Financial Intelligence

$5 Million To Retire In Singapore?

$5 Million to Retire in Singapore?

Recently, I had a conversation with a poly classmate who is running his own small retail business. At one point in the conversation, he asked me how much I thought would be needed to retire in Singapore.

Having already worked out the number for myself, I was curious about his answer. So, like a taichee master, I did a reversal and threw the question back at him with, “How much?”

“5 million”, he replied.

For a moment, I thought he was joking, but then I realized he was dead serious, which made me ask him why would he need such a large sum for retirement. His reply: This is the number those within his circle seems to agree on.

I never quite went on to ask how much did he really need every month. I was too stumped. Don’t get me wrong, this guy is an above average businessman because he has lasted more than a decade doing what he does. However, this was the first time I’ve heard such a figure.


Is That Really A Plan?

Okay, let’s try figuring how much can you get every month with $5 million.

Say if you’re 30 today and so happen to find $5 million tucked under your bed. You let it stay there and live off it till your 100th birthday. That’s 70 years or 840 months. With $5 million, you can spend $5,952.38 every month till the day you die.

Nearly $6,000 per month! That’s not a bad way to get by 70 years in Singapore without having to worry about money!

But reality check time. $5 million. How long would it take to amass that kind of money?

The easiest way is to be the sole winner of the first prize Toto lottery. Your chances of being struck by lightning 1Your chance to be struck by lightning in your lifetime is 1:12,000, whereas your chance to strike the Toto Jackpot is 1:13.98 million is actually MUCH higher 2That’s like getting struck by lightning 1,165 times, then perhaps you may win the Toto jackpot. One can hope right?. Then again, this is not much of a retirement plan is it?

Alright, assuming you REALLY NEED $6,000 every month and can set that aside with 50% of your salary. Mind you, $6,000 a month is no small feat and considering you will be spending another $6,000 (because you absolutely need it), therefore you have to earn $12,000 monthly just to be living within your means and save for retirement.

We’re not even taking into consideration the 15% tax bracket you’ll end up in, as well as CPF… all for simplicity’s sake. Also we will not take into account investing, because we love stuffing cash under our bed so much.

That will take you…. 70 years to accumulate $5 million… which doesn’t make much sense at all.

So much for retirement.


Investments Can Save You 30 Years

But wait.

What we’ve been talking about so far, is assuming that you’re keeping all that money under your bed. Which is draw-down to zero.

Still on the topic of figuring out how much we need every month, if everything was invested in 30-year Singapore Government bonds 3Which are low risk investments that yield 2.75% annually if bought at par value and not taking into consideration trading fees for simplicity., that $5 million would’ve generated $137,500 in coupon payments each year. That’s $11,458.33 per month!

That’s twice the amount we initially thought was needed. So unless you’re actually thinking about spending $11.5K every month, and given the insane amount of income required to save up such a sum (based on the 50/50 allocation above), perhaps it is time to rethink how much you REALLY need for capital.

So, how much would be needed this time to generate $6,000 in interests every month?

Roughly $2.6 million, or nearly half of what was initially thought was needed. Which will take 36.5 years to save instead of 70, at the same rate described above.

You can actually be financially independent at 66.5 years old!  If you live to a hundred, that’s having another 33.5 years to enjoy life instead of working it away, simply by exercising some simple money management.

The best part is, you will still be able to leave an inheritance of $2.6 million when you’re gone.

However, I don’t know about you, but working for 36.5 years still seems a tad too long for me.


Do You Need What You Think You Need?

What if, instead of saving 50% of your salary, you’re able to save 75% instead?

That’s socking away $9,000 every month for our scenario. $2.6 million can be saved in 24 years! That’s being financially independent at 54. Shaving off another 12.5 years of employment slavery!

Hang on a minute.

If you were to save 75% of your monthly salary for 24 years, wouldn’t that mean you’ve actually been living on $3,000 per month all these while?

That means to generate $3,000 monthly at 2.75% annual return, you’ll only need about $1.3 million instead of $2.6 million of income generating assets. Which will take you just 12 years of saving to hit that target!

Say hello to financial independence at 42!

That’s 24.5 years sooner than the original target of retiring at 66.5 years old! Simply by increasing your savings by another 25% of your salary. 12 years seems pretty reasonable.

Here comes the magic: This works for any amount you earn.

Are you earning $4,000 a month? Put away 75% of your pay, and it’ll also take you 12 years to reach financial independence.

It really doesn’t matter how much you earn. If you can live on a quarter of your paycheck for 12 years, you would’ve conditioned yourself to live off investment yields of 2.75% per year, powered by all that capital you’ve accumulated. For the rest of your life.

Freedom will only cost you 12 years instead of 36.5.


So Will It Be Your Money Or Your Life?

$5 million definitely seems like an amount that can get anyone through a lifetime. But the sad fact for most of us who actually have to work towards retirement, there is no retirement if that is the target.

So why did my friend think that’s his magic number?

Lifestyle inflation. When you have lived off your business by paying yourself just enough to be taxed at a minimum for personal income, yet be able to own a luxury car, have all those paid-up travels and meals, all with the added benefit of writing them off as business expenses to lower your corporate taxes — your lifestyle and spending tend to speed ahead like a runaway train. Considering he’s paying the mortgage for a penthouse condominium unit acquired at around $1.7 million and the $50K spent on renovating it — the sum of which is already close to 40% of his target amount.

Perhaps if you own a business, such a figure may be possible. However, I’m always looking from the perspective of the average salaried worker in Singapore. From what I know, the retail sector in Singapore isn’t doing really that well the last few years as well, and my dear friend’s business was going through a rough patch.

The question is therefore not the magic number for retirement, but your savings rate while you’re working towards financial independence. Because this makes a big difference whether you spend the rest of your life doing things on your own terms, or on the terms of others.

Aim to live on 25% of your pay, and financial independence will be only 12 years away 4Assuming you invest everything in something that generates a 2.75% annual yield. That’s not even considering if you have invested the money instead of saving. If you had reinvested 2.75% of annual interest income, it may even be possible to shave off a full year. Not to mention, by increasing your risk-reward ratio, you may even increase your yield above 2.75% to close the gap even more!

Here’s a cool tool to find out how investment returns affect how long it takes to reach your target.

If 25% of your salary seems a little hard to get by, even after making all the necessary cuts, then you may need to find ways of increasing your income while maintaining your expenses. Remember, 25% spending is the target, but if it is really too tough, then anything below 40% should already put you way ahead of the crowd.

$5 million may buy nearly every material thing you want, but it’s price is your life. There is nothing worth buying more than freedom to do anything you want, anytime you want.

Footnotes   [ + ]

1. Your chance to be struck by lightning in your lifetime is 1:12,000, whereas your chance to strike the Toto Jackpot is 1:13.98 million
2. That’s like getting struck by lightning 1,165 times, then perhaps you may win the Toto jackpot. One can hope right?
3. Which are low risk investments that yield 2.75% annually if bought at par value and not taking into consideration trading fees for simplicity.
4. Assuming you invest everything in something that generates a 2.75% annual yield

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