Tuesday, September 23, 2014

Save 75% of your income to retire in 7 years

"Retirement is hard in Singapore." That's what we've heard before from a friend, a colleague or even your own family members. But, it can be easy if we know how to. How about being able to retire when you're young? That's what we call financial freedom.


I've been reading a couple of financial blogs based in the US and one which particularly stands out was the blog called Mr Money Moustache. Oh yes, I like reading other people's blog too even though I own and write one. The owner of the blog retired in his early 30s and he was also featured in an interview with Yahoo! where he explained how he did what he did. This really captured my attention.

In his blog, there's an article titled: "The Shockingly Simple Math Behind Early Retirement". The maths was if you saved 75% of your income, you'll be able to retire in 7 years. How was this number derived? Being curious, i decided to create my own spreadsheet to visualise how it will all work out. True enough, indeed if we save 75% of our income, we can retire in 7 years.


The scenario to retire in 7 years

Here's the scenario:

Let's say if you earn $30,000 a year which is about $2500 a month. I think this amount should be quite achievable for most of us in Singapore. If we save 75% which is $22,500 or $1875 per month, we'll be left with $625 to spend per month.

Next, we must invest the $22,500 savings and assume a 5% investment return, after inflation, for the next 7 years compounded. By the end of the 7th year, this amount would have grew to $204,301.70

The last part of the equation is this:

If the $204,301.70 invested generates a 4% dividend yield, the dividend income will be $8172. This gives us about $681 to spend per month. That's it, you can now retire and stop working. The dividends will continue to provide income for you for the rest of your life. According to my spreadsheet below, if you start working at the age of 24, you'll be able to retire by age 31. Sounds good?

Click to enlarge


Is it achievable in Singapore with our high cost of living?

Now comes the problem. The problem is in order to retire in 7 years, your expenses have to remain the same after 7 years. That means you can only spend $681 per month. Is this enough in Singapore? It may be enough if you're single but if you got a family, then it would certainly not be enough.


How much do you need to retire in Singapore?

An average household would already be paying about $1200 for their housing loan instalment. The above scenario of only spending $681 is certainly not enough. Adding up other miscellaneous bills and daily expenses, the average household expenditure would most likely be about $2500-$3000 per month.

But wait, some of you may say $3000 is still not enough for a household expenditure. Straits times just reported recently that "the average household spends $1,188 a month on food, $811 on transport, $154 on package tours and holidays, $138 on other recreational and cultural pursuits, and $156 on clothes and footwear." This amount is not even inclusive of the housing loan. So if we add up the $1200 housing loan, this amount would be $3647.

With an expenditure of $3647, how much do you need to earn in order to save 75% of your income and retire in 7 years? The answer is $14,588. Yes, you need to earn $14,588 to save 75% of your income in order to retire in 7 years!


I don't want to save 75%. I can only save 10%

Some of you may think that saving 75% of income is too much. How about just saving 10%? If you save just 10% of your income, you'll need to wait 51 years before you can retire base on the earlier assumptions. Do you want to wait 51 years before you can actually retire?

If you save 50% of your income, it'll take you 17 years to retire. It's all about the numbers and numbers can tell you the story.

Saving 50% of your income to retire in 32 years
Click to enlarge


How to solve the problem and retire earlier?

As readers of SG Young Investment, most of you would already know that we can increase income or decrease expenses to have more savings. However, in this case, its the savings percentage that is important. If you increase your income and at the same time increase your expenses at the same proportion, then your savings rate would still remain the same. If your savings rate don't increase, you'll never see a difference in your wealth.

If you're able to increase your income but still maintain the same level of expenses as before, then you're in for a great future. If we earn $2000 now and can only save $400, its just 20% savings rate. But if we manage to double our income to $4000 and still maintain the same level of expenses as before, then savings rate get bumped up to 60%. Young people have the potential to make more money in time to come especially in Singapore where opportunities are plenty while older people may already be making quite a substantial amount of income right now. We can start planning for retirement no matter the age we're at. You just need to know the numbers and see your future. The percentage of your savings plays a big role in retirement planning.

In my next post, I'll show you how an average family in Singapore can retire within 10 years of working. Stay tune.

P.S: Here's the video by Yahoo of how a man retired in his early 30s as what I wrote in the beginning of this post. Watch it here: http://finance.yahoo.com/video/retired-30-144216321.html

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33 comments:

  1. Hi SGYI,

    Inspiring :)

    I don't think I can save 75% with a heavy mortgage, maybe the max I can get is about 50 to 60% and I'm working like crazy! For me, I need to focus on increasing income, so that's the only way for me to increase savings. The good thing is that even though I need a longer time before I can retire, my work is fun enough for me not to dread going, so that's a big plus point for me.

