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Develop habits now that will ensure we retire comfortably. (How to have a comfortable retirement?)

Wednesday, September 24, 2014

(Even when we are richer, keep our frugal habits acquired during leaner times.)
There are many ways to have enough money to retire comfortably from active employment. Win the top prize in the national lottery or inherit a similar amount from a rich relative, perhaps? Unfortunately, the chances of either case happening for the vast majority of us would probably be quite low.

However, this does not mean that a comfortable retirement is beyond us?

In an earlier blog post, I suggested that all of us have a chance to save 100% of our earned income and although it sounded unrealistic at first, after going through some numbers, it wasn't so unrealistic after all. Now, how does that blog post tie in with a comfortable retirement?

The beauty of the idea behind that blog post is that it isn't discriminatory. A person could be 25, 35 or 45 years in age, it simply doesn't matter. A person could put the plan in motion today and 13 years later, as long as the conditions are met, he would be receiving income from his investments that equals his earned income today.

So, if we think that we are able to retire quite comfortably with our current level of earned income, put the plan into action and 13 years later, we would be ready for retirement as we would be receiving an income from our investments that is equal to our earned income today.

For readers who are new to my blog and who have no idea what I am talking about, please read: Save 100% of your take home pay! What? Oh, I should have included people who have a bad memory. Er, ok, I will read it too.




Read it? Then, let's continue.

So, if we are sure that our current level of take home pay is good enough to provide us with a comfortable retirement, we have to start saving 50% of this sum every month. That is one of the assumptions for the plan to work.

Probably, for people who have yet to enter into any big financial commitment, this would be an easier task. For most people who are married with a kid or a few, who have a huge mortgage or (heavens forbid) a few and a car or two, it could be quite difficult. I like to think that it is never impossible but it could be very difficult.

The biggest problem that I see is that people get used to lifestyles which are too expensive and scaling back would mean much discomfort which probably includes a loss of face which could be unacceptable to many people.

For example, I know a friend's dad who lived the high life, had expensive cars like SAABs and BMWs, had expensive watches, dined at fine restaurants, went to casinos and bet on horses. Today, he doesn't have much savings and if not for mandatory contributions to his CPF account, he wouldn't even have any money in his old age. Is he having a comfortable retirement? He doesn't think so.

Money not enough. What to do?

I have readers of different ages who write to me and, from my observation, I feel that readers in their 30s and 40s feel the most stressed out. They could be making $6,000 to $10,000 a month but many of them are not able to save more than 10% of their take home pay. So, asking them to save 50% of their take home pay is a tall order.

What would AK say to them?

The first thing that I would tell them is to go through all their expenses and decide which of them are needs and which of them are wants. The wants ought to be cut out and, then, see if there are alternative options which are less expensive to meet the needs. 

The second thing I would tell them to do is to stick to this simplified lifestyle and do not scale up with the next salary increment which they might get. The reason why many people don't ever seem to save any money is that they upgrade their lifestyles as they make more money in life.

Recently, a reader in his early 40s who makes more than $8,000 a month told me that he used to save about $500 a month of his take home pay but now he saves $2,000. This is not 50% of his take home pay but it is already a vast improvement.

Most of his annual bonuses were spent on family trips to faraway places and "don't know what" (his words) but he has decided to save these in future. This would increase his annual savings to be about 50% of his take home pay.

So, how did he achieve an additional $1,500 in savings a month?

1. He downgraded his car. He is used to having a car but he didn't need a luxury European make. It was a want. All in, he estimates that he now saves $700 a month because of this.

2. His family used to dine in restaurants every Sunday. This is now reduced to only once a month. This helps him save more than $200 each month.

3. He discussed with his wife on whether some of the enrichment classes they sent their two children to were necessary. He knew they were spending a lot of money on such classes but he was surprised at how much they actually spent. So, apart from classes which were deemed essential, lifestyle classes such as tennis lessons were axed. This helped them save about $600 a month.

The reader has also decided to cancel plans to buy a condominium and to stay put in his HDB 5 room flat. He feels more confident now about his ability to retire comfortably with his wife when he turns 55 and, by then, his children should be working and supporting themselves.

Of course, I reminded him that he would be getting some money from his CPF savings at age 55 and also a lifelong income from CPF-Life at age 65. That will certainly help fund his retirement.

While we are still able bodied and making plenty of money, our expensive lifestyles might seem affordable but get used to such expensive lifestyles now and we might not be able to retire comfortably many years later when things become more expensive.

