Monday, July 29, 2019

The 30 Years Retirement Grid - Saving $1500 per month to achieve $1 Million

I was on course last week and during the course, there were several people who were in their 60s and some even nearing 70s. They were here to upgrade their skills in order to make sure they could still afford to work in their old age. I really admire their attitude to continue learning and still go through the stress of having to sit through an exam to get certified. Many of them were worried they couldn't pass the test and were so stressed out. I thought to myself at this old age they should be enjoying life why still go through this? I spoke to some of them and found out that most had to keep working and in order to get higher salary, they decided to upgrade themselves.

Most of them have been working for more than 30 years but still do not have enough for retirement. Many of them were earning as low as $200 per month back when they first started working. As inflation sets in and things become more expensive in Singapore, it became impossible to retire for them. Some of them even tell me to prepare a house overseas as retirement in Singapore will become even more impossible in the future. Is this really the case?

Is saving $500 per month for 30 years enough for retirement? 

I did some quick calculations and indeed its quite hard for low wage workers to save enough for retirement. If they had diligently saved $500 per month for 30 years, they would only accumulate a savings of $180,000. As we now know, this amount is too little to last for any retirement. For this amount to last 20 years, they can only spend $750 per month.

So, saving $500 per month is definitely not enough for retirement especially during our times now. Then, how much savings is enough?

The 30 Years retirement grid - Saving $1500 per month to achieve $1 Million

For retirement planning, we should first determine how much we need to accumulate? For simplicity sake, let's put this figure at $1 Million since this is the sweet spot to have a good retirement. I did a retirement grid which shows how much our savings and investment will become in 30 years.

Let me guide you on how to read the grid above. The left most column is the savings per month and the top row is the annual investment return. The first figure of $180,000 is derived from saving $500 per month for 30 years with 0% investment return. If there is 1% investment return compounded over 30 years, the sum will be $208,709 instead.

I concluded we need to save at least $1,500 per month for 30 years to get a comfortable retirement sum of $1.01 Million. However, saving $1500 per month is not enough. We still have to invest it at 4% compounded returns to achieve that sum. Without investment, we will only accumulate $540,000. Most of us will start working probably in our mid 20s and in 30 years, we will be about 55 to 60 years old so 30 years timeline is just nice for retirement planning.

If we're not comfortable with 4% investment return, then saving $2000 per month may be a better option as we can accumulate $1.14 Million with just a 3% investment return. If we're still not comfortable with 3% investment return, we can save $2500 per month to accumulate $1.04 Million with just 1% investment return. 1% can be achieved easily through bank interest.

Why income is so important for retirement planning?

If you look closely at the retirement grid I created, you may have notice that savings form a big part of the retirement. If we just save $1000 per month and invest at 6% investment return, we will not even accumulate $1 Million in 30 years.

This is why income is so important for retirement planning. If we earn a low income, it is really quite difficult to save more money. It becomes a very miserable life to save money with too low an income. However, do take note that most of us do start with lower income so the starting point is always more of a sacrifice but it gets easier later.

Investing is also an important part in retirement planning. Looking at savings of $1500 per month in 30 years, a person who does not invest will only accumulate $540K while a person who invests at 4% investment return accumulates $1.01 Million. This is almost double in 30 years! This also shows investing early in our life is quite important.

Retirement planning is time critical

Another thing about retirement is that it is really time critical. The above retirement grid is in a 30 years time frame so it is more manageable. If we are late in the planning stage and only have 20 years till retirement, it will be much more difficult to accumulate substantial savings for retirement.

Here's the 20 years retirement grid:

Let's look at the same $1500 per month savings at 4% investment return. This time, we could only accumulate $536K in 20 years vs $1.01 Million in 30 years. You can see how much difference 10 years is in retirement planning.

Let's say we only start saving and investing in our 40s and look to retirement in our 60s, we have to save double ($3000 per month) as compared to the person who started saving in his 30s ($1500 per month) to achieve the same retirement savings.

Start saving and investing early for retirement!

In conclusion, the earlier we start saving and investing, the better it is. Most people could not see the actual benefits of starting early so many people only realise its too late when they are much older. I hope this retirement grid will finally give you the visualisation to see the benefits of saving and investing early.

The earlier we start, it gets easier as we earn more income. This is because we only have to maintain that same $1500 per month savings instead of saving much more to accumulate that same amount if we start 10 years later.

If you're in your late 20s already, its probably good to start saving that $1500 or $2000 per month from now so that you can retire in your late 50s.

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  1. Quote : "there were several people who were in their 60s and some even nearing 70s"

    "Most of them have been working for more than 30 years but still do not have enough for retirement."

    Did you ask them whether they have lost their pant including CPF OA during AFC?

    1. Hi Uncle CW,

      I didn't ask them. There was a 68 years old man doing delivery as a full time job and weekends still do grab food. Hopefully he didn't lost all his CPF.

  2. Hi SGYI,

    6 years have passed since the start of the blog. Are you still aiming for 1 million by 42 or are you aiming for more?

    1. Hi,

      1 Million by 42 may be too stress. I would think by about 50 is more achievable so I can also enjoy life at this moment also.

  3. Thanks, SGYI.

    It is educational to see how goals change with life. I am undergoing changing of goals too as I am starting a family, and it is great to see that I am not alone.

    1. Yes indeed. Our goals have to be adjusted as we go through life. Life experiences also shapes our thinking and direction. Thinking back, when I started this blog many years ago, I was still quite naive.

  4. Investment at these compounded percentage but where to invest?

    1. 3% can get from bonds, 5% can get from stocks (eg Blue chips or reits). If you ask me, these investments are relatively quite safe and achievable in the long run.

  5. Good and sobering article. Work hard, work for many years, regular and consistent savings and invest (not trade) wisely. These are the necessary "ingredients" to having adequate nest egg for retirement.

    People know these things but putting them into practise especially over a life time is a different matter altogether.

    How many people nowadays can be sure of keeping their jobs for a lifetime? Without continuous employment and salary income, one would not be able to save regularly and worse, during the periods of unemployment, they may be forced to drawdown on their savings.

    What is worrying is that people are also not living within their means. When they get nearer to retirement, they grow anxious and seek get-rich quick schemes making thmselves easy prey for scammers.

    1. You painted a very real picture of what is happening in our world. Yes indeed its true that its hard to put it into practice. Requires lots of discipline and consistency and hopefully no major disruptions in life. Even if have disruptions its how we get back on track again. This is life.

  6. Interesting discussion. We'll also need to factor in health costs. As we grow older, health costs will eat into one's savings. A major illness or surgery will wipe out a big chunk of our savings. This gives rise to another topic on insurance planning when young.

    1. Yes insurance is definitely important. Getting a term insurance to insure for death, critical illness and TPD and hospitalisation insurance to insure for medical bills. For disability, careshield life will kick in soon.