How Much do You Need to Retire

18 Dec 2015 
SOURCE: Wong Sui Jau
This question is often asked when the topic of retirement comes up. It is also likely that the sheer amount needed often scares many people so much they stop thinking about it then and there. Or worse, they give up on investing because they imagine they will never ever have enough to retire. Avoiding this question is not really the solution either. Singaporeans have an expected life expectancy of 82.5 years old, based on official government statistics. That is a long time. How long can we feasibly expect to work even if we wanted to? Most people are looking at retirement at 60 to 65 years old max. If you retire at 60, that's 22.5 years of retirement you have to plan for regardless. So, you can't really say "I will just have to keep working forever!" 

Also, if you have planned for it properly, you will be able to have a much better quality of life during retirement than if you didn't. However, back to the burning question of how much a person really needs for retirement? Unfortunately, it is impossible to have a general answer to this question, which is also why it is so hard to answer. You can't say for example "if you have a 1 million retirement nest egg, that's enough!" This is because everyone is different, so 1 million might be enough for one person, but not for the other. 

There is also the difference between realistic and idealistic goals. A person might say, "I must have 20 million dollars in order to have that dream retirement!" Well, that's probably why it's a "dream retirement". Its fine to aim big certainly, but the question is also what kind of opulent lifestyle needs that kind of money and is it a need or just a want? In contrast, some people have extremely frugal lifestyles and needs and could probably retire on a relatively small amount of money. 

Leaving aside the extremes, I find that what is considered "realistic" to me would be existing expenditure. You are typically limited by what you earn every month in terms of what you can spend (unless you are busting all your credit cards). So, for example, if you are earning $3000 per month, you typically spend less than $3000 per month. Using that current monthly expenditure is a good ballpark figure to start with. So, if you monthly expenses are $2000, then if your retirement nest egg can generate you a passive income of $2000 a month (or $24000 a year), then theoretically, you can "retire" or stop work. If you want more, then you need a bigger nest egg. 

This is based on a reasonable level of return for your retirement nest egg as well. If you assume a totally unrealistic annual investment return of 24% per annum, then you just need $100,000 to be able to generate $24,000 per year. But never ever use such unrealistic investment returns. I don't know of any investment that can give that kind of return on a consistent basis and I would be very suspicious of any investment that claimed otherwise. At the other extreme, leaving it in the bank deposit where it earns 1% means you need 2.4 million to generate an annual return of $24000 which is frankly too little considering how much money we are talking about. 

A more reasonable (and prudent) return would be 5% per annum. Based on 5% return per year, one would need $480,000 to generate $24,000 per year. Of course, if you want a higher passive income but want to keep to that rate, then accordingly, having a $960,000 nest egg at the same return would give you $48000 per year which works out to $4000 per month for spending. All this assumes you want to keep most if not all of the capital to pass on to your kids or in case of emergencies. 

At this stage, most people already feel some degree of despair because while Singapore as a country have the highest proportion of millionaires in it, that proportion is far away from 100%. However, there is a way to reduce this amount (other than playing around with investment return). That way is to change the assumption that you will leave money to your kids. 

While it might seem like a selfish thing to do, you want to ensure you are at least comfortably off yourself before you worry about passing on money to your kids. If you can't settle yourself first and foremost in terms of retirement (And you will retire far sooner than your kids), then its pointless to worry about your kids. Only when you have made sure you are adequately provided for in your retirement can you start thinking about how much you might have left for the kids. I believe ensuring we are not a financial burden to our kids in our retirement is already one of the biggest gifts we can give to them. 

So, once you stop thinking about whether you will leave anything after you die and just focus on having enough during your retirement itself, the numbers start to look a lot less scary. Take my earlier example of $24000 per year. If you are fine with your nest egg gradually reducing over the years of your retirement. Then, you need a smaller amount. Assuming you retire at 65 and die at 83, then you have 19 years of retirement. To have a monthly income of $2000 per month at an investment return of 5% per annum, you just need $290,047. This is a much smaller figure than earlier, as in this case your savings gets drawn down instead. Even you want $4000 per month, then based on the same assumption of using up the nest egg gradually, you just need $580,095. Before we celebrate though, this assumes no inflation. Realistically, things will gradually get more expensive over time, so you do need to factor in some inflation each year. Nevertheless, the numbers now look much less intimidating than they did earlier! There are some drawbacks to this though, because you have little leeway if you actually outlive your nest egg. So if you live beyond 83, you will find yourself in a very difficult position. 

Once you know how some of these factors and numbers relate to each other, you will be able to have a better sense of how much you need for retirement. Of course, things change so what you monthly expenditure is like now, may be different from what it is like when you are 65 and truly looking at retirement. But even having a ball park number to how much you need to retire is a much better improvement than having no number at all. Some people may actually already be able to retire but they have just never done their sums. Others may have an unrealistic expectation of how much they actually need which again prevents them from retiring. Of course, the more you earn, the more you tend to spend, this often causes many people to fall into a lifestyle trap. Every time their salary increases, they adjust their lifestyle upwards to match it. As a result, they are hardly able to save anything at all, and they feel like they have to keep on working it is the only way to support their lifestyle. 

How to manage your lifestyle could be another whole topic altogether. Suffice to say, if we stay in the materialistic trap of keeping up with the Jones, it would be a very difficult uphill task to retire. This is because there will always be someone out there with a more expensive lifestyle, a more expensive car or a more expensive house. 

If we start with more modest expectations I believe a lot more people will then find that having enough money for retirement is achievable. From there, you can then work on having more than enough so that you can either improve your retirement lifestyle or have a bigger buffer in your nest egg for your retirement to guard against unexpected events. So, take that first step, find out how much you need for retirement. Then you will be able to work out a plan to gather the nest egg you need for that retirement!


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