Want to retire with S$1 million? It’s achievable, but might not be enough

A MILLION dollars may seem like a huge sum to those of us in our 20s, but it is an achievable retirement sum if you plan well. The real question is: will S$1 million be enough?

One way to answer this question, research says, is to multiply your monthly expenses by 300. The resulting number is how much you need to survive for 25 years, said PhillipCapital senior financial services director Louis Koay.

Assuming you retire at 60 and live till 85, you would need S$900,000 to provide for monthly expenses of S$3,000.

Koay warned, however, that this might not be a “comfortable” strategy. “You will feel uncomfortable, especially if you’re a retiree and have no income; you see your savings deplete every single month,” he said.

This strategy also does not leave room for sudden shocks, such as urgent healthcare needs.

His preference is to consider the passive income from one’s nest egg. Assuming a risk-free rate of 3 per cent, a nest egg of S$1 million would yield S$30,000 per annum – or S$2,500 a month.

If your retirement lifestyle requires more than that, your nest egg needs to be larger.

One should also note that inflation will erode any savings that are not invested. One million dollars today will be worth about half that in 30 years’ time, assuming an inflation rate of 2 per cent.

Young adults should also start investing as early as possible, Koay said, even if they do not have much capital.|

“Many are actually doing dollar-cost averaging. By right, they should stay invested even if the market is weak. But when they don’t see returns in the short term, they start to not follow their initial plans,” he said.

For those who do find it tough to keep investing in volatile times, consider taking advantage of the higher interest rates the government pays on Central Provident Fund (CPF) monies.

Loo Cheng Chuan, founder of the 1M65 Movement, said it is possible for many couples to hit S$1 million in CPF savings by 65 years of age.

His strategy advocates putting as much money as possible into one’s Special and MediSave accounts, both of which earn an interest rate of 4 per cent per year. An additional 1 per cent applies to the first S$60,000 of one’s CPF balance.

A 23-year-old with a monthly salary of S$4,500, which was the median income in Singapore as at June 2022, would be making monthly CPF contributions of S$1,665 (including the contribution by the employer).

If this entire amount is transferred to the Special and MediSave accounts each month, the same individual would have S$139,860 in CPF savings by age 30.

That pool of money, earning 4 per cent per annum, will grow to S$551,900 by 65. Double that, and a couple will have combined savings of at least S$1.1 million.

The fact that money in Special and MediSave accounts cannot be withdrawn except under very specific circumstances makes this savings strategy more likely to succeed, Loo added.

It does mean that young couples must pay for their property either partly or entirely in cash, but Loo believes many couples spend too much on property and end up draining their CPF accounts.

While it is theoretically possible for individuals to climb the property ladder and downgrade before retirement to receive an investment return at the end, those who do so will have to downgrade their lifestyles closer to retirement as well.

As Loo put it, those who have developed an appetite for Haagen-Dazs ice cream will find that Magnolia ice cream tastes worse after.

PhillipCapital’s Koay added that investing in property is risky as it can take up a large sum of an individual’s pay cheque. Typically, people invest in just one property – which creates concentration risk.

Life’s different stages

A million dollars is a lot of money, but it would be useless if we receive that lump sum only when we are too old to spend it well.

Koay encouraged people to split their lives into phases, with different goals at three different phases: go-go, slow-go and no-go.

Individuals in their early 50s to 60s could be in the go-go phase: their retirement portfolios should generate some cash flow to pay for their entertainment and travel needs.

But they may not be able to withdraw savings from their CPF at this stage if they have not yet met the minimum sum, so this would be something to take into consideration.

As individuals enter their slow-go phase, they will likely need more cash from their CPF and other retirement instruments, such as annuities, as they are no longer working.

In the no-go phase, a person’s medical expenses might rise as travel and recreation expenses fall.

“When it comes to retirement planning, you also have to plan your cash flow according to three different phases; it’s not just about getting the highest return at the end of your life,” he said.

Koay encourages his clients to look to the people around them, especially their parents, to forecast how much they may need for their own retirement.

They should also re-evaluate their financial strategies to ensure that they are still on track.

“Sometimes, because of events that happen in our lives, our plans start to change,” he said, adding that he recommends annual or biannual financial plan reviews.

Repurpose article from The Business Times by Yong Jun Yuan.