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Full Version: Trying to Figure out How Much You Need to Retire
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IMSAAVY - posted by Wong Sui Jau on 27 Feb 2012 9:54 AM

This is actually something that is on many people’s mind. Singapore is aging! How much exactly do I need before I can retire, do I at least lead a lifestyle that I want without having to worry that I will not be able to pay the bills eventually? Financial planners run through calculators, excel spreadsheets and come up with huge figures that are so scary that it seems we cannot afford to retire. Even some financial calculators are like that. This is because they factor in all sorts of stuff. I have come up with a much easier way to look at it, but it does require certain assumptions and explanations.

Here’s a very simplified way of looking at it. Let’s say you are aged 55, and you are wondering if you have enough to retire. First thing, ask yourself how much you will be spending each month from now until the day you die. Don’t just pluck a figure out of nowhere. Think through a much simpler lifestyle where you don’t have to travel to work every day, and you don’t necessarily have to eat out every day. But do factor in medical expenses and housing. Let us assume you already have a place to stay and you can get by on $1500 per month (that is $50 per day, which should usually be more than ample unless you want a more lavish lifestyle). Now let us also assume you think you will live till 80.

So, the simplistic way to calculate that would be to take $1500 and multiply it by 12 months, and then multiply by 25 years. That adds up to $450,000. That is a very rough figure but it is actually fine. Here, I can see lots of raised eye brows by professional financial planners. What about inflation? What about other things? What about the returns from investments? All the other considerations make the calculation much more complicated, but in the end, surprisingly, they tend to balance out.

Take inflation for example. This is often used to inflate a present sum of money into such a huge amount that it looks scary and unachievable. But balanced against inflation, we also have the returns from investing our retirement nest egg. Unless you are going to place everything into savings account earning 0.1%, then yes it time to fire up those financial calculators and see those inflated numbers. Otherwise, if your rate of return is able to at least match or keep close to inflation, the two will cancel each other out. If you are very good at investing and your rate of return beats inflation significantly, then everything in addition is simply bonus and you should be happy with that.

The other factor that tends to inflate this figure is when you want to leave something for your children (if you have some). It’s a very Asian mentality. However, I need to ask a very personal question here. Are we living our lives only for our children or for ourselves? Don’t get me wrong. I have two kids myself and I love them. Goodness knows I have also sacrificed for them, and I am not even counting the amount of money I am spending on them now and in future. However, ultimately, will I be defining my entire life’s happiness based on them? I certainly think I shouldn’t be.

I have seen some parents who go to extreme lengths for their children, including using their retirement fund to help buy a property for their child. I bought my own property with my own money, and I certainly don’t expect my children to ask me for money to buy a house. In the same vein, I won’t expect my children to take care of my retirement either. The biggest “gift” you can give your kids is to be financially independent so that you don’t need their money after they have started to work. Besides that, all the effort, time and money we have already spent before this to prepare them for the working world should already be more than enough. Beyond a certain age, if the kids (now adults) are still relying on you to get by, then something is seriously wrong.

Take care of yourself first. After you are sure you can get by comfortably, then you can start thinking about the kids if you want and have the means to. They have to learn to be responsible and independent adults eventually. You can’t look after them forever because they will outlive you. But if you spend your retirement fund on them to do something like buying a house for them, then what happens when you don’t have enough to retire later? Would you want to continue working past age 70 because you cannot afford to retire? And how much is enough to leave to your kids in the first place? 1 million? Will it breed a spoilt or entitlement mentality? Or worse, end up saving too much for our children such that they start wishing we kick the bucket soon because they want the inheritance? That would be a rather sad day wouldn’t it? I have seen some people who seem to have spent their entire lives working for their children rather than themselves.

Actually, once we start thinking about how much we actually need to cover our expenses for the rest of our lives and use the simple calculation above, it doesn’t become that scary amount of money that financial planners like to show you. Now, that doesn’t mean it’s zero either. But is something like $500,000 achievable by age 60 for someone who starts saving and investing when he is 30 or younger? It certainly should be. One key thing to all this though, is that you must educate yourself about investing. You have to at least match inflation rate with your returns or else the amount you need for retirement will start to balloon. Putting it into a bank savings account just doesn’t cut it. I am not saying everyone needs to learn about stock markets and such just for this to work. There are many bond funds around, some of which are relatively low risk and their historical returns over the years have been able to match or beat the rate of inflation. Just don’t get greedy and start wanting10% per annum or more. You don’t need such high levels of returns (and the associated risks) if your objectives are more modest. In the end, it’s definitely good to think about what you truly need for retirement. Perhaps for some people, you are already there, you just have not realised it!
I like this piece which is much more balanced than those numbers worked out by so-called financial planner.
i think some of us will realise as we grow older and older---- What's the heck, we don't live forever and if we are able leave behind a little legacy, it's more than enough for us not living in vain. So we may actually be able to upgrade our lifestyle instead of downgrade, if we want to. i witness an old man of 70+(my guess) has upgrade his car to a brand-new Mercedes than to a brand-new BMW. And don't be mistaken, my neighbour is living in a HDB block, just like me. i don't really know about my neighbour's background. He may have realised he can not bring anything along with him when he says "Sayonara"
So really, how much you need to retire?
Yes. Inflation, property and leaving for Children are what keeping us awake. A mentality change needed.
I had been doing my own "planning" since I am "so free". A few things here which I think the writer missed out.

1. The writer wrote about 1 single person. So for a couple, say both age 55, will need $900,000 to retire.

2. For someone around 30 to retire at age 55, he/she will need to adjust the figures for inflation for 25yrs. So the figure will be $1,000,000 at 55 if the inflation is 3%.

