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. :)