    I blogged about this retirement recently ( http://bullythebear.blogspot.sg/2014/09/retirement-thoughts.html), but I didn't put in any investment returns. I'm not sure if 5% is actually sustainable over such a long period, so I'm using just brute savings for retirement. I'm still going to invest, but it's a bonus for me. This kind of thinking prevents me from being so focused on getting high yields that it jeopardises the safety of my capital.

    Your thoughts?

    ReplyDelete
    Replies
    1. Hi LP,

      Its quite impossible to save 75% for most of us Singaporeans who have a mortgage. 60% is still not bad. If we manage to save 65%, we would be able to retire in 10 years. Still not too bad.

      I think it is very hard to focus on savings alone for retirement. I did another spreadsheet to see the difference between the same savings rate but one with 5% investment return and the other without investment. The result was a huge difference. 5% should be quite achievable in the long run. The key is we must invest for the long term. Maybe some one who has done it over 10 years or more can share with us if its possible?

      Delete
    2. Forgot to say i read your post before. I agree with your part on living a simple life. When we don't get tempted by material things any more, that's a stage where we find true happiness. Not easy to get there but its possible.

      Delete
  2. Haha, this whole post about retirement in 7 yrs is itself a prime example of impossibilities! Nah, but instead of spending energy on saying this can't be done, we might as well quietly do it :)

    Thanks for writing this post...keeps me motivated!

    ReplyDelete
    Replies
    1. Haha LP, I was trying to stir up some motivations. Or rather some sacrasm from other people. LOL

      The next post will be retire in 10 years. This time is for a whole family. It's possible! Increase income and live a simple lifestyle. We can still be happy. :)

      Delete
  3. Hi SGYI,

    Glad to find another MMM fan around here. He's actually the inspiration behind my blog.

    The interesting thing is that he could have 'retired' even earlier since he is still earning some good income from his 'hobbies'. So maybe we don't need to set aside that much? Nonetheless good to have a big margin of safety if one is really not intending to earn any money for the rest of his life.

    Granted, MMM does earn a pretty good salary (100K annual) so that does make it slightly easier for him to do it like within 10 years with such a big stash. But it's also not impossible with an average income as Jacob (earlyretirementextreme.com) has proven that it is not too difficult to live on less than 10k a year.

    I am still struggling with lowering expenses (think you're much better at this) so let's hope I can achieve something similar to them at 35. =)

    ReplyDelete
    Replies
    1. Hi 15HWW,

      Oh you read MMM too. Haha. I only just recently read his blog. Its just been about a week or so. Yes I saw that he has about 100k annual salary. Its impressive he manage to amass 800k in his early 30s. I think it may be possible if you're working with your wife with the same goals. At least by 40 you'll be able to achieve it.

      Delete
  4. Interesting calculations. Thanks for sharing.

    I would think unless you're earning big and spending little, it would be tough for most married folks like me to achieve this goal. Throw in kids and the dateline extends even further down the road.

    While retirement is a nice position to be, I'd prefer semi-retirement instead - Do the things you like and still get rewarded in the process.

    ReplyDelete
    Replies
    1. Hi,

      Yeah I do know its tough to retire if you have a family with kids. Maybe you can share how much is your family monthly expenses for yourself?

      I prefer semi retirement too. I don't like the idea that retirement is about idling and doing nothing in old age. Its more about being able to do the things we love and not worry about money. Life is too short to just spend time to work and work for money.

      Delete
  5. Hi SGYI,

    I was surfing the net for information about investing and found your blog very interesting.

    I'm new to the whole investing aspect and am curious about how "Investment Returns" and "Passive Income Rate"(dividends?) was derived.

    To a lay person like me (I have no training at all), I always thought it was the same thing.

    I was wondering if you could help me understand how both can be achieved with the same amount (??) of money.

    A ~

    ReplyDelete
    Replies
    1. Hi,

      Investment returns can be in the form of capital gains where we buy a stock lower and sell it at a higher price to make the difference. Dividends received can be considered into investment returns also.

      Passive income is mainly from dividends. The dividends will pay for our expenses which allow us to retire (financial freedom).

      Delete
    2. Hi SGYI,

      Thanks for the explanation, looks like I got a lot much more to learn!


      Delete
    3. You're welcomed :)

      Feel free to browse through my blog. Hopefully the other articles that I've written for the past one year will help you to learn better ;)

      Delete
  6. It can be done. Go up the corporate ladder or reduce the spending. Create one or two streams of passive income. When expenditure is less than passive income, financial nirvana is attained.

