How Much Do You Need to Retire Comfortably is a “Million Dollar Question”?
Let assume you need to have 40,000 dollars a year for each retirement year from the return income of your capital fund.
There’s a simple way to calculate how much you’ll need to save up, for creating an investment fund before you can retire.
Take your desired annual retirement income, and divide it by 4% (the maximum amount you will withdraw from your investment /savings fund each year to pay for your living expenses in retirement).
For example: $40,000 ÷ 4% = $1,000,000/-
You will need $1,000,000 Investment Capital to generate an annual income stream of $40,000, to finance your regular expenditure per retirement year.
This expenditure includes food, transport, travel, loan repayments, insurance premiums etc. The average monthly expenditure is estimated to be around $3,333.
Notes:- The following assumptions are made:
- Investment vehicle’s dividend yield remains constant at 4% return rate, throughout your retirement years and
- Ignoring inflation rate effect on consumer prices.
The monthly expenditure of $3.3K is comparable to a person’s income having the median salary of $3,467 (excluding CPF contribution by his/her employer) in the latest stated median salary of $4,056 from the Ministry of Manpower (MOM).
The “Million Dollar” figure will be used as a target amount, a person who wish to have for his/her Investment Capital Fund prior to year of retirement (at the age of 65). If you could achieve it in a much shorter time, you could retire earlier!
The following sections will cover the strategy of building an investment capital by a person in each stated age prior to his/her retirement, at age of 65, taking into consideration the impact of inflation rate and the anticipated income return to finance his/her retirement needs.
PLANNING AT AGE 25
I’m 25 years old and I plan to retire at age 65 with about $1 Million in investment fund
I make $36,000 a year or $3,000 a month
I save $500 (16.67% of my salary) monthly for retirement
I’ve already saved $0 for retirement
I’ll need $3,333 income to fund expenditure each month in retirement
I expect an annual return of 6.0% from my investment fund
Assuming the following:- inflation rate remains at 2.0% throughout the retirement years
I could contribute $500/- every month without fail.
In 40 years (480 months), the accumulated amount in
retirement fund is $1,000,724
PLANNING AT AGE 35
I’m 35 years old and I plan to retire at age 65 with about $1 Million in investment fund
I make $60,000 a year or $5,000 a month
I save $1,000 (20.00% of my salary) monthly for retirement
I’ve already saved $0 for retirement
I’ll need $3,333 income to fund expenditure each month in retirement
I expect an annual return of 6.0% from my investment fund
Assuming the following:-inflation rate remains at 2.0% throughout the retirement years
I could contribute $1,000/- every month without fail.
In 30 years (360 months), the accumulated amount in
retirement fund is $1,009,537
PLANNING AT AGE 45
I’m 45 years old and I plan to retire at age 65 with about $1 Million in investment fund
I make $84,000 a year or $7,000 a month
I save $2,250 (32.14% of my salary) monthly for retirement
I’ve already saved $0 for retirement
I’ll need $3,333 income to fund expenditure each month in retirement
I expect an annual return of 6.0% from my investment fund
Assuming the following:-inflation rate remains at 2.0% throughout the retirement years
I could contribute $2,250/- every month without fail.
In 20 years (240 months), the accumulated amount in
retirement fund is $1,044,789
PLANNING AT AGE 55
I’m 55 years old and I plan to retire at age 65 with about $1 Million in investment fund
I make $108,000 a year or $9,000 a month
I save $6,250 (69.44% of my salary) monthly for retirement
I’ve already saved $0 for retirement
I’ll need $3,333 income to fund expenditure each month in retirement
I expect an annual return of 6.0% from my investment fund
Assuming the following:-inflation rate remains at 2.0% throughout the retirement years
I could contribute $6,250/- every month without fail.
In 10 years (120 months), the accumulated amount in
retirement fund is $1,029,367
(The above illustrations are hypothetical and does not represent the return on any particular investment. All investing is subject to risk, including the possible loss of the money you invest.)
Food for thought. Will you do it consistently as above?
Reuben Ong