Being a millionaire seems to be the pinnacle of financial success for many of the average person on the streets. Being one of the richest countries in the world, I am sure that there are many millionaires residing in Singapore.
However, it's not common for an average person or working class folk to be a millionaire here. Recently, it got me thinking about how possible it is for an average Singapore household to achieve millionaire status.
By my definition, achieving millionaire status would mean having SGD $1,000,000 outside of your home equity and CPF funds. Since a typical Singapore household usually has two working people (the husband and wife), I then assume that achieving millionaire status for a Singapore household means having SGD $2,000,000.
This seems like a big and daunting number. So I am curious to know if this is even achievable for the average Singapore household. To begin answering this question, we need to first look at what the average Singapore household income is.
Based on statistics, the average Singapore household income is SGD $9,646 (excluding Employer CPF contributions) in 2023. If we look at data for the past 5-6 years, the average Singapore household income typically grows at 3.3% annually.
With these data in mind, let's do a simulation exercise with the following parameters.
Let's look at how possible an average Singapore household can achieve this SGD $2,000,000 across different savings rates (30%, 40%, 50%, 60%, 70%) across different time periods (10 years, 15, years, 20 years, 25 years, 30 years). The average household income here is determined to be SGD $9,646 in 2023 and assumed to grow at 3.3% annually.
Given an assumption of 2% annual inflation rate, this is how much SGD $2,000,000 will look like at the end of different time periods.
10 years: SGD $2,437,988
15 years: SGD $2,691,736
20 years: SGD $2,971,894
25 years: SGD $3,281,211
30 years: SGD $3,622,723
Tabulating the results from the simulation, this is what the table looks like.
Horizontal headers represent the saving rate while the vertical column represents the number of years.
The highlighted result is the only scenario when the average household managed to achieve millionaire status. Pretty awful results. An average household will have to save 70% of their income for 30 years to succeed as millionaires! This is pretty challenging, I will say. I don't know many who can save 70% of their income for 30 years!
Now, how can we change this situation?
What if we start investing our money and achieve a certain rate of return?
Let's find out how the scales tip when we start to achieve a 5% annual return with the funds.
Now, the results get a lot better. We have several scenarios where we achieve success. Given a CAGR of 5% return, an average Singapore household typically achieves success as long as their savings rate is 40% and above. As the duration reduces, the savings rate needs to increase to ensure success. With a time horizon of 10 years and 15 years, you do not achieve any success even at 70% saving rate.
I went ahead and did a few more simulations at different CAGR levels: 7%, 9%, 11%, 13% and 15%.
So what are the takeaways from this?
Even at a CAGR of 15%, an average Singapore household cannot achieve millionaire status in 10 years. This is true even if the savings rate is 70%. This shows that you need to start saving early and give your funds the time it needs to compound. 10 years is simply too short for an average Singapore household to achieve millionaire status.
For a time period of 30 years, an average Singapore household achieves millionaire status across all saving rates for a CAGR of 9% and above. Even at a CAGR of 7%, you could be successful if your average saving rate is 30% and above. This shows again the power of compounding over time. Start investing early.
Saving rate is important albeit it's not the most important factor. It increases your chances of successes you see from the simulation results above. However, it is not as important as allowing a sufficiently long period for your investments to compound. Allowing your portfolio to compound for another 5 years makes a bigger difference compared to increasing your saving rate from 50% to maybe 60%.
I once ran a poll in my Telegram group to understand what is the typical savings rate for most people.
Here are the results.
It seems like most people are achieving a saving rate of around 30-40%. At this saving rate, you would need a time period of around 20 years with a CAGR of 10-11% to achieve millionaire status with an average household income.
It's indeed hard to be a millionaire.
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