    ReplyDelete
    Replies
    1. Hi,

      That's my exact thoughts too. :)

      Delete
  7. Another way, not mentioned, is to drastically increase your rate of return.

    This is one reason why I am investing in buying online properties that generate a monthly income. They are way cheaper than actual properties but have a overall high percentage returns.

    Enjoy your blog as I am a first visitor. I am now 36 and am planning to retire before 40.

    ReplyDelete
    Replies
    1. Hi Aaron,

      Yes another way is to increase rate of return. But I try to be conservative by putting 5%. A higher rate may not be sustainable and is much more risky.

      Oh, online properties? I've never heard of it before. Is it safe?

      Delete
  8. Hi may i know how you calculate from $22.5k becomes $200k? Thanks

    ReplyDelete
    Replies
    1. Hi,

      The detailed calculation is seen in the image I provided from my spreadsheet. There is additional savings of 22.5k added in every year and these savings are invested to grow at 5% compounded to achieve $200k.

      Delete
  9. Thanks!So silly of me not to view the images! I finally see the light on how some people could retire early. A bit hard for me because i am a woman and we shop a lot! But i will try my best to save up and invest and encourage my female friends to join me in this journey.

    ReplyDelete
    Replies
    1. Hi,

      I'm glad to hear that you'll try to save up and even encourage your female friends to join you in this journey. Somehow yhe world targets women in sales and all that which makes it even harder to save. But well, I have expensive expenditures such as travelling too. I try to plan for all these and make sure I have additional money before I splurge.

      Delete
  10. Hi , im just a Malaysian but working in Singapore , but i hope can retire in 7 years also , what should i do then? Haha

    ReplyDelete
    Replies
    1. Hi Heng Cong,

      Save up 75% of your salary and invest that money to generate a 5% investment return. The formula is already there. It depends whether we have the determination to do it? Since you're working in Singapore, i suppose your income should be higher than what you earned back then. It'll be even easier to save up.

      Delete
  11. Hi,
    In Singapore, you have to factor in employee CPF contribution, in your post, you mention abt earning $30,000 a year, $2500 a month is exclusive of employee CPF contribution?

    ReplyDelete
    Replies
    1. Hi,

      $2500 is net income/take home pay. I do not consider CPF as a form of savings since we can only see it when we reach 55 or older. That will not be early retirement anymore.

      Delete
  12. Practically impossible since i have to give a 30% to my parent every month and I believe many young Singaporeans do that too. To so-call retire you will have to forgo so many thing such as vacation, outings with frens in those 7 years.

    Of course, if you increase the income from 2500 it may be slightly better.

    ReplyDelete
    Replies
    1. Hi noodles,

      IF we can't save 75%, then we can save something lower. If we save 50%, it will then take about 17 years to retire. The lesser we save, the longer time it'l take to retire. Its really up to ourselves how we plan it out. If can't reduce expenses any more then try to increase income.

      Delete
  13. isn't it risky to invest 75% of our salary? what if the stock market crashes or companies decrease the dividends? i think it may not be suitable for someone with a very low risk appetite. i would rather use 50% for investment and put the other 15% or 25% in the bank as savings in case if anything happens. just my POV :)

    ReplyDelete
    Replies
    1. Hi,

      Yes its important to have savings in bank just in case anything happens. When we invest, we have to make sure its for the long term so the money cannot be used in the short term. We should keep an emergency fund of at least 6months-1 year of our monthly expenses before we even start to invest. This will create the safety aspect there. Thanks for sharing your views :)

      Delete
  14. Dude you totally forgot we got 20% cpf contribution. So out of 30,000 a yr our take home is only 24,000

    ReplyDelete
    Replies
    1. Hi,

      Yes I still remember CPF. The 30k should be take home pay so our salary need to be higher than that.

      Delete
  15. hi,
    I like your advice on saving 75% for retirement. However, I have a query: if we spend a proportion of our income on savings plans and endowments, does that count into the 75%? Cos it is current capital outflow, though there's a bit of returns later (much later) in life.

    Would appreciate if you can advise on this.

    thanks

    rgds
    KC

    ReplyDelete
    Replies
    1. Hi KC,

      Endowments take very long to mature and the interest is quite low so i wouldn't count it as part of the 75%. It will take quite a lot of savings in endownment to reach our retirement goals. Furthermore, most of the money in endowment are not guaranteed so we may not get back as much in the end.

      Delete