Do Singaporeans Have Enough to Retire?

This article is aimed at working Singaporeans who are in their twenties and thirties. People in this category are either just starting out their careers, or reaching a stage where their career is starting to go somewhere. It is also in this life stage that several important milestone events occur: getting married, buying a house, buying a car and last but not least – having children and raising a family.

So it would seem that, for these up and coming young adults, retirement is something distant and far off in the future. It isn’t something to be concerned about at this stage, right? After all, there are so many more pressing matters to deal with.

Wrong. Disagree with me? Read on.

Retirement is a concept that does not enjoy much thought in peoples’ minds, except for one thing: It represents the reward that awaits at the end of the road, for decent men and women who have worked hard their whole adult lives. Retirement is what we expect to enjoy at the end of our working lives – the pot of gold at the end of the rainbow that makes the trouble and toil of working for decades all worthwhile. Strongly associated with this concept is the idea that, as long as we save a portion of our income every month, we should have enough to fund a decent standard of living in our golden years.

But how much is enough? This question is something many find themselves unable to answer. And it’s not their fault, either. Life is full of uncertainties. How is one expected to be able to estimate the possibility of unforeseen events like accidents or illnesses happening, as well as their attendant costs? This is not to mention the cost of raising children, from paying for their daily meals in kindergarten to putting them through university in their later years. And what about a car to fetch the kids to school, or to send aging parents to the hospital if the need arises? One can never be too sure of the costs.

And the above just covers the ‘hard’ costs. What about money for enjoyment? All work and no play makes Jack a dull boy, right? One needs to relieve stress at times, either through holidays, massages, good food – the list of ways that money can salve the strain of working is endless.

With such a wide variety of methods to thin one’s wallet, it is easy to see why most young working Singaporeans find themselves unable to squirrel away much of their income towards saving for retirement.

Let’s try to take a look at some actual figures for some perspective:

An article published in late 2014 by local newspaper My Paper puts the average household as being able to save $1,500 monthly, while the above-average household  can manage monthly savings of $3,000 monthly.

If we split this down the middle, this works out to $750 a month for the average Singaporean, with more well-to-do savers managing $1,500 a month.

Now, let’s try to answer the Question of the Day: How much does one need to retire?

In a more recent article published just this year by The Straits Times, the magical number that allows for one to retire comfortably is supposedly $1.38 million. It’s true that this figure is the result of an online poll which surveyed affluent Singaporean investors, and therefore cannot be taken as a conclusive amount. However, 55% of those surveyed sought professional financial advice to arrive at this figure, so let’s just run with that for now.

$1,380,000. That is quite a daunting figure. While Singaporeans currently have a minimum age of 62, employers have the option to let valued employees work until 65. The retirement age is expected to be raised as lifespans grow ever longer, but that’s a topic for another day.

Let’s assume you aim to be one of these valued employees, and that you will retire at 65. Let’s also assume you start working at 24, after getting a degree (A bachelors degree is normally 4 years, so girls will graduate at 23 and guys at 25, which explains the average of 24). For those of you without a degree, let’s assume that you start work at 20, and subsequently study part-time or full-time to get one in order to improve your skills. Therefore, the amount of time worked will roughly be the same.

For the above-mentioned average Singaporean, he has 41 years of work between the starting age of 24 and the retirement age of 65. That works out to 492 months of work – a lot of time spent working. If we plug in the figures we got from the My Paper article, this means that by age 65, the average Singaporean will have saved up a modest sum of $369,000. This works out to a deficit of $1.011 million for the average Singaporean at the time of retirement. If he continues working and saving at the same rate beyond 65, he will have to work for an additional 1,348 months, or 112 years and 4 months more to hit the required sum. Good luck with that, I say.

Things look slightly less bleak for the more affluent Singaporean, as he will have twice as much as the average Singaporean at 65: $738,000. That still means a deficit of $642,000 – a sum that will take him 428 more months, or 35 years and 8 months more to earn – meaning he will finally succeed at the tender age of 100 years and 8 months. There are some exceptional people who live long enough to become centenarians, but I daresay the odds are stacked against you. Besides, do you really want to work until you are 100?

Of course, the longer you work past retirement age, the less you need for your retirement. But this simple math exercise I have taken you through should make one thing clear: Most of us aren’t going to have enough to retire. If we carry on with what we’ve been doing so far, we will be working until the day we drop dead.

Hold on a minute, I hear you say. What about our CPF?

