Where do you envision yourself in 20-30 years? Are you still at work? Do you have a family? Or are you retired; with all the free time in the world to relax, travel and pursue your own interests? If it’s the latter you find yourself gravitating towards, then this is the article for you!
Traditional retirement planning often emphasized saving in the form of passive investments, or in other words, a form of risk management that insures you against living a long and full life. This can take the form of a 401 k plan, or the Singaporean equivalent; the CPF Life Scheme. How this works is that by putting forth a premium payment, an annuity is able to pay you a fixed monthly income for life, starting at a certain age. Compulsory contributions to the CPF often occur in regards to Singaporeans and other residents. However, these contributions are not taxable. That means for whatever percentage of your salary that you agree to set aside is a tax-free payment. So if your marginal tax rate is 16%, then for every $1,000 that goes into your CPF, you save an extra $160. It may not seem like a lot now, but considering that this sum will only grow over the next 20 odd years, you can only imagine how vital that sum will be for your future.
And true, this kind of saving can work wonders for someone who plans to have a working career over the course of 40 years, in order to prepare for 30+ years of retirement. If you are looking for a shorter career and a longer retirement, then this strategy simply isn’t realistic. You will have less time to save more money, and unless you plan to spend the next 20 years in extreme frugality, there simply won’t be enough time to compound the growth of your assets.
So now that we’ve kicked that idea right out of the equation, here are a few other ways to aid in you saving for the retirement that you deserve.
In the past, people have followed a 4% rule to ensure that once they’ve retired, they will live comfortably for the rest of their lives. The way this rule works is that say you have just retired, and the total sum you have saved is 1 million dollars. According to this 4% rule, you will be able to live comfortably throughout your retirement if you spend no more than $40,000 a year. Now imagine that you are married, that same rule will apply, regardless of how much you have saved in the bank. And for many people, depending on their intended lifestyle and where they live, this can work. However, what you must also factor is the tax deductibles that you may face once you have retired. It is true that while you are in the process of saving, often these accounts are not subject to any form of tax whatsoever, it is only when you start withdrawing cash that this exception becomes mute. So what we cannot stress more than anything else, is to have some leeway – do the math and always aim for a larger sum you intend to save; that way, you can save your future self from having to rejoin the workforce out of necessity.
Retiring early isn’t just about what you make and what you save, it’s also about determining what kind of lifestyle you want to have when you retire. If you envision retiring in luxury, then you are going to have to spend the next 20 years living sub par. However, if you envision retiring comfortably, then the time spent working and the amount you’ve saved will be sufficiently less.
As a rule of thumb, most people save roughly 50% of their monthly salary in order to retire early. Otherwise, you will most likely be retiring at the average retirement age of 65. Many people cannot stand the idea of not working; it is entirely dependent on your own personal choice. More than anything else, what really does wonders to your ability to save, is the addition of another paycheck. If you and your partner are happy to continue working, even if you have children along the way, this will propel your ability to save so much more.
With a decent amount of savings, you can choose to do one of two things:
1. You can either continue to save and put aside the money for the rest of your working career or
2. You can dabble in active investments.
Of course, active investments come with a risk. Because of these risks, they are not suited for everyone. Patience and drive are your key ingredients to investing. If you truly believe that you have what it takes, you might want to look into putting your savings into a unit trust or exchange traded funds (ETF).
A unit trust and exchange traded funds both pool the money of investors so that it may be invested in securities such as stocks and bonds. The key difference between the two is to whom the responsibility of trading/buying shares lies with. Unit trusts are usually managed by management companies, and thus, investments are made through them as well. Whereas in an ETF, investors may trade their own shares on the market exchanges via a broker, as opposed to buying them from a specific fund management company.
These contributions are not taxable. That means for whatever percentage of your salary that you agree to set aside is a tax-free payment. So if your marginal tax rate is ten, which goes into your CPF, you save an extra. That may not seem like a lot now, but considering that the accumulated sum will roll over to be quite a large sum, you can only imagine how vital that sum will be for your future.