Ways to retire a millionaire
By Stephanie Thng, Funds Supermart
Start saving early and it could make a world of difference to
your retirement plans. Time is your best friend as you will find in
this story. Here, we assume five individuals at different stages of
their life, from those earning at entry-level, to those close to
retirement age. All aim to achieve a monthly income of S$2,500
during their retirement years from age 62 to 82. We also taken into
account that the inflation rate stands at 3% per annum, meaning
that the general cost of goods and services rises by that amount
each year.
Further, we assume that whatever the investors save during
their pre-retirement days will earn 8% annually. After they hit the
age of 62, we assume that the return on their savings drops to 4%
per annum as they take less risk in their investments. This simple
illustration does not take into account your other financial needs,
such as whether you have planned for your insurance needs (life or
term insurance, mortgage insurance, health and hospitalization
plans).
If You're 25
Savings: S$0
Monthly Salary: S$2,500
Rate of Increase in Wages: 3% p.a.
Number of Months in Bonus: 2 months
Housing Loan: Not Required
What You Need to Save per Month for the next 37
years: S$158.30
Planning for your retirement when you are 25 years old may seem
a bit far-fetched. But the benefits of starting early cannot be
underestimated. Assuming that a person starts working at 25 with a
salary of S$2,500, you would need to save S$158.30 per month to
ensure that your retirement income can stand at S$2,500 per month
during your retirement days, which we assume will run from the age
of 62 all the way to 82. Even with no savings to start with, having
a regular savings plan (RSP) may be a good way to start planning.
An RSP would ensure that you have the discipline to force yourself
to invest – there is little room for excuses! Very often, we may be
tempted to use up our savings for a travel trip or to purchase that
dream car. And even for those who believe in the merits of
investing, they may not have the discipline of investing regularly
because they feel it is not the "right" time to invest. This could
be especially true when markets are going through a bull run and
some may feel that it is too expensive to go into markets. An RSP
is a disciplined way to ensure that you will invest no matter
markets are up, down or sideways.
If You're 35
Scenario 1
Savings: S$0
Monthly Salary: S$6,000
Rate of Increase in Wages: 3% p.a.
Number of Months in Bonus: 2 months
Housing Loan: S$800 per month over 30 years
What You Need to Save per Month for the next 27
years: S$666.57
Scenario 2
Savings: S$40,000 (earning 1% p.a.)
Monthly Salary: S$6,000
Rate of Increase in Wages: 3% p.a.
Number of Months in Bonus: 2 months
Housing Loan: S$800 per month over 30 years
What You Need to Save per Month for the next 27
years: S$620.73
At the age of 35, the monthly salary is assumed to have risen to
S$6,000. But being able to afford an expensive lifestyle has meant
that there are no savings in the bank account, and now you have
a housing loan to deal with. While things do not look very
bright, it is not too late. Save S$666.57 per month and you could
ensure that you have S$2,500 every month during your retirement
days.
If You're 45
Scenario 1
Savings: S$0
Monthly Salary:
S$8,000
Rate of Increase in
Wages: 3% p.a.
Number of Months in
Bonus: 2 months
Housing Loan: S$800 per
month over 20 years
What You Need to Save per Month
for the next 17 years: S$1692.34
Scenerio 2
Savings: S$40,000
(earning 1% p.a.)
Monthly Salary:
S$8,000
Rate of Increase in
Wages: 3% p.a.
Number of Months in
Bonus: 2 months
Housing Loan: S$800 per
month over 20 years
What You Need to Save per Month
for the next 17 years: S$1582.63
At the age of 45, things will get tougher if no plans have been
made yet for retirement. After all, the time horizon till the
retirement age of 62 is less than 20 years. Assuming that there are
no savings in the savings account, you would need to save S$1692.34
per month. And even with savings of S$40,000, you would still need
to save S$1,582.63 per month.
If You're 55
Scenario 1
Savings: S$0
Monthly Salary:
S$10,000
Rate of Increase in
Wages: 3% p.a.
Number of Months in
Bonus: 2 months
What You Need to Save per Month
for the next 7 years: S$5319.54
Scenario 2
Savings: S$40,000
(earning 1% p.a.)
Monthly Salary:
S$10,000
Rate of Increase in
Wages: 3% p.a.
Number of Months in
Bonus: 2 months
What You Need to Save per Month
for the next 7 years: S$4937.02
The lesson is to start early. The later you drag your retirement
planning, the higher the cost. You would need to save over S$5,000
per month (over half your salary) from the age of 55 to 62 to
ensure that you have S$2,500 per month during your retirement
days.
