Tan Kin Lian's Blog: Retirement savings

Wednesday, April 14, 2010

Retirement savings

Read this article,

My view.
It seems that the average amount that most people need for retirement in the USA is $1 million. I suppose that this include the value of the house. A similar amount will be needed in Singapore, i.e. $500,000 as value of house and $500,000 cash for retirement. At 4% yield (hopefully), $500,000 will produce $20,000 a year or $1,600 a month. This is similar to what most people comments in an earlier article in my blog.

However, if I am mistaken and most people expect $1 million cash on top of a fully paid house, then they are looking at monthly expenses of $3,200.

10 comments:

Anonymous said...: Personally I wouldn't feel safe with just $500,000 to retire for husband and wife. The standard of living in Singapore is getting too expensive. A better way is to save $500,000 and than retire in another lower cost country.; April 14, 2010 8:20 AM
Anonymous said...: Mr Tan,
Very nice projection of having $500,000 cash in Retirement. If only this was the message promoted 44 yrs ago? BTW How many are in this category?

Because of poor interest rates, there is another way of spreading your wealth such to max.the $500,000 and draw down say for 20 yrs at $25,000 per yr. if one is 65yrs. old. as what I plan to do barring all investment risks

How many Singaporeans have this $500,000 for retirement? Many will have combined property plus savings........"asset rich cash poor", so how to manage retirement at age 65?.......probably doing a reverse mortgage who knows or working till the 70s???; April 14, 2010 9:33 AM
Retired said...: Never include your home as an asset.
Yes, one million cash ( or highly liquid assets ) excluding the home is far more realistic.

The anticipated 4% yield is not a sure thing and there is inflation and medical issues. Therefore $3200
a month is a good figure to start and to ride out all these unknowns over 30 years.

In America, the income tax rates are higher ( although, some other living costs are lower )including for retirees.
It also depends on the city that you intend to live in. Manhattan in New York is very expensive.

Hopefully, people here will understand that saving and preparing for their golden years is a serious matter, not to be left to the Government or anybody else.

I have friends who believe that their children will house them and give them pocket money.. it is a view that I find puzzling.
Although it is a very Confusionist
concept of filial duty, the current generation has mostly embraced very western practices, and I am doubtful if our children will want to do it.

Ours is a very urban society and an expensive one too. It will most unfair and unwise to depend on the next generation to help us.

I am 54, married, with 2 sons. I do not expect my kids to look after me. I plan to have my own home and die in it, have my own funeral expenses paid from my own account.

Do not count on the kids.
Do not count on the Gov

Do prepare for retirement, gracefully.; April 14, 2010 10:51 AM
Ex-Con said...: Thanks Mr Tan,
that was a balanced and easy to read article on retirement savings. Some parts may be too US-oriented such as moving to lower cost part of the country. For singaporeans, we can only move to Jurong West, Punggol (foodstalls here not really cheap), or Woodlands. Maybe more adventurous and better planned will be willing to consider Penang or Chiang Mai (hey, you can be Marc Faber's neighbour!).

Readers have mentioned in previous post that the predicament is very low interest returns in Singapore, even GLC and stat board bonds now yield not more than 4%pa. Also not easy to buy such bonds. Well, if you are retiring and have managed to save $500,000 you can actually buy 2 lots of such bonds, from banks or stockbrokers. You need to pay service fees and transaction fees. But if you DIY online, you just need to pay transaction fee around 0.3%. You will have guaranteed let's say 4%pa interest to live on for the next 20-30yrs.

But is this such a good idea? There are a number of problems:
1) For coupon of 4%pa from GLC and stat board, the bond maturity will be at least 20 yrs, maybe 30 yrs. Such long dated bonds are incredibly sensitive to inflation or interest rate movements. If interest rates go up 1%, such bonds will go down by 10% in market value. And don't forget interest rates are now at their lowest in decades. The only direction for interest rates and inflation is now UP. Very high chance your bonds will become negative territory for 20+ years. And never say you will never sell the bonds halfway --- what IF you need a lump sum of money suddenly?

2) You are locking yourself in for 20-30yrs on a fixed coupon. The principal value of the bonds also remain the same upon maturity. There is no chance of capital appreciation. With very high chance of higher inflation and rising interest rates in future, your coupon income will be eroded by inflation. i.e. In 2010, you get average $1,600 per month. In 2030 you still getting $1,600 per month. You think kopi-O will still be at 70cents 20-to-30 years down the road?!?

3) Becoz of the large minimum lot size, your $500K egg is all in 1 basket. You are tying your 30-yr retirement to the future of Singapore and to some extent the PAP govt too. Private companies and MNCs are always mobile and relocating to the best places to do business. Stat boards? No way. Even for GLCs, if Singapore was to deteriorate in the future, many are not that efficient and will also go down.

Therefore, having a well diversified low-cost blue-chip equities as the foundation for your retirement fund is crucial if you (1) want your retirement fund to last for 30+ years and (2) have retirement income that can increase along with inflation.
And yes, even a 70 yr old should have about 35% to 40% of his retirement funds in equities.

