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?

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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

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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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