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Some people ask how it’s possible to plan for retirement if they don’t know what’ll happen in the future.
Should they plan for more funds “just in case”? What if they thought they wanted kids but eventually don’t have any? Will they look back with regret as they spent so much time planning for the future while missing out on experiences (like vacations) in their younger days?
The catch-all phrase of retirement planning can seem intimidating to a young adult who has never attempted it before, but it doesn’t have to be so. The tip is to start with a goal-setting exercise, and we’ve simplified this process into 3 steps to get you started.
The first step in the process requires you to consider what you would like to do after retirement. Let your imagination run wild! You’ve worked hard for nearly 40 years of your life and with prudent planning, you are now financially free to do whatever you want.
Are you travelling to a new country every other month to experience different cultures, or would you prefer a relaxing life in your home? Do you want to wine and dine at a fine restaurant, or would a delicious meal at the hawker do just fine?
Thinking about how you want to spend your retirement years will give you a gauge of how much you have to save to achieve them. After settling on the lifestyle that you think you’d want, the next step is to figure out how much you’ll need to fulfil it.
Some financial planners will advise you to have about two-thirds of your last drawn salary available for your monthly expenses during retirement, but this amount could vary to a large degree, based on your preferred retirement lifestyle.
Let’s say that during your retirement, you’d like to travel 3 times a year. You prefer to have local food at a hawker on a day-to-day basis, but over weekends you’d like to go out for something nice.
Taking these factors into account and assuming that your monthly expenses would cost you S$16,800 a year, let’s calculate how much extra you’d need to set aside to achieve that lifestyle in a year.
|Expenses||Estimated costs (S$)/ Year|
|Housing and utilities||2,400|
|Total essentials expenses||16,800|
|2-week trip to Europe||6,000|
|1-week trip to Japan||2,800|
|1-week trip to Bangkok||1,500|
|Fine dining on weekends||3,600|
|Total luxury expenses||13,900|
It looks like the luxury expenses alone would cost you an estimated S$13,900/year, including the food. So if you want to maintain this lifestyle for 20 years of retirement, you would need a grand total of S$614,000 (excluding inflation).
If you’re currently 30 years old and aim to retire at 62, you will have to start saving S$1,598 a month to have the retirement of your dreams. If this number sounds too high or low, you can always do your own version of goal setting with the table above and come to a number that’s right for you.
Once you have a rough idea of how much you’ll need, the next step is planning how to get there. If you’re still building up your savings and emergency fund, stick to it until you have a comfortable amount before maybe moving some of it into a long-term, low-risk investment.
Investing in bonds and mutual funds could be a good place for a new investor to start, as they are lower in risk compared to picking individual equities, derivatives, or forex. Making small investments early in your career can also help your funds weather the onset of inflation, while providing higher returns than if you had just saved cash.
Your CPF savings could also help during your retirement years, but solely relying on it may not be enough if you’ve used most of your funds to purchase your home.
Maybe you don’t even know what the next step in your career is, and planning for retirement feels a little bit like you may be jumping the gun.
Fortunately, the steps outlined above remain relevant even during times of uncertainty. The process can be revised and repeated as many times as necessary – your dreams may change, but you’ll always have to think about what you want for your future. Even if you find yourself in a drastically different situation in 10 years, thinking about the amount you need and the potential tools to grow your money will still be an important part of retirement planning.
Coming up with an initial retirement goal will kick-start your retirement planning. The numbers you settle on can always be tweaked, but it’s smarter to get started right now than waiting to plan around something that may never happen.
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