Singaporeans all over the island freaked out when the Straits Times published this article last year declaring that they were going to need $1 million in order to retire. Many began gearing up for a grim future of slaving away till the day they could finally be put to rest in their graves.
Before you start panicking and thinking up ways to shorten your lifespan, it’s important to note that everybody’s situation is different, and some are going to need more or less to retire on than others. Instead of going insane over an arbitrary figure supplied by one journalist, it would be more useful to examine the factors that will affect the amount you’ll need to retire. Here are 5 things Singaporeans miscalculate when trying to determine how much they’ll need for retirement:
Length of retirement
The traditional retirement model assumes that once you hit the age of 62, all your income streams will drop off the face of the planet and you’ll be left to live off your savings for the rest of your life. However, when you actually retire might vary as many people choose to work part-time even after they retire. For instance, many retirees become private tutors or piano teachers, or work part-time in their professions as consultants.
In addition, just because you stop working doesn’t mean you automatically stop earning income. For instance, if you have rental or passive income that can cover your monthly expenses, you can actually retire way earlier than you think… maybe even now.
Not adjusting for inflation
Before you freak out about how it’s going to take you 100 years to save $1 million, it’s important to note that the final sum you will actually need varies depending on when you will retire and the actual figure you will need to save thanks to inflation. If you’re retiring in 30 years’ time and have calculated that you’ll need $1 million, that doesn’t mean that saving $1 million today is good enough.
It does mean that whatever you do save will have to be invested and given time to grow to $1 million by the time you retire. On the other hand, if you’re planning to retire tomorrow, you won’t need that much as costs today are certainly nowhere near as high as they’ll be in a few decades’ time.
Overestimating investment returns
We tend to think of investment returns as a sure thing—since your stocks have been performing well on the market over the past few years, you start to expect to enjoy a steady 5++% return per annum each year for the rest of your life. And everyone just assumes that property values will accrue over time, never mind that the property market is in a huge slump now.
When estimating your investment returns, you would do best to project modest gains or risk getting a rude shock when you investments do not perform as well as expected and you have to abort your luxurious retirement plans.
Not accounting for peripheral expenses
So, you might be able to survive on a few hundred dollars a month by eating bread and water at home every day. But that doesn’t mean you should think of living like that when you calculate how much you need to retire. Other than medical expenses and the like, you might also want to spend on things like travel, stuff for your kids or grandkids, your hobbies or simply the finer things in life. As much as you might want to retire as early as possible, you have to be realistic about your spending and cut yourself a little slack here and there.
Fluctuation in loan interest rates
Realistically speaking, many Singaporeans will have to continue paying mortgage instalments even after they retire. As you know, loan interest rates fluctuate, and you’ll have to take into account the possibility that interest rates will be much higher when you’re about to retire. That means your monthly expenses could rise significantly, often by hundreds of dollars.
You can mitigate this danger by always being on the lookout for better interest rates and refinancing when it’s prudent to do so. If you’re thinking of retiring anytime soon, then use MoneySmart’s free Mortgage Refinancing Wizard to check out the best interest rates across the various banks. This is especially important because refinancing is going to be extremely hard once you retire and aren’t earning a steady income.
What factors have you taken into consideration in your retirement planning? Tell us in the comments!
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