Do You Know How Much You Need For Retirement?

Many investors invest for retirement. However, do you know how much you would actually need for retirement? If you can get an approximate figure, you might be able to work backwards to see how much you’d need to invest and the rate of return you’d require. Let’s do a little exercise.

Let us imagine that an individual named John is planning for retirement. He is currently 40 years of age, married, but has no kids. His wife isn’t working and their current lifestyle requires them to spend roughly S$30,000 annually today. John plans to retire at the age of 65 so he has another 25 years of work to go.

Now come some of the assumptions:

1) His lifestyle would not change dramatically after he retires.

2) Inflation over the next 25 years (from today, when he’s 40 years old) would be 3% annually.

3) John and his wife remain well-insured for the remaining of their lives.

4) The couple would live to a long fruitful age of 90 (this is not unreasonable given that Singaporeans’ life expectancy is 82 in 2012 and had been climbing for many years prior).

5) John saves around S$15,000 a year and can grow that at 3% a year as his salary is more or less pegged to inflation; he has no prior savings at all.

6) Upon retirement, John would put his capital into a bond fund which would give him annual returns of around 4%.

Using our assumptions and everything else we know about John, his current annual spending of S$30,000 would be inflated to around S$63,000 when he’s 65. His yearly savings will grow from S$15,000 per year to about S31,000 per year at his retirement age.

If John has no plans to leave any part of his wealth for anyone, we can assume that he is willing to spend all his accumulated wealth for the remainder of his life when he reaches 65 years of age. If that is the case, then John would need about S$1.4 million in the bank when he’s 65 in order to maintain his lifestyle.

And to hit that S$1.4 million target, John would need to just achieve a 7.5% return per year on his savings. In fact, that return target would leave him and his wife with more than enough to sustain their lifestyle.

Foolish Summary

I think this little exercise highlights a few important points, which are:

1) We do not need huge returns to retire comfortably

2) We do not need huge savings to retire comfortably too; in fact, John is only required to save around S$1,250 per month despite the fact that he had no savings before the age of 40 .

3) We do not need to earn a lot to retire comfortably; John’s household income started at around S$45,000 a year at 40 years of age.

4) Investing and planning for retirement takes time and effort; even when he’s 40, John still needed to plan his investments 50 years ahead for him and his wife.

5) You do not need incredible investing skills. John needed an annual return of 7.5% for his savings; for some perspective, the SPDR STI ETF (SGX: ES3), a plain-vanilla proxy for Singapore’s market barometer the Straits Times Index (SGX: ^STI), has delivered annualised total returns (where gains from reinvested dividends are included) of 8.39% since its inception in April 2002.

Hopefully, this illustration gives you a new perspective on why having a comfortable retirement and becoming a millionaire is not out of reach for even the average investor. But if you’d like more, we at The Motley Fool Singapore have also created an easy guide for you in your quest to becoming a better investor. The guide, titled 10 Steps to Making a Million Singapore Dollars in the Marketis FREEClick here now for your copy!

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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 contributor Stanley Lim doesn’t own shares in any companies mentioned.