What comes to your mind when you think about your retirement?
Staying at home looking after your grandchildren, taking public transport to meet friends over coffee or majong. Taking an occasional vacation to a nearby destination in Asia. Healthcare options are limited to government restructured hospitals. Financially independent.
Zipping around town in your car meeting friends for a round of golf followed with a high tea buffet in a hotel and some shopping in town. Have the option to change your car every 5-7yrs. Ability to afford at least 2 vacations globally a year with your grandchildren. Healthcare options are available up to private specialists and hospitals. Financially independent with a decent-sized estate that can be passed down to your children and grandchildren.
Whether it’s option A or B will depend very much on your desired retirement lifestyle and the size of your retirement nest egg prevailing at that point. The more funds you have, the more retirement options will be available to you.
For most working professionals, I believe they will desire a lifestyle similar to option B but interestingly, their retirement plans may not match that objective. Why?
Some of the possible reasons are as follows:-
- Prioritizes immediate gratification over deferred enjoyment
- Low savings ability due to inability to curb lifestyle spending &/or over-commitment to car and housing. With our high property prices, it is not uncommon to see couples saddled with at least S$1mil in housing loan nowadays
- Having a single income to support the family after a spouse leaves employment to look after the children
- Being overweight in investments with a performance that did not pan out as expected. Wost still, ended with a capital loss.
- Procrastination leading to delay and underfunding in the accumulation plan
- Overestimated that CPF alone will be sufficient for retirement
- Underestimation of how much is required at retirement age to live that desired retirement lifestyle
In this article, I’d like to discuss point #7.
To facilitate the discussion, let’s think of retirement to like taking a long term overseas vacation…something that most of you will be able to identify with. After all, taking overseas vacations is one of the most favorite pastimes for overworked Singaporeans, wouldn’t you agree?
A. The Destination
With every vacation, it starts with the destination.
Given our longevity, retirement may span at least 25yrs. Hence, for discussion purpose, let’s assume that we’re taking a Flight to Brazil which is a 30 hour flight time
Perception pitfall: one may think that the retirement period is far shorter
B. Plane type, Engine, and thrust, fuel capacity
Given the destination, which plane do you think can best bring you there most effectively in one piece with minimal refueling stops? A turboprop, piston, midsize jet or a wide-body airliner?
– A wide-body airliner of course!
In financial planning terms, the size of the plane is akin to the size of the retirement nest egg required to provide you with the desired retirement lifestyle. If your financial adviser has done a calculation for you, you will realize that it’s no small change. After all, Singapore is reputed to be one of the most expensive cities to live in.
With a large airplane, it needs to be equipped with large engines and fuselage to power the aircraft. Moreover, the cost of the plane is not constant. Instead, it goes up over time due to inflation.
Hence in financial terms, the earlier we start accumulating and the higher the regular contribution, the more power you will inject into the accumulation process…and the more likely we can achieve our retirement goal.
Perception pitfall: one may think that they can rely on CPF alone or that retirement doesn’t require too much money.
C. The Runway
Every plane needs a runway to allow it to pick up speed for take-off. Similarly for retirement, the runway is the time period from now till our expected retirement age. This is the critical period for us to contribute towards our retirement nest egg, and take advantage of the compounding effect of money.
Typically the larger the plane, the longer the runway needed. Since we have deduced from above that we’ll require a Airbus A380 equivalent, we do need a long runway for it to do a proper take-off, agree? That means that we really need to start early – as soon as we’re in our age 30s, to start the accumulation process. Appreciating this point is the most important part of the accumulation process.
If we take advantage of the long runway by starting early, small regular contributions can allow us to achieve our retirement goal with little financial stress. We can see that through the effect of compound interest in the picture below. It certainly looks like a plane take off trajectory, isn’t it?
However, if we procrastinate and start later in life e.g age 45, the runway will be shorter and we will be required to contribute significantly more on a monthly basis to reach the same end goal. That would be pretty stressful, wouldn’t it? Another example can be seen in the following
If you’re only starting to accumulate in your 50s, your runway will be rather short and you will need all the financial firepower you can give to your accumulation plan. If you fail to do that, I’m afraid you may have to consider deferring your retirement age and/or downgrade your retirement expectation.
In summary, our ability to achieve our retirement goals are dependant on how well we manage the following 4 parameters:-
1. desired Retirement Lifestyle, expected Longevity and Inflation
– which will determine how much is needed at retirement age
2. Accumulation Period
3. Size of the Regular Contribution to the plan
4. Rate of Return on the plan (which I’ll address in a later article)
Ready to take off to retirement bliss? Get in touch with me at email@example.com