How Much Do You Really Need to Retire?

Introduction

How much do we really need to retire? There are four factors involved here.

The amount of capital invested into the retirement fund.

The rate of capital growth.

The amount of time for the compounding to work.

The amount of income generated for retirement once the capital is established.

We shall go through a few case studies here. I trust they will help you understand the need to start early, and to choose the correct vehicle for growth.

Fixed Deposit Instruments (aka Certificate of Deposit)

These are our assumptions.

$200 invested in this instrument each month. I believe this is a reasonable amount to set aside each month for our retirement.

Interest rate at average of 3% per annum (0.25% per month). This is not impossible. Here in Singapore, we had FD rates of 6% before, but currently we are at a super-low of 1.25%. Over our assumption of 30 years required for capital growth, 3% should be reasonable.

Retirement in 30 years after the investment plan.

This part is tricky. The fluctuations in interest rates can really destroy your retirement objectives. But let us assume that there is an economic depression akin to what we are experiencing now at the time of retirement, resulting in current interest rates at 1.25% per annum (0.104% per month). Tell you what, let us try this even at a good 6% per annum (0.5% per month).

This results in final capital of $116,547.38 with an investment of $72,000. Unfortunately, the retirement withdrawal each month is only $121.21. This is barely even subsistence living! The CPF Board itself allows a withdrawal of $300. To me, FD instruments represent the most ridiculous planning for retirement. Even assuming 6% per annum, we are talking about $582.74 a month. If you want to retire on that living standard, I really have nothing to say.

Stock Market Instruments

Many insurance plans use this instrument as well. Money Market instruments have performances slightly less than equity markets, but it is similar enough not to matter. The average investor would use Mutual Funds run by professional fund managers instead of investing on their own. Personally, I believe with good financial education, the personally investor can do better than the professional fund managers. This is due to something called the Institutional Imperative.

$200 invested in this instrument each month. I believe this is a reasonable amount to set aside each month for our retirement.

Stock market average performance of 8% per annum (0.67% per month). This has been historically proven accurate when you talk about a time frame of 30 years. Shorter time frames give wide fluctuations. The shorter it is, the wider the fluctuations - even negative growth is possible!

Retirement in 30 years after the investment plan.

With stable companies like utilities and food, yearly dividends should average out to 6% (0.5% per month). Companies with business cycles can vary from no dividends to huge 12% or more dividends. Let us assume 6%, otherwise, we can write about it forever!

This results in a final capital of $300,503.50 with an investment of $72,000. The retirement withdrawal each month is $1,502.52. This is considered pretty good for someone who supposedly has no major financial commitments. I beg to differ, however - a major illness in the family can wipe out a big portion of the nest egg. Also, I believe after working for our children and our parents, our retirement is meant to be enjoyed. I personally would find it difficult to enjoy retirement on $1,502.52.

Private Investment Fund

I used to run a private investment fund, yielding much better returns. The better returns is due to the use of derivatives to secure leverage over the underlying stock. And since I buy the underlying stock as collateral as well, I am pretty much covered in case the market moves against me. I have since then closed the fund.

$200 invested in this instrument each month. I believe this is a reasonable amount to set aside each month for our retirement.

My investments net me conservatively 2% per month (24% per annum uncompounded) on my money.

Retirement in 15 years after the investment plan (yes, I can retire that fast!).

Continued investment at 2% per month (24% per annum uncompounded).

This results in a final capital of $343,208.31 on an investment of $36,000. The retirement withdrawal is $6,864.17. Now I can definitely live comfortably and well off on that amount!

Conclusion

My most sincere hope is that you will think deeply about the amount of money you will need to fund your retirement. Most of us do not spend enough time thinking about it, and find ourselves not able to have a good retirement when we can no longer earn the kind of pay we used to have.

Michael Chan used to be a teacher, before he left to run a managed fund. When his business failed, he returned to teaching, and is currently a Department Head at the Shanghai Singapore International School.

He constantly applies his business acumen to his job, to add value to his employer. His thoughts on K-12 education and on financial education can be found in his blog at http://www.senseimichael.com

How to Retire as a Millionaire
Will you have a sense of fulfillment and security when you have at least a million dollars in the bank when you are old and cannot work anymore? Almost anyone can retire as a millionaire, all you need is a little over $3 a day. We will explore some techniques to make money work for you and make you a millionaire while you retire.Dollar-Cost Averagi...

How Investment Property Helps You Retire Early
Everyone is looking for the best way to retire early. We work ourselves to death and still over 90% of the population cant afford to retire at the age of 60. Why is this? There are many theories as to how to change this, but the decision must be made on an individual basis. You have to decide when you want to retire and plan accordingly. Idle wishi...

You Deserve To Retire Early
The fact is that most people continue to work for a living, because they dont have the means to live without that income. Do not get me wrong. You may enjoy doing what you do. If you do not have to worry about making a living out of this, could you do better, on your own terms?Perhaps work fewer hours and spend more time with your family? Perhaps...

Do I Need $1 Million To Retire Comfortably?
Question: Do I need $1 million to retire comfortably?Answer: Imagine a world free of alarm clocks, bosses, long commutes, office politics and limited vacation time. Wouldnt it be nice to call the shots, spend more time with your family and friends, doing only those things that youre passionate about? You can have that life today and you dont nee...

Build the Nest Early and Retire At 50
Investments are the rose-beds for old age. So it is imperative that you invest and ensure a comfortable future, after you retire. But investment involves a lot of strategy and planning. A smart investor would know what to invest, where to invest and most importantly, when to invest. As far as this when goes, its always best to start building ones n...

How to Retire a Millionaire
Once upon a time, a millionaire was a rare thing indeed. But thats not the case anymore. Of course, money has depreciated over time thanks to inflation, so that a million dollars now does not have the same buying power that it did in the past. But thats not the only reason that more and more people are able to claim that they are millionaires. Part...

Your Friends Fear Success
OK, Ive been thinking. Not that I do much of it but sometimes its worth something.Im going to tell you why most people you know hate their job and will never do anything to improve their situation in life. Not only that, but why they would rather accept mediocrity than success.You heard me right for the most part your friends would rather NOT succe...

Tags: Create Wealth //