For further testing, you can use T Rowe Price's retirement calculator to estimate what you can have in inflation-adjusted retirement income. They use Monte Carlo simulation to derive the results, and this online application has already been around for last 10 years. I first used it in 2000.

http://www3.troweprice.com/ric/ric/public/ric.do; April 14, 2010 1:27 PM
CreateWealth8888 said...: Some ideas on my retirement planning

http://createwealth8888.blogspot.com/2009/09/9-in-10-sporeans-do-not-feel-well.html; April 14, 2010 2:04 PM
Ex-Con said...: Guys & gals,

From my observations here, you cannot simply plan your retirement funds with just a fixed amount like $2000 per month, and then sitting on it. Your retirement funds must allow that $2000 per month to increase with inflation e.g. if inflation is 3% over the next 12 months, then starting in Jan 2011 you will need to draw $2060 per month, and so on.

Neither can you be so conservative or gung-ho (I don't know what is the right word) to say that you will accumulate sufficient retirement funds to give you $4000 per month (IN TODAY'S DOLLARS), even though you need only $2000 (IN TODAY'S DOLLARS), just becoz to cater for future inflation. Coz this means you need to over-save in order to double the size of your retirement funding.

Most people already have trouble saving 300 X (monthly expenses). You want to accumulate 600 X (monthly expenses)? The trick is to be able to structure your retirement funds to provide income and also with good chance of capital appreciation to allow inflation increments.

Please take note that all the talking we've done so far about needing $XXXX for retirement is in TODAY's dollars i.e. as if you are retiring NOW. If your projected retirement is 20 yrs later and you calculate you are spending $2000 per month NOW (minus away the mortgage), then in 20 yrs time assuming average 3% inflation, you will be needing $3612 per month -- and this is just in the FIRST YEAR. Next year you need to increase upwards for inflation (just like pay increment).

Go and ask any insurance agent or financial consultant how to tackle the above. They will tell you invest in ILPs, hot UTs, endowments, even wholelife insurance. Ha ha.; April 14, 2010 3:38 PM
Anonymous said...: Thanks Ex-con, for the finer details
about savings for retirement.

Yes, factor in the inflation.
With investments in shares that pays dividends ( at least 500K worth of shares, with half of them paying dividends )and if possible, another property ( not the home you are living ) to provide rental income.

Property is another asset class that will move in tandem with inflation, and so will the value of shares.

The reality, is that perhaps only 20% of the people have the capability to achieve this.. most will see their profits and quickly sell it off and spend it all on abalone soup and a lambourghini.

I am a believer of long term holdings.. more than 25 years. Of course, I monitor them and adjust the mix, type and quantity.. buying enough to sell and keep the balance.. where the gains are large enough to pay for the entire holdings.. henceforth, the shares are held completely free of charge and dividend is actually pocket money.

Just my personal views.; April 14, 2010 5:50 PM
Anonymous said...: Remember the long term inflation rate is 3.5%.
If you are growing your funds make sure your return should well be above the inflation like 6% before there is real growth.
If you have beyond 10 years time horizon and you are growing your money to meet your retirement it is suicide to invest in single premium endowment that gives 4%. Don't fall into the trap like many retirees who are having funding problem now. Is the endowment safe?; April 14, 2010 9:41 PM
Retired said...: My view is: the required retirement amount (CASH, not including asset like houses) will depend on the age who this person (single) or couple want to retire (could be any age). Some assumption have to be made.
Assumption are:
1) All loans are fully paid ie. Housing, education. No more dependent allowances and expenses to worry about. It will be difficult to talk about retirement if loans/debt are not cleared.
2) Inflation: average 2% annum
3) Optimistic Investment return: 4% annum (ie. SGS bonds)
4) Assuming a person life span of 80 years old.
5) Assuming CPF RA minimum amount reached - S$117,000.

Retirement age at ie. 50years old
A) For Single - $600K CASH
$600K at 4% - $24K passive income

B) For retired couple -$900K CASH
$900K at 4% - $36K passive income
[Left over from passive income to be re-invested to SGS bonds]
[Remember that at 65years old, CPF RA will be able to be utilised]

Retirement age at ie. 60years old
A) For Single - $500K CASH
$500K at 4% - $20K passive income
B) For retired couple - $700K CASH
$700K at 4% - $28K passive income
[Left over from passive income to be re-invested to SGS bonds]
[Remember that at 65years old, CPF RA will be able to be utilised]; April 15, 2010 11:57 AM
peter said...: Insurance can be understood as promise of compensation for specific potensial future losses in exchange for a periodic payment of premium. Insurance is designed to protect the financial well-being of an individual, company or other entity in the case of unexpected loss.
Insurance covers risk and uncertainities that is unexpected and has probability of occurance in the future based on the previous likely events. Agreeing to the terms of an insurance policy creates a contract between the insured and the insurer. In exchange of payments from the insured which is called PREMIUM, the insurer agrees to pay the policy holder a sum of money upon the occurance of a specific event against which insurance policy in taken.

WHY INSURANCE IS IMPORTANT
Insurance is a means to
1. savings
2 Children Education
3. Provides financial support to the family of the policy holder in case of unexpected death
4. better future and helps for children’s marriage
5. Pension plans return a reasonable amount after retirement
6. Health insurance plans Financially the policy holder, support when one has to undergo major surgery.
7. ULIPS act as insurance cover *** investment with good returns.
8. many more benefits from insurance

Best Fixed Rate Savings Accounts; October 28, 2010 8:07 PM