Sunday, October 23, 2011

Why I worry about retirement

Many close friends who read my blog often label me as a salty man. This has a negative connotation because in Hokkien context, it is “kiam” or scrooge in western terms. However, when I explained my rationale to them, suddenly they realize they either be prepared to work past 55 or be better off being more salty.

In today’s competitive workplace, there are not many people who are willing to work past 55 years old, even if they are ABLE to. Perhaps it is due to the increased pace of life and work pressure, many people just find it too stressful to cope mentally and physically beyond 55 years old.

The problem is exacerbated when the same group has ailing parents, growing kids and mortgages to repay monthly.

Life becomes much more stressful, simply because they need to work or they die (from debts and poverty).

In a nutshell, most people don’t retire at 55 simply because they cannot afford to do so, not because they choose not to.

Let’s work some simple figures here. Most Singaporean men with degrees start work at 25 years old. If they aim to retire at 55 years old, they have 30 years of working life. Assuming a life expectancy of 85 years old, they have another 30 years of income-less life to sustain after retirement.

This effectively means for every day we (men) work, we need to set aside funds for both the day we work and another day we do not work for the next 30 years.

And for the savings we put aside, we need to grow it at least at the prevailing 5.7% inflation rate in order to sustain the same kind of life style when we retire.

CPF only grows 2.5% PA, which is grossly not enough to cover inflation. Even if it is enough, most likely it is depleted to purchase HDBs which easily cost $500,000 at today’s prices.

Let’s assume again a modest lifestyle of $2,000 per month for a single at age 55. This works out to be $2,000 x 30 years = $720,000 cash balances in today’s dollars to sustain a modest life style. The amount will balloon to $900,000 if the single requires $2,500 a month for the next 30 years.

If we factor a conservative 4% inflation, today’s $720,000 will be worth $2.34M (future value) in 30 years time.

The same 4% inflation will make $900,000 today’s dollars worth $2.92M.

For people lost in reading, it simply means that you need $2.92M in 30 years time to buy something worth $900,000 today if inflation is 4%.

In order to enjoy the same modest lifestyle of between $2,000 to $2,500 per month, the individual who retires at 55 needs to set aside between $2.34M-$2.92M for him to call it quits at age 55, 30 years later.

This is not factoring if the individual lives beyond 85 and whether he can invest his retirement funds at the prevailing inflation rates. If he is unable to do so, he probably needs to sell off his house in order to exchange for food.

Most Singaporeans who buy houses today stretch their loans to 35 years. This means that a 30 year old couple will need to service their loans till they reach age 65 before they finally own their homes.

There are no prizes to guess why government is stretching the retirement age.

Some other observations I made as follows:

(1) Most singles out there probably spend more than $2500 a month, even if they just earn this much.

(2) Most people at age 55 now do not have $720,000 to $900,000 to lead a worry free life up to age 85. What makes you think we can achieve the equivalent amount in future value 30 years later?

(3) Medical costs and inflation rates are not at 4% only.

(4) You need to earn a minimum of $5,000 a month, save $2,500 a month and invest this sum at prevailing inflation of at least 5% consistently for the next 30 years in order to retire at 55.

(5) The sums required may increase 1.5x to 2x if you have a partner. If you have kids, you need to pray that they give u some allowance if you have not achieve the required by age 55

(6) You cannot afford to be retrenched or your retirement age stretches even further.

(7) You cannot depend on CPF for retirement if you have bought a house.

In my workplace, I do see many people earning high 4 figure salaries but have not much savings. They take for granted that health, wealth and career path will always be smooth sailing.

Let’s not be pessimistic about life but admit the fact that we can’t afford to retire if we are not prepared for it.

And I am not kiam, just getting prepared. :)


Musicwhiz said...

Hi SGBlueChip,

Thanks for this post - yes you have highlighted how much cash one needs to retire in this super expensive city (which is getting more expensive by the day).

