I was scrolling YouTube earlier this week and came across this video from CNA which talks about what a person could achieve with their money by 40 years old and how he/she can catch up if the person hasn't been actively planning for retirement by that age. It's a relatively easy to understand video which touches on a few good financial habits that we can practise for better financial security.
Some of the practices recommended in the video include limiting your total debt servicing ratio below 35% and limiting your spending on insurance to be less than 15% of your take home pay.
While watching this video, a thought struck me. How likely can a Singaporean with average income retire comfortably at 55 years old if they stick to these good financial practices?
The reason why the age 55 years old is chosen is because this is an age which I personally want to retire at.
Hence, I decided to do some simple calculations to look at the possibility of doing so.
To answer this question, I think we have to define what is considered as a comfortable retirement. Personally, I think a comfortable retirement is one where the returns of your investment portfolio is already sufficient for your expenses and there is little/no worry of your principal sum running out. For simplicity sake, we will use a safe withdrawal rate of 4% here. This means that a person is considered to have a comfortable retirement if he/she can accumulate a sum equalling 25 times of his/her annual expenses.
Based on the data here, we define average monthly income as $4,550 excluding employer CPF contributions.
Next, let's define monthly expenses (excluding insurance) to be $1,200. That's a little on the low side, but let's go with this.
So with this data on hand, let's work out some numbers.
Monthly Salary: $4,550
Annual Salary: $54,600
Annual Salary (after deducting 35% for servicing of debt and 20% for CPF contribution)*: $24,570
*Assuming that an individual kept to a maximum of 35% for debt servicing to purchase a property and do not use his/her CPF for property purchases
Monthly Expenses (excluding insurance): $1,200
Annual Expenses (excluding insurance): $14,400
Annual Expenses on Insurance: 15% x $24,570 = $3,685.50*
*Based on best practice of keeping the spending on insurance to be less than 15% of take home pay
Annual amount to be saved for investment after all deductions: $24,570 - $14,400 - $3,685.50 = $6,484.50
Now, based on the above data, we can work out the annual expenses including insurance to be $18,085.50
Considering a safe withdrawal rate of 4%, the retirement sum needed will be 25 times of $18,085.50 which results in a final figure of $452,137.50. This is almost 70 times of the annual amount that could be saved by the individual! Based on first look, this certainly doesn't look do-able at all!
Now, let's try to add in a few additional factors into the calculations by putting in some further assumptions here like
An annual salary increment of 4%
An annual inflation rate of 2% on expenses
Full conversion of OA to SA for CPF funds (since no CPF contributions is used for servicing of debt)
An annual growth rate of 3.5% on Full Retirement Sum
A CAGR of 5% on the annual saved amount via investments
A time period of 25 years (same as the typical tenure of a mortgage loan)
Since a time period of 25 years is used here and the retirement age in question here is 55 years old, we can assume that the individual starts putting aside money for investments at the age of 30 years old.
When I put these factors into my calculations, the figure doesn't turn out to be as bad as expected.
At the age of 55 years old, an individual who has kept to the above factors would need about $720,000 based on a 4% withdrawal rate. Based on his portfolio (which grows at 5% annually together with constant full annual contribution of savings), he/she will still not be able to hit this desired retirement amount.
However, if we factor in the CPF amount, this individual could have easily hit Full Retirement Sum at this age (as he/she did not use the CPF funds for servicing of mortgage loan) and have surplus to be withdrawn at the age of 55. This surplus, coupled together with his portfolio, does have a relatively good chance of hitting the desired amount of $720,000.
While this does make the situation sound a lot better and plausible, we must bear in mind that such factors are not practically easily achieved and could be quite limiting on a person's lifestyle. You need to be able to be constantly employed during this period with a 4% annual increment and be able to know how to grow your portfolio by 5% annually.
Considering a maximum limit of 35% debt servicing ratio, it's very likely that this amount will be all utilised to fund your mortgage loan over the 25 year period. This means little room for any further home upgrades along the way.
Not to forget, we are basing this on relatively lower annual expenses (excluding insurance here). With this amount, there is almost no room for any exotic holidays, extravagant spends and car purchases. If you have a family with kids, it's almost assured that such an amount of expenses will not be realistic.
Given such strict conditions, I don't think we can say that a Singaporean with average income can successfully retire comfortably at 55 years old under usual circumstances.
Even with good financial habits such as keeping debt servicing ratio to be under 35% and not paying more than 15% of take home pay on insurances, we have to bear in mind that it takes more than just these few financial habits to be able to retire comfortably.
Other fundamentals such as investing early, managing your investments well, and ensuring you constantly progress on your employment income are as important in increasing your chances of early comfortable retirement.
Perhaps I'm raising the bar a bit too high here by putting a relatively young age of 55 years old for the calculations here. But I believe that our energy level drops drastically beyond a certain age and I am no fan of working into the sixties.
So I guess we have to do a little better than average if we want to retire "early" at 55 years old.
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