Determine Your Retirement Needs
Key Takeaways
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Have a good idea of the kind of lifestyle you want when you retire
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Decide when you want to retire, and for how long
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Estimate how much you need to save in order to meet your retirement goals
What kind of lifestyle do you want to lead when you retire? How many years do you expect to be in retirement? What debt or income will you still have when you retire?
These are, broadly, the questions you have to answer when you plan for your retirement:
The Kind Of Retirement You Want
What would you consider a comfortable life upon retirement? Some have aspirations of travelling around the world while others prefer to slow down and live simply after decades of being in the rat race.
Whichever lifestyle you choose, these are some things you will have to consider:
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Home – Where do you expect to live? Is it fully paid for? What are the costs of maintaining the property?
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Health – Do you have any chronic illnesses or long-term medical needs?
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Hobbies – What do you enjoy doing? How much will it contribute to your expenses?
Inflation Rate
In working out how much you will need to set aside for spending in your retirement, you must factor in inflation, or the rising cost of living. Put simply, you will not be able to buy as much in the future with the same amount of money that you do today.
Expected Return For Your Investments
When working out how much to save, you would want to factor in how much your retirement nest egg could grow. Generally, investments that generate higher returns also carry a higher risk of losing money.
For example, stocks may have higher potential returns than bonds but they also carry higher risk. On the other hand, cash and fixed deposits are safe but have relatively low returns.
Tip: You can top up your CPF account with cash to enjoy attractive interest rates of up to 5% for your retirement nest egg.
Number Of Years Until You Retire
To get this number, subtract your current age from the retirement age. This is the period you have to build your retirement funds.
The current statutory retirement age is 63 but your desired retirement age may differ. Other circumstances such as health may also force one to retire early.
Number Of Years In Retirement
To get an idea of how long you can expect to be in retirement, subtract your retirement age from the age you expect to live to.
Currently, the life expectancies of men and women are around 80 and 85 years respectively. Given the current retirement age of 63 years and re-employment age of 68, you should aim to build up retirement savings that can last at least 20 to 30 years.
Working Out Your Estimated Needs
Based on your projected retirement lifestyle, try to work out how much you will need per month when you retire.
If your estimate looks challenging to save up for, explore a more cost-effective lifestyle.
As a rule of thumb, you could consider a spending benchmark of roughly two-thirds of your last drawn monthly salary.
Work out how much you need and then estimate in more detail how ready you are for retirement.
Calculate Your Retirement Income Needs
There are two ways to estimate the funds needed for a comfortable retirement.
Income Replacement Ratio Method
This method recognises that most people will be spending less on certain expenses during retirement. As a guide, aim for two-thirds to three-quarters of your income to live comfortably.
Say you want to replace 75% of your current income. If you currently earn $48,000 per year, and your desired retirement age is 62:
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Annual retirement income needed: 75% x $48,000 = $36,000
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Years in retirement (life expectancy - retirement age): Men: 83 - 63 = 20; Women 88 - 63 = 25
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Total retirement income needed: Men: $36,000 x 21 = $720,000; Women: $36,000 x 25 = $900,000
Adjusted Expense Method
You can estimate what you will need to retire comfortably by using your current level of expenses, compounded yearly to the retirement age with an appropriate inflation rate.
With this method, you need to examine your spending habits. Certain expenses may increase, some decrease, while others vary as you grow older. So, it is important to review your expenses before and during retirement.
If you need $2,000 per month at retirement and your desired retirement age is 62:
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Annual retirement income needed: $2,000 x 12 = $24,000
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Years in retirement (life expectancy - desired retirement age): Men: 83 - 62 = 21; Women 88 - 62 = 26
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Total retirement income needed: Men: $24,000 x 21 = $504,000; Women: $24,000 x 26 = $624,000
Note: When doing your actual calculations, you will need to take into account inflation and your expected investment returns.
