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

(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.

Pause.

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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.