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How To Retire On $1.2 Million

The Motley FoolHere is a statistic that made me shudder.

If you have today, a two-year-old girl in front of you, and a 97-year-old man, the two-year-old girl is more likely to reach the age of 100 than the 97-year-old man.

How can that be possible?

The two-year-old girl still has another 98 years ahead of her before chalking up her century. Meanwhile, the 97-year-old man only has three years to go.

It is feasible because thanks to advances in medical science, longevity is improving right before our very eye. Young people born today are likely to benefit from discoveries that we cannot possibly imagine right now.

The lengthening our lifespan even prompted one German scientist to suggest that 72 is the “new 32”. On that measure, I would be about 20 years old, which is another frightening thought.

Who pays?

Thing is, on the one hand it is great news that we are all living longer. But on the other side of the equation, the cost of longevity has to be borne by someone. It must either be paid for collectively through the state or we will have to fork out for it ourselves.

Whichever way you choose to look at it, there are no free lunches. In fact, free lunches invariably come with strings attached. And there is nothing more unappetising than a stringy lunch.

The fact is that the balance that we used to have, namely we work for 40 years and then typically enjoy retirement for 15 years worked remarkably well. As a ratio, that seemed almost ideal.

But things are a little different today. Indeed they are. These days, we want to work for 30 years and retire for the next 30 years. That equation just does not work. That is unless you do something about it yourself now.

Are we there yet?

The key is therefore to think ahead.

You need to have some idea about what you will need in the future and the kind of income that you hope to enjoy from your investments when you stop work.

Put another way, you need to know where you are now and where you want to be some time in the future. Once you have defined those two crucial reference points, then you can start working at achieving your objectives.

There is, it should be stressed, no right or wrong way of reaching your goal – only what is right for you.

For instance, let us assume that the historical total rate of return of around 8% for Singapore shares can carry on into the future. The rate of return is made up of the capital appreciation of the Straits Times Index  (SGX: ^STI) since 1988 and a 3% annual dividend yield.

Using those numbers, an investor who regularly invests $500 a month for 35 years, could have a retirement pot of about $1.2 million. To achieve a similar pot of money by salting away cash at a savings rate of 2%, you would need to put away around $2,000 a month for the same length of time.

Cash or shares?

That is quite a big difference. By saving cash rather investing in shares, you might need to put away four times more to achieve the same target. Alternatively, if you still only wanted to stash away $500 in cash, it would take around 80 years to reach the $1.2 million goal. By then it might be too late.

That is why I invest in shares. It is riskier than cash. But without taking on some risk, you are unlikely to reap the rewards.

But the choice is entirely up to you.

Or put another way: Half of knowing what you want tomorrow is to know what you must give up today before you can get it. It is really that simple.

This article first appeared in Take Stock Singapore.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.