Our CPF is there for our retirement needs, so this is a valid point that needs to be addressed. Let’s revisit our average Singaporean, shall we – let’s assume he earns a salary that allows him to make half the maximum contribution to his CPF account every month. The current maximum is $1,850 ($1,000 from employee contribution and $850 from employer contribution), so half of that is $925. If we choose to keep things simple and don’t take into account the changes to the CPF allocation rate over the course of one’s working life, as well as the compounding effect of the money in the CPF accounts, we can see that by age 55, which is the age at which Singaporeans can withdraw any excess amount in their CPF accounts beyond the Full Retirement Sum (currently $161,000), our John Doe will theoretically be able to take out $183,100 (= $925 x 12 x (55 – 24) – $161,000). Not only that, the new CPF LIFE scheme means that from age 65, he will be able to get a monthly payout of about $1,270 until the day he dies.

If we assume that John Doe lives until 85, that is 20 years of retirement. Let’s total up the entire amount he will receive over the course of his life from his CPF: $183,100 (Payout at age 55) + $1,270 x (20 years x 12 months in a year) = $487,900. If we add these amounts to what the average and affluent Singaporean can earn on their own, that reduces their deficits to $523,100 and $154,100 respectively. To completely eliminate this deficit, one must save an additional $314, or approximately $1,814 in total, every month in order to make it.

What can we tell from all this number crunching? The results seem to suggest that while the average Singaporean is still going to have to work until he dies, one *might* stand a chance if he manages to sock away almost $2,000 a month from the year he starts work up until the year he retires. How many of us can do that, especially with all the big-ticket expenses I mentioned earlier in this article?

As if things weren’t bad enough, there is still one last point I haven’t brought up, which finance-trained readers have probably been waiting for: The concept of inflation.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.

– Alan Greenspan, ex-Chairman of the US Federal Reserve

The money you have stored away in the bank is not as safe as you think. Just as a bowl of noodles used to cost $0.50, that same bowl costs $3.50 today. Does that mean that your $10,000 in the bank has grown to $35,000 over that same period? I don’t think so. And as we all know, the costs of things only move in one direction: Up.

This means that our earlier assumption that $1.38 million is sufficient for retirement no longer holds. The figure is going to be significantly larger than that. Of course, while this means that our incomes should also inflate correspondingly – so do our expenses. If the original figure was already impossible to achieve, what more this new inflated retirement sum?

Despite what it may seem, the purpose of conducting these estimations is not to spread a gloom and doom message. According to the above-mentioned Straits Times article, 66% of those surveyed do not feel financially secure. That means that two-thirds of the population may have already figured out what I have laid out above. However, that also means that one in three of us have never even thought about doing the simple sums I did. It’s not rocket science – anyone with a basic understanding of primary school mathematics could do them, and come to the same conclusion that I did: We aren’t going to save enough to be able to retire.

So why is this the case? Why aren’t more people perturbed by this state of affairs?

Imagine a special sort of marathon, where participants run along a straight road from the start to the end point. This marathon is our race to save the sum necessary for retirement. If you reach the finish line, you’ve made it – you’ve made enough to retire comfortably without having to work through your golden years. Everyone in the working class has to run this marathon, and depending on the amount we save every month for retirement, we find ourselves running at different paces.

What some of us have chosen to do so far is to keep their eyes on the ground and just focus on running. Their hope is that, by the time they turn 65, or whatever age they feel they want to retire, they will look up and find that they have somehow reached the Finish Line. The belief that as long as one is working and saving, it should be enough for retirement is a very pervasive one, and nothing more than wishful thinking.

In contrast, what The Thought Experiment aims to do is to make readers look up from the pavement, take a long hard look at their pace of running and consider whether it will bring them to where they want to be by the time they wish to retire. And if they come to the same conclusion as we did above, then it becomes clear that maintaining the status quo is not a workable solution.

Is there even a solution for this problem? Yes – there is one – but obtaining such a solution will involve the changing of some very deep-seated notions of what money is and how it is earned. The Thought Experiment aims to cover this in a future article – one which we hope will be read by as many people as possible. By changing our approach to money, it is our hope that readers will learn how to not only generate enough income to fund a comfortable retirement, but also have enough to allow them to retire earlier than expected.

Smart financial planning – such as budgeting, saving for emergencies, and preparing for retirement – can help households enjoy better lives while weathering financial shocks. Financial education can play a key role in getting to these outcomes.

– Ben Bernanke, also an ex-Chairman of the US Federal Reserve
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