Head of Partnerships
06 October 2020
How much you need to save to be ready to retire is largely about where and how you expect to plan your time, and the associated expenses. It’s important to paint your vision of retirement so that you can figure out the costs related to that. Here, we’ll help you visualise what you want your retirement to look like so that you can figure out how much you need to save for retirement.
By considering each of these questions, you paint your vision of what you want retirement to look like. Your answers will ultimately affect how much you need to save for retirement.
Cost of living varies widely depending on what country, city, and neighborhood you live in. Having a sense of where you plan to live will help you estimate the day-to-day expenses you’ll have when you retire.
On top of where you want to live, another factor that strongly influences how much you need to save for retirement is the lifestyle you want. Retirement looks different for many people. While someone might want to live quietly, another person might want to travel the world 6 months a year. Depending on how extravagantly or simply you want to live, you’ll need to account for the associated expenses and include them in how much you need to save.
Just because you’re retired doesn’t mean you won’t have more dreams, goals, and ideas. Maybe you want to turn a hobby into a business, or learn how to golf. These things cost money, so you should account for them when you’re estimating your retirement expenses. Even if you don’t have a specific project in mind, still account for “play money” as you decide your savings target for retirement.
If you plan to pass on some assets to your family, or contribute to a cause you care about, include how much you want to pass on or contribute in your retirement savings target.
In retirement, you won’t need to contribute to your retirement portfolios or CPF savings, and you’ll also probably have paid off your mortgages and other loans. Also, your taxes will also likely be lower since you’re not earning an active income. You can subtract these expenses, and perhaps others, as you estimate your monthly retirement expenses.
Once you have a sense of how much your dream retirement lifestyle will cost you in a given year, you’ll have to consider a few more factors:
It’s definitely not pleasant to think about the health problems that come with age, but it’s better to be prepared for the costs associated with it. Setting aside funds for out-of-pocket medical expenses saves you from having to dip into funds meant for your other retirement expenses. Health insurance premiums increase with age, so include that in your expenses, too.
Once you have an estimate of your monthly retirement expenses, you’ll need to adjust that estimate for inflation. Inflation is generally estimated to be 2% per annum. In other words, a dollar loses 2 cents per year in its ability to buy. So if you base your retirement savings target on today’s value of money, you’re going to find yourself with not nearly as much spending power as you want. There are plenty of inflation calculators online, and if you use StashAway’s goal-based investing portfolios, we calculate it automatically for you.
The next question is, how many retirement years do you need to pay for? Asking yourself how long you want your retirement savings to last sounds morbid, as well as imprecise-- after all, none of us know when we’re going to die. But, the reason you’re asking is actually so that you know how early you can retire based on your savings plan and expected lifestyle. If you want to retire at 50, consider your country’s life expectancy, add a buffer to that, and then work your way backwards to figure out how long the money needs to last you. In Singapore, the life expectancy is 85, so to retire at 50, you’d need to have saved up enough to last 40 years (35 years plus a buffer of 5 years). This can be a way to decide whether you want to retire sooner with maybe less in savings, or later with more in savings.
To have the retirement you want, you need to set a specific goal, and then build a savings and investing plan so that you can reach it. With these considerations now in mind, there are plenty of tools out there, including manual spreadsheets, or StashAway’s own goal setting function, that you can use to calculate your expenses and inflation for your retirement.
Then once you have that target amount, you’ll need a savings goal to get there. That’s where our Retirement Portfolio in our Goal-based Investing comes in. In seconds, we’ll compute your retirement savings target for you, account for inflation, and tell you how much you need to save and invest each month to reach your target.
If your target amount and savings plan seems daunting, you may need to adjust the lifestyle you’re aiming for. Of course, you’re never locked into the lifestyle you envision now: You may decide you want to live elsewhere or do different activities. And that’s okay. Planning and saving for your retirement now is really about buying the freedom of choice. You can choose what to do with your money and your time later on.