Related posts:
1. A common piece of advice on saving.
2. Do you want to be richer?
3. Tea with AK71: A three point turn.
4. Free e-book: Retiring before 60 is not a dream.
5. To retire by age 45, start with a plan.


RayNg said...

Thanks for another good post of retirement.

IMO, rule #1 is Pay Yourself First.

If one decided to save 15% of take home pay, then make sure he transfer this 15% saving in a Special saving account.

The remainder 85% should be spend on needs than nice-to-have.

Learn to invest to grow your money over long term.

AK71 said...

Hi Ray,

Unless we are born with a silver spoon or a spoon made of some precious metal in our mouth, how much money we save really will help to determine how secure our financial future is going to be.

Of course, like you said, the important second part is to learn how to make our savings work harder through prudent investments over a longer term. :)

pf said...

I think ppl spend money because they have the time to do so. Haha....

Invest time in ourselves, invest time in other people, invest in a greater cause...then probably won't have time to spend money. Haha....

yeh said...

hi, just wish to share my story about the power of saving.

after 10 years non stop working, live frugal, within my mean. i able to save 80% of my take home pay.

The amount i save up able to clear my 5rm HDB flat housing loan. i am just 32 years old, btw:)

Power of Saving:)

AK71 said...

Hi pf,

I know your strategy. Signing up for a few more courses in the near future? ;)

AK71 said...

Hi yeh,

I like your story. I am very impressed. I would like to invite you to do a guest blog for ASSI if you could spare the time. Please say "yes". ;)

yeh said...

hi AK, thanks for you offer.but i am not good in writing.

just my simple of lifestyle help me in my saving plan.

my hubby also a good saver, he just dislike high risk investment, eg share:) so he invested his money in saving plan and insurance, endowment,unit trust etc( one month about 2k).so he has less saving than me. but his saving also enough to cover our Outstanding HDB he just put aside that 6 digit saving in FD account for any emergency.

so most of my money, i use for share investment.

we can afford car, but we do not buy car.
we can afford condo, but we choose to buy HDB for our stay home.
we will buy online groupon or free dining voucher( incentives from credit card) for our restaurant dining.
we do not fancy any branded stuff. so this can help me save a lot money.
we also go our holiday once per year, but we choose to be backpacker. this can help to save some money.

another main reason for me to save up. i think most probably we do not have kid.

well, we still enjoying our life without spending a lot of money.

AK71 said...

Hi yeh,

Thanks for sharing your lifestyle in greater detail with us here. Aiyoh, this is good guest blog material. LOL. ;p

Yes, not having children saves plenty of money. Going by what friends and family tell me, I have no doubt about it.

However, good money saving habits are really what form the foundation of a secure financial future for the most of us. You and your husband are good examples of this. :)

OT83 said...

Hi AK,

Saving is power! investment is important! many of my friends keep saying they not enough money, complain here and there. but they have much more earned income than me. why?

Share a secret: I am netcash position even adding my hdb debt. but I am far far from you to have 10k passive per month :( Must work harder!!

AK71 said...

Hi OT,

Long time no hear from you. Good of you to touch base. ;p

Net cash position is good! Is there any reason why we prefer to invest in net cash companies? Hmmmm... ;p

More passive income? That is good too! Strong free cash flow. Is there any reason why we would like to invest in companies with strong free cash flow? Hmmm... ;p

If we ran our personal finances well and invested well, we would become a company we would like to invest in. ;p

OT83 said...

Hi Ak,

netcash company are generally more recession proof. For company if they are netcash and the cash can substain the company even if zero earning during recession, the company likely can be alive after recession.

haha for me, I hope my netcash can be equal to sufficient bullet to shoot the bear in recession. (but I doubt so. haha).

for fcf = ocf - ppe, the higher the better! think my friends fcf is very low.

did I get the answers correct? AK cher!

AK71 said...

Hi OT,

Oh, my. You must not ask me difficult questions like these. It is way too stressful for me. -.-"

I can only hope that I will make it through the next recession intact. That is what matters most to me. ;p

WTK said...

Hi AK,

My take is that it makes more sense to disregard the "insecurity" feel (which one may have experienced despite having the investment portfolio to last a lifetime - applicable to a simple peasant) to have a comfortable and relaxed retirement. Peace of mind is possible with such "insecurity" disregard as per my perspective.


AK71 said...


It is risky to ignore any feeling of insecurity.

Things could always go wrong and, sometimes, horribly wrong.

Peace of mind could be an illusion. ;)

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