By Soh Ching Heng
Mr Soh Chin Heng is the Deputy Chief Executive (Services) of the Central Provident Fund Board Singapore and a non-practising certified financial planner. He gives talks and writes regularly on CPF and financial security. The stories shared in this series are based on real life experiences, suitably anonymised to preserve confidentiality.
Let's do a quick recap. There are three important questions to ponder over in your journey towards financial security :
- Why do you want to be financially secure?
- How to be financially secure?
- How much do you need to be financially secure?
Remember Sally, and her reason to be financially secure? Have you considered yours?
You need a compass and map for your financial security journey. Your financial security compass comprises two prongs – knowing your net worth and keeping your cash flow positive. Your financial security map marks out your start point (your current net worth) and your end point (your desired net worth). To travel from your start point to end point, you need to traverse four types of terrain – the road (work and CPF), the mountain of debt, the valley of risks and the peaks and troughs of investments.
Now for the third and final question. How much do you need to be financially secure?
There are two main considerations. First, the duration to plan for. The start point is what I call your point of retire-ability. That's when you have accumulated enough net worth to last the rest of your life, without needing to work. While the end point is obviously death, the practical challenge is that we cannot predict when that would happen and I will discuss how to address this in the next article.
The second consideration is your desired standard of living in retirement. People generally find it easy to use their pre-retirement expenditure as a guide to determine their retirement needs.
Conceptually, how much you need is the area below the blue dotted line (see below). The longer a period you are planning for and the higher your desired standard of living, the more you need.
You also need to have a sense of the rate of return you are confident of achieving with your investments, and the inflation rate. To help you have a preliminary gauge, the CPF Board has developed a retirement estimator to aid you in the process.
Have fun trying out the estimator!
This article is part of a series by Mr Soh, who will be sharing tips on how you can chart your way towards financial security. Read more:
The Most Important Financial Question
Your Financial Security Compass
Your Lifetime Financial Partner
Albert Einstein and Warren Buffet
My Three Generational Story
The Mountain of Debts
A Most Wonderful Emergency Fund (For Some)
The Valley of Risks
The Peaks and Troughs of Investments