$1M By The Time You Retire: Part 1
When money realises that it is in good hands, it wants to stay and multiply in those hands.
When it comes to money milestones, the first million is often the prize that many Singaporeans fixate on. While the desire for this elusive figure may just be a human preference for round numbers, on a deeper level, $1M symbolises freedom and independence. There are even songs that talks about the fantasy of having a million dollars in the Hokkien dialect — it comes as no surprise that buying the lottery in Singapore is an extremely popular national hobby, all in the hopes of, you guessed it, striking a million dollars!
However, if you feel that buying a lottery ticket is not really your cup of tea, we will outline 3 ways in which you can reliably rely on to reach your first million dollars without relying on luck or chance.
First Things First — Diligent Saving
Singapore government data shows that the median salary of Singaporeans by age group in the following table below.
If you kept your savings in a deposit account at the bank, expect an interest rate of close to 0%. So if you started saving early, you would need to put aside over 30% of your income at the bank to reach your $1M target by 65YO. The later you start, the harder the journey, this is especially so for those over 50 years old.
The benefits of saving early is that you have to save less capital over your lifetime and let the interest earned on your bank deposits pick up the slack. Many of us face heavier liabilities in our 20s as many of our large purchases will occur such as the purchase of our first house, first car, first child and so on. The chart below clearly shows how much of your investment amount comprises of interest accrued over time vs your principal amount (based on a 0.25% deposit account interest rate). The earlier you start saving, the more of your savings is made up of compounding interest! Time really does play a part.
However, you need not get stuck in a savings account to help save your first $1M. There are options out there which can help generate a higher investment return - of course the higher the return, then the higher the risk. Whichever option you choose, you have to be clear on the expected return you desire and also the potential losses you could face.
Potential Pitfalls
Everyone bandies about the $1M amount as the holy grail for retirement funding. Whilst it may be sufficient for some, it may likely be insufficient for many others. The key here will be future rate of inflation which can seriously erode the purchasing power of your money. $1M in purchasing power today is only worth around $550,000 in 30 years time at an inflation rate of 2%. So you would either need to increase your savings rate over time or to put it into an instrument that can generate a return that at least matches or beats inflation.
