them.

For example:
AK is buying a 12 year tenor AAA rated bond.

Finally, peace of mind is priceless. We should do what we feel comfortable doing. ;)

Spur said...

Hi AK,

I took up your undeclared challenge and for the fun of it, see whether $4,000 monthly withdrawal from a $1 Million retirement portfolio can last from 65 until 90s.

Since I'm a lazy bugger, I used T. Rowe Price's Retirement Income Calculator:

This runs Monte Carlo simulations on 1,000 possible scenarios, and sees whether a retirement portfolio can tahan a certain level of withdrawal.

To make things simple, I entered the following:-
1. Single, no spouse.
2. Current age of 65, to start retirement immediately.
3. Portfolio of $1M.
4. Asset allocation of 40% stocks, 40% bonds, 20% short-duration/MMF.
5. Monthly withdrawal of $4000.

At $4K monthly, the $1M portfolio only got 51% chance to last until 95 years old.

Recommended to lower monthly withdrawal to $3,271 in order to have 80% chance to last till 95 yrs old.

Shows that trying to run your own annuity can be tricky!!

Anyway take it with a pinch of salt! :)

Oh, and talking about annuity, if they're going to increase the CPF FRS at the rate of 3% p.a. then by 2052 it'll be $467,100.

Venkatesan said...

You need to understand that a sovereign state is very different from a mutual fund. Ask yourself - Singapore govt promises CPF return in which currency? USD? AUD? JPY? Nope, SGD! And who controls the CCY? No prizes for guessing its the SG govt. And can you now understand how they can "proimise" what no other private company can? AK says AAA rated bond because the govt has been prudent and earned the rating - not from another SG company but from independent and established rating agencies. And, unlike a mutual fund, SG govt mixes up all CPF monies in lieu of issuing a promise (so called special bond) - with its other revenues and spends them in a million ways - party via Temasek SWF, party by funding our infrastructure, partly by offering tax rebates to multinationals, partly by investing in joint ventures overseas, partly by investing in skills of singaporeans, partly in housing etc etc. You are content once the MF company says we invested in bond X or company Y - how does that entity inturn use your money? Which MF gives you _that_ detail? But when SG govt does the same - it issues you a bond - you are not content and want to know the full details of how _that_ money is spent - you cant hold the govt to arbitrarily high reporting standards. We all need to be reasonable - a bond issued by a AAA rated govt in its own currency is as safe as it gets. As for us not allowed to take the money out - its for our retirement! Its really no different from you paying into social security as taxes, IRA etc and then getting it back at 70!

csky said...

Thanks, AK.

I kind of like the view to treat CPF as a AAA govt bond, albeit a pretty long term one.

But I am still somewhat confused by CPF with their top-ups, minimum sum and annuity. Would it be wise to first focus on building up my cash capital and not think about topping up my CPF accounts, until I am able to generate good passive income from investments?

AK71 said...

Hi Spur,

Thanks for crunching the numbers. Very interesting! :)

I like to think that $4,000 a month is sustainable but I could be looking through rose tinted glasses if I assume that the CPF would continue to pay us at least 2.5% a year on that $1 million from age 65. That gives us $25,000 a year. This will shrink because at a draw down rate of $48,000 a year, interest income will reduce with a shrinking principal. At some point, the money will vanish.

The money should last almost 30 years or well into our 90s if we start this at 65. I used this caculator:
How long will my money last?

Yes, the FRS is supposed to increase 3% every year to, hopefully, keep pace with inflation. I am hopeful that inflation will be lower at 2% a year over the very long term. :)

AK71 said...

Hi Venkat,

I share your sentiments. :)

Why does a highly indebted nation like the USA enjoy AAA credit rating? Almost everyone has the confidence that the USA is able to honor and even repay her debt.

In the worst case scenario, a government could print more money but not a corporation or fund manager. Of course, this is not the ideal path as it would probably lead to inflation because the value of money could decline, all else remaining equal.

If we are not confident that the Singapore government will do at least a decent job, then, what about all our investments based in Singapore and are linked to the Singapore Dollar?

AK71 said...

Hi csky,

Oh, I know what you mean about being confused and that was why I published this blog:

Know how to grow our CPF savings.

Hope you find that helpful.

The magic of compounding needs time to work but with a bigger base to start with, it will be even more magical. You don't have to use cash to top up your CPF SA if you want to use cash to invest for income. You could consider OA to SA transfer.

How to upsize $100K to $225K in 20 years?

csky said...

