Most of my friends including me has been working very hard. The daily grind has really taken a toil on us, especially when we are no longer young. No longer we are in our twenties. In between all these toiling, sometimes I ask myself what is the reason behind all these and why am I working hard for?
Of course it is to meet all my present needs, my current commitments and also to provide for my family and my parents. However beyond all these immediate needs, for me one other important need is to be able to provide for my old age. Just like a squirrel, it will store up food for winter, I will have to make plans for my old age.
However, the first thought of saving for retirement was quite a daunting one.
Then I just started working and I owe a student loan. I feel that I could not even have enough for myself now, let alone saving enough for retirement. As I age, I start to realise that I have shorter and shorter time ahead of me to start saving for retirement. I remember an advertisement on the TV showing how this person at his retirement party, with all his colleague was celebrating for him, and yet he is feeling sad. He said that, he did not save enough for retirement. He may need to carry on working.
This advertisement echoes my exact sentiments.
Then I have not started any planning for retirement and has not even saved a single cent at all. All I am doing is just to meet my day to day expenses. The interesting fact is that even I have acquired financial knowledge, yet I did not start to save for my retirement. I realise that having head knowledge alone is not enough. I must have the heart to face my current situation, no matter how bad it is, and start taking action towards it. I am running away from facing the reality of being responsible for my own retirement. I do not want to know how much do I really need.
One day, I decided to take my first baby step towards my retirement planning as I have enough of all my excuses. To me, this first step of retirement planning will be to determine how much I would like to spend every month in my retirement.
So, I come up with a list of expenses I think I will spend on in my retirement years, and estimate the amount that I will need to spend on each items.
Here is my list:
| Retirement Monthly Budgeting | |
| Food | 500 |
| Transport | 300 |
| Utilities | 100 |
| Internet | 100 |
| Phone | 100 |
| Gifts and Ang Pows | 100 |
| Travelling | 600 |
| Entertainment/ magazines/ news etc | 150 |
| Conservancy/ condo maintenance charges | 300 |
| Govt, Property taxes etc | 100 |
| Personal grooming | 150 |
| Groceries | 200 |
| Medical Expenses/ Health Supplement | 200 |
| Insurance | 300 |
| Miscellaneous | 100 |
| Total | 3300 |
The total amounts comes up to be $3,300 (in today’s dollar value) monthly.
Next, I need to decided when do I want to retire? Perhaps age 60. If I am currently age 42, I will then have 18 years ahead of me. In the 18 years ahead of me, I will expect inflation to come into play. The $3,300 in today’s dollar value maybe a much bigger amount in the future due to inflation. So I did my sums, assuming 3% inflation each year:
| Desired Expenditure at retirement | $3,300 |
| Inflation | 3% |
| Current Age | 42 |
| Desired Retirement Age | 60 |
| Years to Retirement | 18 |
| Desired Expenditure at Retirement Age Due to Inflation | $5,618.03 |
The equivalent of $3,300 that I need based on today’s value is $5,618.03 18 years later. At this point, I start to realized that inflation can really erode away the dollar value of my money.
Having established this $5,618.03 monthly amount, I need to calculate next is to determine the lump sum amount I will need from my retirement age till the day I am not longer around. However, to calculate this lump sum amount is not so straight forward. I need to ask myself these few questions:
- How many years will I estimate to spend in my retirement?
- What is the assumed returns from the lump sum that I have saved at retirement?
- How much will be the estimated average inflation throughout my retirement days?
Will all the above assumptions in mind, I calculate what is the lump sum that I will need to save at retirement, so that I can have enough to spend.
| At retirement age: | 60 |
| Monthly Amount to draw down at retirement | $5,618.03 |
| Number of years in retirement | 28 |
| Number of months in retirement | 336 |
| Returns from my retirement funds | 5% |
| Inflation | 3% |
| Net return from retirement funds | 2% |
| Retirement funds required at beginning of retirement | $1,444,478.22 |
It is an astonishing $1.444 Million! I almost fainted when I saw this figure.
Now faced with this amount, I have a few choices:
- Compromise or lower on my retirement standard of living by setting a lower monthly expenses, maybe $2500 (in today’s dollar value) is enough for me instead of $3,300?
- Maybe I can invest my retirement fund more aggressively for even higher returns. Perhaps at 8% annual return rate?
- Work longer and spend less years in my retirement. Maybe work till age 65 or even age 70?
Looking at the choices that I have, here is what I have decided:
- I am not going to compromise on my retirement standards. Since I have worked so hard in my working life so far. I should at least enjoy a decent retirement.
- I decided against retiring beyond age 60, so that I may still have the strength to do the things I like (e.g. travelling activities etc) before my body cannot do it.
- It is also a bad idea to invest with a higher returns, as that will mean taking more risk with my retirement funds. I feel that at retirement, I should be more conservative in investment and not take excessive risk with my monies.
Since there seems to be no way out, the best way to secure my retirement is to save or invest enough today for my future retirement. Therefore I start to calculate how much will I need to save per month at different returns rates in order to reach my retirement. Here are my calculations:
| Return from current savings | 1% | 5% | 8% |
| Monthly amount to save to reach my required retirement sum | $6,106.36 | $4,136.51 | $3,008.79 |
Now, with these figures, I will have a targeted amount to save each month to secure my retirement years. Soon I started to save and embark on my retirement savings journey. However, years down the road, I started to realise there is a limitation to my planning above. What if I live beyond age 88? Meaning I lived beyond the retirement period that I planned for? What if I out-lived my retirement funds?
Then I started to explore and think of ideas on how to mitigate this limitation. One of the ideas that I explored is to own a fully paid property by the time I have retired. By renting it out at the monthly rental that can take care of my retirement expenses, I will have no problem retirement. For example, owning a condo that gives me a monthly rental of $3,300 (in today’s dollar value) to pay for all my retirement expenses. Then as long as I hold on to this condo, always have a tenant paying the rental, I will have my monthly retirement funds secured.
If you want to find out how it is done, you can drop me an email. Do take some time to read the previous article article that I wrote on Who wants to be a millionaire to have a brief idea how you can also save effectively using property.