$1M By The Time You Retire: Part 3

When money realises that it is in good hands, it wants to stay and multiply in those hands.

— Idowu Koyenikan

Part 1 looked at accumulating $1M through the interest rates offered by a savings accounts at a bank, while Part 2 showed how you can reach your goal through CPF contributions at an annual return of 4%. Accumulation by saving alone poses the lowest risk to your assets but also the highest difficulty (and hence lowest probability) in achieving that $1M-by-retirement goal. Accumulation by CPF makes the journey relatively more smooth because of its higher interest rate but it comes with other drawbacks such as constraints on withdrawal. The final part of our series will look at utilising a Globally Diversified Portfolio.

Why a Globally Diversified Portfolio?

We’ve written extensively about the advantages of diversification backed by a wealth of financial science and research and how it allows you to minimise risk in your investments (Spreading risk through diversification — published on Mediacorp’s TODAY). We won’t be going into all of that here but as you can see from the diagram below, investing in stocks provide the largest return (more than property and significantly more than gold).

Research and historical data show that a globally diversified portfolio should provide an approximate return of 8% per annum over the long term. For example, the 5-star Morningstar rated United G Strategic Fund holds more than 11,000 securities across 47 different countries and has a 5-year annualised return of more than 10% (as of 31 Dec 2021). With an initial investment of just $5k and a monthly contribution of $600 dollars into such a portfolio, you can accumulate more than $1 Million in 35 years (increasing your contributions will allow you to reach your goal sooner). Further details can be found in our Mustard Seed Million Dollar Builder (MSMDB) Savings Plan.

If you’re able to stomach the increased volatility that inevitably comes with investing in stocks (not just any basket of stocks, but a portfolio backed by financial research and historical data), and stay the course, accumulating your nest egg sum through this method gives you a greater degree of flexibility and higher rates of return. You’ll be able to manage your investment risk and steadily save towards your goal, all while being able to adapt to unforeseen emergencies and financial needs that may occur in life.

Your Investment Journey & The Importance of Time

Consider two different investors, Jane started at 25 years old, set aside $5,000 a year (~$416 a month) for 10 years in a globally diversified basket of stocks (~8% per annum). She then stopped investing at 34 years old, putting a total of $50,000 into the market. She kept the investments until she was 65 years old.

John started 35 years old, 10 years after Jane, and also set aside $5,000 a year ($416 a month) in a globally diversified basket of stocks (the same ~8% per annum over the long term) but he did so for 30 years vs. Jane’s 10. John continued investing until he was 65 years old, putting a total of $150,000 into the market.

The diagram below shows the stark difference of Jane’s 10-year head start. Jane (represented in blue), ends up with almost $180,000 more than John (orange), while only investing a third of the capital that he did.

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The Retirement Crisis

The retirement crisis has been frequently reported in our local newspapers, highlighting that the majority of Singaporeans are unprepared for retirement.

• Majority of Singaporeans unprepared for retirement.

• Singaporeans either poorly or highly prepared for retirement, the inequality may worsen.

• 2 in 3 working Singaporeans do not have savings to last them beyond 6 months: OCBC survey.

One possible reason why many Singaporeans are unprepared could be because we are all caught up in the fast-paced bustling rat race — always trying to get the next new shiny thing — expensive home, car, bag, shoes, clothes etc. Raising a family is also definitely not cheap. As a result, many may not think about saving for retirement until their late 40s or even 50s.

As you can see from Jane’s example above, a significant sum of money can be achieved much more easily if you start early. If you are still young and have time on your side, then that is good news. However, if you are already late in the journey of life, you might be asking —

‘Is this the end of the line for me? What other options do I have?’

Moving Forward

The first step of finding an answer is knowing the question. Likewise, the first step to finding a financial solution is knowing your financial goals. If you are unsure about how much you’d need to save, start by figuring out the kind of lifestyle you would want to have in retirement, calculate how much that would cost, and then work backwards from there. You can use online tools to help you figure out what you need. For a more holistic and accurate account, you could speak to a fiduciary adviser like GYC.

A few helpful pointers or insights on retirement:

• Teamwork Makes The Dream Work
  Discussing the situation with your family can help alleviate some of the stress and give you new perspectives to tackle the problem. After all, your retirement involves them. If you have a spouse or children, your future lifestyle and finances will have a direct impact on their life.

  Taking on retirement collectively, each person can play a part in reducing expenses and increasing savings. You may find that the family needs to change their lifestyle to reduce costs — e.g. not eating out so often, or choosing cheaper mobile and home entertainment plans; downsizing or selling the car, and making do with public transportation or ride-sharing services would also greatly reduce expenses. You could also consider downsizing your home; moving to a smaller place could help provide additional cash on hand as well as reduce the expense of utilities and other home-related expenses.

• Continue Working
  The unfortunate fact is that if you do not have enough savings to survive, you will need to keep working. There will be greater limitations to the type of work you can do as you grow older and older, but having a job will nonetheless ensure that you can continue funding your daily expenses and increase your savings, thus deferring the need to dip into your small pool of retirement funds.

• Increase Allocation to Stocks
  If you do not have sufficient savings to begin with, you need to turbocharge whatever you have with a higher allocation to stocks. The 10 to 15 years that you have before retirement will still provide a sufficiently long horizon to ensure your portfolio will have enough time to recover from any setback.

  As long as you are able to stay the course and stomach the increased ups and downs that come with higher allocation to equities, you will be able to capture a higher return in the long run.

If you are still worried and unsure about what to do, please get in touch with us for a no-obligation 30 minute pre-discovery session. We can discuss the issues you’re facing and see whether we are the right fit to help you get to where you want to be. Getting an objective external perspective and professional opinion on the best way forward will take a huge load off your shoulders.