4 steps to derive the monthly savings needed for your retirement
Updated: Jul 31
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In the previous article: Introduction to retirement planning, we spoke about passive income and what are the components that form up your passive income during retirement.
In today’s article, I would like to walk you through the 4 steps required to derive the monthly amount you need to save or invest to achieve your retirement goals.
Step 1: Defining your retirement
Determine for yourself:
When do you want to retire?
How long do you think your retirement will last?
How much do you need per month for your living and recreational expenses?
Step 2: Adjusting for inflation
Let’s face it, inflation is something that we can never escape. An average price for a plate of chicken rice 20 years ago maybe $2 but today, it can easily cost $4. Moving forward, how much do you think the same plate of chicken rice would be 20-30 years down the road? You get the idea.
In terms of calculating for inflation, the rate I prefer to use is the 30-year inflation rate as our retirement plans will stretch over the same duration as well.
By doing so, you will be able to derive the amount you need during retirement as well as the breakdown between how much you will need a month from guaranteed and non-guaranteed income sources.
Step 3: Determine shortfall
In order to determine the shortfall that you have, there are a few things you will need to account for:
1. Cash & Investments: Project your current balance and monthly contribution to understand how much you will have by your retirement age if you were to continue doing what you are doing today
2. CPF Account balance: This will determine the amount of guaranteed income you will get from CPF life after age 65
3. Private insurance annuities: This will determine the amount of guaranteed and non-guaranteed income you will get before and after age 65 – depending on your insurance contract.
4. Property Rentals: This will determine the amount of non-guaranteed income you will get before and after age 65.
After you’ve accounted for the above items, you will need to identify the amount of short-fall in your passive income during retirement and work backwards to derive the overall short-fall you may have for your own retirement plan:
Step 4: Reconciling theory and practical methods
Now, there is a huge difference between what’s true in theory and what’s true in reality.
The steps that we’ve taken up thus far are all abiding by the principles of the theory, but when it comes to structuring a retirement plan, we have to take into account the different scenarios and combination of financial instruments to provide us with the desired guaranteed and non-guaranteed income during our retirement.
This is because, if you were to blindly adopt the savings required based on the calculation, you will end with a disproportionate amount of non-guaranteed income which increases the sensitivity of your retirement portfolio with the economic conditions.
As such, this is where you will have to tweak your plans and understand what instruments will provide you with the right proportion of guaranteed and non-guaranteed income. Most importantly, you have to decide WHEN you want to incorporate certain financial instruments as all these decisions that you will have to make will affect:
the monthly savings that you will need to have
the allocation of your monthly savings into the different financial instruments
Long story short
The magic number for everyone will always be different as different people have different retirement expectations, different financial situation as well as different preferences towards the direction they would like to embark on for their retirement journey.
As such, to ensure that you derive the right number for your own retirement, it is imperative that you engage the help of professionals to help you better understand the consequences and outcome of your decisions and the plausible alternatives so that you can have a better picture before embarking in your journey towards retirement and financial freedom.
Once again, as previously mentioned, the key to retirement planning is balancing between the guaranteed and non-guaranteed passive income stream during retirement. As such, when you approach your own retirement plan, your focus should be on achieving the right proportion of guaranteed and non-guaranteed passive income during retirement instead of focusing solely on investments.
If you were to only focus on investing as the only method or source to finance for your own retirement, you risk subjecting your retirement portfolio to the mercy of the market's ups and downs. As a result, your retirement plans can be easily disrupted, pushed back or even fail due to market cycles that are outside of your control.
In the next article, we will be looking at retirement planning products and differentiating the differences among the different categories of retirement planning products that's currently available in the market.
Should you need help in quantifying your retirement expectations and short-cutting your retirement planning process, you can reach out to me here!
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Daniel is a Licensed Independent Financial Consultant with MAS and a certified Associate Wealth Planner, who specializes in retirement and investments planning. Find out more here.
This article is meant to be the opinion of the author and is for information purposes only.
This article should not be seen as a financial advice
This advertisement has not been reviewed by the Monetary Authority of Singapore