The problem is that most people live more in the moment or only with a view on the next few years; and never bother to think 30 years into the future. That's why most of them think nothing of 30-35 year loans. It's essentially flushing your future cash flows and retirement funds down the toilet bowl.

As for your friends/peers earning high 4-digit salaries, just curious - how do you know they have little savings? Do they share these details with you? I'd always assumed most people who earned a lot manage to save quite a decent sum.


Temperament said...

That's why there is street protests in most parts of the world except Sinkapore. Since time immemorial, at the end of the day, the ordinary folks are squeezed until they are forced to change the situation, for living conditions have reached the unbearable.(Actually, this happens in China, now and then).
Even though we have "democracy" and one man one vote, look at USA now and you know what i mean.
Sinkapore may be very near like USA or actually maybe worse if not now, it will be soon.
Let's see what happens this five years.

And don't forget to remember to check your passports are stamped when you visit Malaysia as quoted by one of our "Elites". How come we never hear somethings like this from the "Elites" across the causeway. So in Singkapore, this is what we called we practise Meritocracy until everyman is for himself except the "Elites". YES? NO?
Majulah Singapura!

Singapore Stock Picker said...

Your post is very true but I doubt most people will retire at 55.

Overall, I think unless housing and healthcare gets cheaper for most people (the lower income, lower-middle income) or if real wages increase through productivity measures, in the long run we are most likely screwed as the Singapore system has no social security.

Unknown said...

Hi 'sgbluechip': It's a good article, which would be beneficial to a lot of my readers too at
May I re-publish your article.

We will duly provide a link back to your blog, as we hv done for all
contributions such as this one by AK71:

Hope to hear from you soon. btw, u don't have to publish this comment on yr blog...
CT Leong

Sgbluechip said...

Hi CT leong, please go ahead.

ClearTear said...

if this is on facebook, i will click Like like like..

i agree with u.

im already 35... no savings cos of my daughter. But got investment here there somewhere. i hope i can retire in peace, at least with food to eat, place to stay.

Yeo Kian Hwee said...


I think we are similar kind of guys, not kiam but just getting prepared. :-)

With Singapore getting more and more expensive, I have heard from friends with different level of income speaking their concern. Almost all of them were saying retirement is not an early option in Singapore and some even prepared to work till the day they die (how sad is that?)

With housing and medical cost rising like nobody business in Singapore nowadays, people are getting tougher to support themselves and their family member. WIth house price rising much faster than wage increment, Singaporean has been forced to work longer, harder for lesser money. People also reduced their spending on other industry like travel or education course which might enhance their life compare to small space in their higher priced HDB flat.

People who live on poverty line aside, I believed most of the people is not realizing the cost of many things in life.Car for an example is considered a luxury in Singapore. Although we don't have a perfect transportation system here in Singapore (no country have it anyway), but I would say the public transport is still doing a decent job in transporting people to and from their office.

What people don't realize when they sign on the dotted line of a car loan contract, it is a financial commitment that will eat up their monthly cash flow for the years to come. The amount of money that suppose to go into saving has gone to the bank, and not consider the opportunity cost when you can invest in some investment vehicle that bring you some return on your money.

Saving rate is always the key to how fast can you retire. If you can survive on 30% of your salary and invest the rest in income generating investment, it is a pretty safe bet that you can retire faster than another person who save only 10% of his salary or even worse overspend it. I believed by paying a little more attention when making your purchase and spend time on comparing the products you are going to buy helps here. Cut down the number of credit card is also helpful, there is some statistic shown that by cut down your credit card to only one helps to cut down your yearly spending up to 30%.

Another thing I can think of here is retire in another country. Places like Malaysia, Thailand has a cheaper living cost and they are near enough to Singapore if you like to visit your friend sometime. But I believed most of the people won't choose this option because it is emotionally difficult to move away from a place where we spend most of our living time at, not to mention all the friend and connections we made here. :-)