A simple search among financial institutions recommends a retirement nest egg that's nearly close to a million dollars. But for most of us, our savings are far, far less – and a hefty, seven-figure recommendation tempts us to hit the panic button now. Is this how much I really need? Isn't my CPF enough? Will I be ever ready to retire?
Keep calm and take heed. Here are practical ways and tips to find out if your savings will work for you in your golden years.
INCOME REPLACEMENT RATIO
Industry experts throughout the world have come up with a figure to estimate how much is adequate for retirement. It's called the income replacement ratio – or a person's gross income after retirement divided by his income before retirement. For example, you earn SGD60,000 annually before retirement and will receive SGD45,000 every year from CPF and other forms of retirement income, your ratio calculation is 45,000/60,000 = 75%.
The globally accepted income replacement ratio is 70% to 80%. At this rate, a retiree would be able to maintain his or her pre-retirement standards of living. Hence, if you currently earn SGD60,000 annually, your goal is to have a retirement annual income of about SGD42,000 to SGD48,000.
This basic formula assumes that certain expenses would drop upon hitting retirement, such as children's education, mortgages and loans, and professional/work-related expenses. But while certain costs will be taken off the budget, other expenses will certainly go up. With much time on your hands, do expect entertainment and leisure expenses to increase. Take into account your health care needs vis-à-vis your medical insurance coverage, as well as hobbies you want to pursue. In other words, do not simply assume that your monthly expenses would decrease just because you have slowed down.
The retirement planning tool of a local bank asks its user about desired current monthly retirement income based on current income. Target at least for 70%.
ANALYSE YOUR PROJECTED CASH FLOW
Another practical method to finding out how much nest egg you should have is calculating the difference between projected annual income vis-à-vis your projected annual expenses. Use a time period of at least 15 years, or estimate the retirement period to be from age 65 to 80, considering that life expectancy is getting longer.
- Start this by summing up your projected yearly income, whether it be your banking savings account, CPF savings, insurance policies or investments.
- Next, identify retirement expenses and costs. For a more realistic estimation, use these guidelines in coming up with your budget:
a. 1.5% inflation rate.
b. Retirement lifestyle. As mentioned above, spending patterns during retirement might not necessarily be lower than today. Can you really scale down your lifestyle, or not? Be honest with yourself. As you go through this exercise, it will help to classify your expenses into must have, nice to have, can do without.
c. Factor in monthly, quarterly, annual payouts.
d. Build in other desired spends. For example, you need a holiday every 2 years, a new TV every 4 years, a new AC every 6 years. These costs could drain your savings.
Now calculate the difference between your projected income and projected costs – and work out on the shortfall.
The retirement planning tool for a bank asks its user to give an estimate of estimated spending and desired monthly income. You may double check your own calculation with the bank's projections.
MAKE YOUR MOVE
There is no fixed figure for an ideal retirement income. But your retirement nest egg largely depends on how you define your desired retirement lifestyle and spending pattern. While your post-career life may be decades away, working out your sums as early as today ensures that your golden years are truly golden.
This article first appeared on BankBazaar.sg.
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