3. Is there any low risk bond funds that can give 5% return? Maybe in the emerging markets?
(12-06-2013, 08:09 AM)Penguin Papa Wrote: [ -> ]3. Is there any low risk bond funds that can give 5% return? Maybe in the emerging markets?

In today's low interest rate environment, it is highly unlikely that a low risk bond fund returning 5% exists.

First, interest rates are very low today meaning that 5% is high on a relative basis. Even in emerging markets the strong borrowers are often paying less than 4% on their bonds. In developed markets they may be paying 2% or less.

Second, interest rates are likely to rise in the medium term, and virtually guaranteed to rise in the long term. When this happens, all bond funds will suffer capital losses on their holdings. In this respect NO bond funds are low risk.

Anyone buying a bond fund today is taking a great deal of interest rate risk, in other words they are exposed to heavy capital losses in future. In exchange they may get 3-4% a year in coupons. It would be a high risk, low return investment. Don't do it.

Note that if you buy a bond fund that pays 6% or more thinking you can get a higher yield, note that it is definitely a junk bond fund, whose returns will track the stock market i.e. the fund's NAV will rise and fall in line with the stock market. No stability at all.

And if you say: OK no junk bond funds, no investment-grade bond funds, what do I buy if I want safety and a bit of return? This is a common question, and my $0.02 answer is: NOTHING.

There is no return without risk.
But understand how much risk you are taking in exchange for that potential return. If you do your homework you can get a good risk/reward ratio i.e. low risk, moderate return or moderate risk, high return. If you don't do your homework you may end up with high risk, low return - as an investment-grade bond fund paying 3-4% would be today.
(12-06-2013, 10:57 AM)d.o.g. Wrote: [ -> ]
(12-06-2013, 08:09 AM)Penguin Papa Wrote: [ -> ]3. Is there any low risk bond funds that can give 5% return? Maybe in the emerging markets?

In today's low interest rate environment, it is highly unlikely that a low risk bond fund returning 5% exists.

First, interest rates are very low today meaning that 5% is high on a relative basis. Even in emerging markets the strong borrowers are often paying less than 4% on their bonds. In developed markets they may be paying 2% or less.

Second, interest rates are likely to rise in the medium term, and virtually guaranteed to rise in the long term. When this happens, all bond funds will suffer capital losses on their holdings. In this respect NO bond funds are low risk.

Anyone buying a bond fund today is taking a great deal of interest rate risk, in other words they are exposed to heavy capital losses in future. In exchange they may get 3-4% a year in coupons. It would be a high risk, low return investment. Don't do it.

Note that if you buy a bond fund that pays 6% or more thinking you can get a higher yield, note that it is definitely a junk bond fund, whose returns will track the stock market i.e. the fund's NAV will rise and fall in line with the stock market. No stability at all.

And if you say: OK no junk bond funds, no investment-grade bond funds, what do I buy if I want safety and a bit of return? This is a common question, and my $0.02 answer is: NOTHING.

There is no return without risk.
But understand how much risk you are taking in exchange for that potential return. If you do your homework you can get a good risk/reward ratio i.e. low risk, moderate return or moderate risk, high return. If you don't do your homework you may end up with high risk, low return - as an investment-grade bond fund paying 3-4% would be today.

Will the argument be the same for holding bond to maturity?
Agree. Very logical.
But they are people who buy bonds for the coupons of maybe 3 to 5 % and hold the bonds to maturity. And this group of people will think they get low to moderate risk and quite happy with the YTM return.
That's why bonds will always be in the market. imo
This is exactly what I mean that the author had missed out. Looking at the date (March 2012) of the article, I doubt there were any low risk bond funds that can give 5% to beat the inflation rate then. Those that advertised to give 5-7% are basically non-investment grade (aka high risk) or emerging market bonds (also high risk too). Thus I raised that question.
(12-06-2013, 11:05 AM)CityFarmer Wrote: [ -> ]
(12-06-2013, 10:57 AM)d.o.g. Wrote: [ -> ]
(12-06-2013, 08:09 AM)Penguin Papa Wrote: [ -> ]3. Is there any low risk bond funds that can give 5% return? Maybe in the emerging markets?

In today's low interest rate environment, it is highly unlikely that a low risk bond fund returning 5% exists.

First, interest rates are very low today meaning that 5% is high on a relative basis. Even in emerging markets the strong borrowers are often paying less than 4% on their bonds. In developed markets they may be paying 2% or less.

Second, interest rates are likely to rise in the medium term, and virtually guaranteed to rise in the long term. When this happens, all bond funds will suffer capital losses on their holdings. In this respect NO bond funds are low risk.

Anyone buying a bond fund today is taking a great deal of interest rate risk, in other words they are exposed to heavy capital losses in future. In exchange they may get 3-4% a year in coupons. It would be a high risk, low return investment. Don't do it.

Note that if you buy a bond fund that pays 6% or more thinking you can get a higher yield, note that it is definitely a junk bond fund, whose returns will track the stock market i.e. the fund's NAV will rise and fall in line with the stock market. No stability at all.

And if you say: OK no junk bond funds, no investment-grade bond funds, what do I buy if I want safety and a bit of return? This is a common question, and my $0.02 answer is: NOTHING.

There is no return without risk.
But understand how much risk you are taking in exchange for that potential return. If you do your homework you can get a good risk/reward ratio i.e. low risk, moderate return or moderate risk, high return. If you don't do your homework you may end up with high risk, low return - as an investment-grade bond fund paying 3-4% would be today.

Will the argument be the same for holding bond to maturity?
i think it will. Suppose now banks IR is 5 %, the new bonds issue will carry much higher coupon than 5%. For the group who is staunch income investors if they run out of capital, what they going to do?
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