Hi Venkat, Thanks. Yes you are right. After AK referenced it to govt bond, I saw the similarity of it to the US Treasury Bill. And like AK also said, if they run out of money, they can just print more... just like what US is doing.

On another note, AK, given that USA has printed so much extra money and in so much deficit, why is there hardly any inflation in USA? Many ppl say the next crash likely to be triggered by debt deficit in US and/or China. What are your thoughts on that?

Unfortunately, there's not much money left in my OA after using it to pay housing loan (which based on your posts, I should also do some rethinking there). Hence was wondering if I should put some cash to OA to get the 4% advantage or just keep it all for investing.

Spur said...

Hi AK,

Thanks for the savings calculator link!!

I think I know why the difference in portfolio longevity --- annual increase in withdrawals to cater for inflation.

T. Rowe Price's calculator puts in a fixed 3% annual increase.

For CalcXML, the default assumptions are:-
1. 0% annual increase.
2. 8% portfolio returns. (this one is the tricky thing!!! :) )
3. Federal marginal tax rate of 25% (this for US residents)

With the default settings, yes, $1M will last over 30+++ yrs on $4K monthly withdrawals. Basically indefinitely, barring a huge markets crash early on in retirement.

Becoz your annual withdrawal rate is 4.8% versus a projected 8% portfolio returns. :)

I changed the assumptions to the below:-
1. 3% annual increase in withdrawal.
2. 5% portfolio returns.
3. 0% tax.

And this time it gives me 27 years. Still very good though .... until 92 yrs old! :)

If portfolio returns 2.5% p.a. then only 20 years. Ooops!

AK71 said...

Hi csky,

I don't know when the next crash is going to happen and I don't know what would trigger it. I cannot predict a crash. I can only prepare for one. ;)

AK71 said...

Hi Spur,

Hahaha. Well, we are only "on paper talk soldiers". Time will tell. ;)

In the meantime, we can only do what we feel is the right thing and, hopefully, we will be well prepared when the time comes. :)

Venkatesan said...

US did not print money - QE is a liquidity swap. This is what the then fed chairman Ben Bernanke had to say about it:

This is an excellent write up on that:

You can search for milton friedman + helicopter money for more info

csky said...

Thanks, AK. I went through your CPF posts and have a much better picture now. Just wish I have enough extra cash to max out my minimum sum now :(.

One question, when one reach 55 yrs old, the FRS (say $166K now) will be transferred to RA. This $166K will be used to pay the premium for the annuity. Based on $166K, the monthly payout is about $1200. But the annuity pays for life, so if you live for more than 12 years, look like an awesome deal. But what happens if you live for less than 12 years? Will CPF refund you any difference between $166K and the payout you have already received?

By the way, is there a way to view all your posts chronologically? Like an archive section where the posts are all sorted by date. I would to start reading from your first post :-P

AK71 said...

Hi csky,

If you should pass on before you turn 85, there will be some money left from your CPF Life annuity which would go to your beneficiaries. You might be interested in this:
Worried you won't live to enjoy all your CPF money?

There is an archive function in the blog which you will find in the left side bar. You might want to read this blog in which a reader shared how she went through my blogs:
Get the most out of ASSI.

csky said...

Thanks AK.

I am trying to see if I have learned correctly, say if one have $50K cash lying around, and SA still haven't meet the min sum limit yet, should one
option 1: Top up SA to get the 4% compound interest or
option 2: Do partial repayment on the HDB loan principal amount (to stop accruing the 2.5 interest) and get 2.5%

I am thinking option 1 is better cos 4% returns still more than the 2.5% you owe. Is this correct or am I missing something again?


AK71 said...

Hi csky,

It would depend on what you are trying to achieve. If you are saving for retirement, the CPF-SA is more rewarding. If you want to retain some flexibility and have more options for your CPF money, then, doing a voluntary refund into your CPF-OA makes sense. It isn't purely a case of the account that pays a higher interest is better. :)

csky said...

Haha ya, true true. Thank you!

AK71 said...

I am actually hoping to be financially free like u. I wonder how to accumulate $1 million. I have been learning to invest in stock but don't have much success.

Actually, you don't have to invest in stocks if you don't want to. Here is another blog which I should share again.

Ben said...

I am of view that $1 million is enough for retirement as long as one reduces the spending. The 4% withdrawal rate will go towards sustaining the spending for a indefinite amount of time.

Live on the generated dividend from the portfolio and I believe that it will be feasible strategy for the individual.


AK71 said...

Hi Ben,

Just have to pray that inflation behaves itself and does not go galloping away. ;)

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