Can you retire early? What about semi-retirement?
An edited version of this article (in Chinese) was published in the 25 February 2018 issue of ZaoBao. Below are our original interview answers in English, by Shawn Lee, Assistant Vice President of GYC.
A. Can you retire early?
Many of us dream of an early retirement. Might this actually be something that you can achieve? To find out, you’ll need to decide what kind of retirement you hope to have, and the things you would need to do to get there.
1. Set your retirement goal
First, you’ll need to set your retirement goal. What age would you like to retire at? How many years are you likely to be spending in retirement? How much monthly income would you want during that time? Take into account the inflation rate and your Returns on Investment (ROI). Online calculators like the CPF Retirement Calculator can help you play around with different scenarios.
2. Assess your current financial situation to understand the shortfall
Take a look at your current assets and liabilities to understand what your financial situation is with regards to retirement. What is the difference between what you expect to have and what you need for your golden years? If there’s a shortfall, how much of your existing assets can be invested towards your retirement goals?
3. Closing the gap
Knowing what your shortfall is will tell you how much you need to save every month and at what rate of return. Diagram 1 below gives an estimation of how much you would need to save every month per $100,000 of shortfall for your retirement:
Knowing what rate of return you will need may help you determine which savings or investment vehicle would work best for you. However, always be mindful of your risk tolerance level and investment horizon. While everyone wants higher returns, the reality is that it comes with higher risks.
If the gap can be closed, then congratulations! You are all set for retirement.
However, if you still find yourself coming short, you can consider one of the following:
Delaying your retirement to a later age, thus giving more time for your savings to grow
Decreasing your retirement expenses – which will correspondingly reduce the required retirement income required
Decrease existing spending so you can further increase your monthly savings
Increasing the rate of return (yet keeping within your risk tolerance level) - You can consider segregating short-term investment goals and longer-term investment goals, and then taking relatively higher risks for the longer-term goals as time in the market reduces the overall risk level.
4. Other considerations
Your retirement income before the age of 65 will have to exclude CPF Life pay-outs, as that only starts from age 65 to 70 years old.
It is also important to review your insurance plans and ensure that you and your family have sufficient protection. The risks of serious illnesses increase with age, and can result in hefty medical bills which can not only derail your retirement goals but wipe out a significant chunk of your retirement savings.
5. Semi-retirement is an option
If you had already accumulated some assets and wish to have more free time pursuing other interests and life goals, then semi-retirement could be an option. Find part time work that you can enjoy and use that income as a bridge between what income you can derive from your assets versus your expenses.
It is important to understand the shortfall in your monthly income requirements after factoring in the drawdown from existing assets, ideally without depleting the accumulated nest egg which would affect your long-term retirement funding needs.
Many Singaporeans look to CPF Life forming an important component of their retirement income. However, as that kicks-in only from age 65 onwards, an early or semi-retirement before 65 is only possible if you have other passive sources of income e.g. from your built-up assets.
Ideally, continuing to work should be a choice and not a necessity in one’s retirement. Hence, it is imperative for everyone to start planning early!
B. Is there anything that can be done to speed up the process?
If it is impossible or very difficult to increase your monthly savings amount or decrease your future retirement needs, you would need to make your money work harder for you in order to still retire at the desired age.
For example, if you have savings that is accumulating at a return of 1% per annum in fixed deposits, you are going to need approximately $1,530 of savings every month for the next 15 years to accumulate $300,000. But you can accumulate $415,000 in that same period just by investing the same amount of $1,530 monthly in an investment portfolio giving an average return of 5% per annum.
So, if you have not yet started investing, do consider how you can get started. Take time to do some research online to understand the fundamentals and risks of investing and speak to a professional if you have to. Avoid the seduction of choosing investments solely on the basis of having the best returns in the past. Always ask the question: ‘How much money can I lose from this investment?’ If you can stomach the risk, then go ahead. Otherwise if it sounds too good to be true, then it probably is and you should just walk away.
Some further tips to think about when investing:
Always understand your own risk tolerance level (if it keeps you awake at night and you break out in cold sweat thinking about your loses, you have taken too much risk!)
Define your investment plan and start building an investment portfolio that will increase your probability of achieving that higher return.
Review the plan and your financial situation annually (major milestones in life is likely to affect your plans e.g. getting married, having children, etc,)
Stay the course. Market volatility is normal. (avoid getting unduly affected by news headlines. Panic withdrawal of your assets is not always the wisest thing to do).
If all that sounds like Greek and too much hard work, then you may want to consider engaging a financial professional to help you on your journey.
