One thing we must know is that retirement can never happen by chance. If we do not plan for it, we will never have enough when the time comes. This is a scary fact when we actually reached that stage. In this article, I will write about some of the easiest ways to plan for retirement. The ways I will be writing about will NOT require much effort and most of us will be able to do it. The goal is to plan to have at least $2000 monthly to spend during our retirement years. This amount may not even be enough for some people but we will start of small first. The more you need, the more you need to plan.
The assumption of the scenarios will be to start work at age 25 to age 65 (40 years of working) and retire at age 65 to live till age 85 (20 years of living).
$2000 Monthly for retirement through savings only
If you just want to live on your savings alone for retirement, this is not difficult to calculate. If you approach a financial planner, this would most often be the method. They would advise you to get a retirement savings plan so that you can save up for your retirement and have some cash when you stop working. However, this is not the best method which you will find out why later.
Let's assume you retire at the age of 65 and live to age 85, this is 20 years of retirement life. Using a simple calculation, you'll need $480,000 to draw-down $2000 per month for 20 years. How are you able to save $480,000? If we assume we start work at age 25 and work till age 65, this is 40 years of working life. To save $480,000 in 40 years, we'll need to save averagely $12,000 every year for 40 years just to achieve that.
$2000 Monthly for retirement through savings & investment
If we up our game and not just save but invest also, how much do we need to save every year to achieve the same $480,000? The answer is a stunning $3758 only as compared to $12,000 for a person who does not invest.
For a person who invests, they can even retire earlier. For the same $2000 monthly for retirement, a person can save $10,000 every year and be able to accumulate $480,000 in about 24 years. This means if this person starts working at the age of 25, he or she can probably retire by the age of 50. However, this $480,000 still can last 20 years only if we draw down $2000 monthly.
$2000 Monthly for retirement through CPF Life
For Singaporeans, we are all under this CPF life scheme whether we like it or not. However, we can actually use it to our advantage in planning for our retirement.
As we can see earlier, we actually need $480,000 savings to have $2000 monthly for retirement which can last for 20 years only. With CPF life, we will only need $256,000 savings at age 55 to get monthly payout of $2000 for the rest of our life from age 65 onward.
How do we achieve the $256,000 in our CPF by the time we are 55 years old? The strategy is to utilise our Special Account (SA) to let the money compound to reach that amount. If we have $38,000 in our SA at the age of 30 and have $300 monthly contribution till age 55, we would easily achieve that $256,000 in 25 years.
Which method will you use to plan for retirement?
I have stated 3 methods which are most common in retirement planning. I have summarised the different methods in the below table:
| Method | Accumulaed Savings | Annual Savings | How many years to save? | How long the money can last? |
|---|---|---|---|---|
| Savings only | $480,000 | $12,000 | 40 years | 20 years |
| Savings + Investment (5%) | $480,000 | $3,758 | 40 years | 20 years |
| Savings + Investment (5%) | $480,000 | $10,000 | 24 years | 20 years |
| CPF Life | $256,500 | $3,600 | 25 years | Life |
There is no one method that fits all. The most important thing before planning for retirement is to know how much you need when you stop working which can sustain your lifestyle for as long as you live.
It is also crucial to plan early as the earlier we start, the less we have to save to achieve the same amount of funds for retirement. Just like a marathon race, the road to retirement is the same length. If we start early, we have the luxury to jog or even walk to the finish line. If we start too late, we may have to even sprint just to reach the same finish line. It can be very tough at that time.
There is one last method for retirement planning which is creating passive income for retirement. The most popular way is to create a sustainable dividend income stocks portfolio or through getting rental from properties. Both these method need a significant amount of savings in order to create that income. For dividend income through stocks investing, the rule is 4% draw down during retirement years which according to research is sustainable can last a lifetime. This means if we have 1 Million dollars, we can generate $40,000 dividends every year using the 4% rule. If we have $500,000, then we can generate $20,000 every year. This should be sustainable and not difficult to achieve.
No matter which method we use for retirement planning, starting now is the key. Try thinking how much you need per month when you retire and work backwards from there. Its actually not as difficult as we thought it would be once we start the ball rolling.
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