The Sunday Times
Jonathan Kwok
30/3/2014
One million dollars seems like a huge sum of money to any young adult.
It can probably buy you a small condominium. Or a few cars. I wouldn't even know what I would buy if I had $1 million.
It stretches my imagination to think about how long I will have to work to get to that magical seven-digit sum.
But for those of us starting our working life, we had better hope that we accumulate that amount in the next 30 to 40 years. Because we may all need around $1 million for our retirement.
That was the surprising conclusion last week when I used the retirement estimator on the Central Provident Fund (CPF) website.
My premises were simple. Assume a 25-year-old hoping to stop work at 62 and expecting to live to 83 - the life expectancy for Singapore men.
I assumed that the person would need $2,000 a month in "present dollars" - basically, that after retirement, he would consume the amount of goods and services that $2,000 can buy him today.
The CPF site assumed an inflation rate of 3 per cent and investment returns during retirement of 4 per cent.
And after the number-crunching, the figure of $1.14 million was generated.
"Owing to inflation, your desired monthly income of $2,000 (in today's dollars) would be the equivalent of $5,970 in 2051 when you retire," said the website to the hypothetical 25-year-old.
A smidgeon of good news was in the next paragraph.
"Similarly, the amount of $1.14 million at 62 is the equivalent of $381,000 in today's dollars," the site noted.
Ah, so the future $1 million is not really today's $1 million, if you get what I mean.
That gargantuan retirement sum exists in a future world where a bowl of prawn noodles will cost $10, and a small condo, not less than $3 million.
Fresh university grads had better be earning $10,000 a month by that time.
But still, it is a daunting figure to aim towards.
Who cares about "today's dollars" or "tomorrow's dollars"? The thing is, we better have seven digits in our bank accounts at 62.
If our investments or salaries cannot catch up with the assumed 3 per cent inflation rate, we will in fact be slipping further and further back.
I sure hope the McDonald's fast- food chain still hires older workers when I hit retirement age.
Far from our minds
It is safe to say retirement is one of the furthest things on our minds when we start out in the workforce - and understandably so.
There are a thousand financial commitments that suddenly creep up. The costs associated with getting a job include the daily commute and buying the right attire to look professional if that's your line of work.
There might be study loans to pay, and you may want to contribute financially to your family.
Unsurprisingly then, I was one of the youngest attendees when my company last year organised a talk on retirement planning.
The company had invited a speaker from the MoneySense- Singapore Polytechnic Institute For Financial Literacy.
As she asked for a show of hands, I found out that many of those in the auditorium had served the company loyally for 20, 30 or 40 years.
Those in the "less than 10 years" category, like me, were in the absolute minority.
"Who has time to think about retirement?" many people around my age may ask.
"It's so far away and right now I have so many immediate financial needs."
Unfortunately, such an attitude flies in the face of sound financial advice.
"Ideally, you'd start saving (for retirement) in your 20s, when you first leave school and begin earning pay cheques," said an article by CNN Money. "That's because the sooner you begin saving, the more time your money has to grow."
CNN isn't the first to extol the virtues of compounding and it won't be the last.
Basically, this refers to the ability for our money to snowball over time, as each year's investment returns get more returns in the next year and so on.
We will need all the help we can get from compounding, especially with inflation and longer lifespans.
The life expectancies of men are presumed to be 83 years while women can expect to live to 88, said the speaker at the company talk.
Such longevity should in theory be a blessing, but it can be a nightmare if we outlive our savings.
Many Singaporeans point to their CPF accounts, but really that should just be a part of our savings.
It may be a good idea to squirrel away a few hundred dollars each month just for retirement, leaving the money untouched come what may.
For the more enthusiastic ones, there is the Supplementary Retirement Scheme (SRS) to give tax incentives for retirement saving.
Not so simple
Of course, it is not so simple and there are multiple demands on our finances as we trudge through our 30s, 40s and 50s - making it harder and harder to save.
Planning our exact budgets for the decades to come can also be a headache.
You cannot just take the final retirement sum and divide it by the number of working years, to arrive at a figure of how much to save each year.
It isn't so simple, as our income and expenses will fluctuate throughout.
Alongside the simple retirement estimator that churned out the $1.14 million figure, CPF's website has a more detailed retirement calculator to help you plan your finances.
Using that more complicated calculator is tough, as you have to dig out all your financial details such as all your expenses, assets and liabilities.
Sometimes it turns into a fortune-telling exercise that would baffle the most experienced tarot card reader.
We are asked to impute our expected annual increment and bonuses, and the maximum salaries that we will hit in our lifetimes. I don't know how to pluck these numbers out of thin air.
With real-life personal finance so complicated, it makes the exercise very tedious and the results will have a margin of error.
I didn't complete filling in the calculator. So my retirement plan remains the same: Just save as much as possible and invest prudently.
Of course, critics will point out that this is as haphazard a "plan" as you can get. You can never know if you are saving too little until it is too late, and you find out you need to work beyond retirement.
For the love of a million dollars, I probably should use that complicated retirement calculator. And so should you.
jonkwok@sph.com.sg
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Background story
Start saving early
"Ideally, you'd start saving (for retirement) in your 20s, when you first leave school and begin earning pay cheques... That's because the sooner you begin saving, the more time your money has to grow."
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