What is your Retirement Sum?

No, this is not about your CPF Retirement Sum. But really, the amount of money you need for your retirement. Some of us have a fuzzy idea of the amount that we need. When we work backwards, it translate into fuzzy numbers that we need to save or invest each month. Retirement fuzzy logic.

The issue is, not all of us are programmed this way. We need firm inputs or data — if I spend X dollars a day from the day I retire, I need to save Y dollars each month today minimum for at least Z number of years. That is the purpose of today’s discussion.

So imagine the older you is chilling and taking in the sights of the Singapore skyline. How would you advise your younger self?

Rule of 25 towards Early Retirement

The general rule: Save 25x of your annual expenses and you are ready to go, financially free. This ignores other potential sources of retirement income, such as private annuities or CPF retirement funds. You might not have access to the above anyway, if you are considering to retire early. Do note it is a general guideline and may not work for everyone.

For instance, if you spend $100,000 a year, you will need a $2,000,000 nest egg minimum to retire. Retirement’s main goal is to die before our retirement funds equals zero or phrased in a nicer way — longevity risk.

The Rule of 25 is also the 4% Rule, or the 4% safe withdrawal rate. It assumes that the retiree can withdraw 4% of their investments in the first year and increase amount in subsequent years by inflation rate. Traditional calculation says that this withdrawal rate is just about right; you can spend about 4% percent of your investments each year and most likely never run out of money. There is a reasonable chance of dying before retirement funds equals zero.

Early Retirement Grid – First Perspective

This grid maps the number of years to reach financial independence based on your current annual income and annual spending. The assumptions are:

• No other savings
• Withdraw rate of 4% each year after reaching financial independence
• 5% annual returns on investments

For example, suppose your take-home pay is $50,000 after taxes. Your annual spend is $30,000. From the grid, you will take 21.6 years to reach financial independence. The more you earn and less you spend, the lesser number of years you would require to reach financial independence.

How did we arrive at that number? You have $20,000 net to invest each year and assuming a 5% annual return on your investments, 21.6 years is the time to build up a retirement nest to suffice withdrawing 4% of your portfolio each year and never go broke. Once again from the grid, when you cut spending by a mere $5,000 – $10,000 each year, you do yourself a favor by largely decreasing the amount of time required to reach financial independence.

Early Retirement Grid – Second Perspective

This grid is from another perspective which maps the number of years to reach financial independence based on your current annual income and monthly savings. The assumptions are:

• No other savings
• 7% annual returns on investments
• Lifestyle remains the same in retirement

For example, suppose your take-home pay is $50,000 after taxes. You save $2000 of your monthly salary (out of $4167 or 48%). From the grid, you will take 16.0 years to reach financial independence. The more you earn and save, the lesser number of years you would require to reach financial independence.

Conclusion

The takeaways are to either strive for a higher income (or multiple streams of income), spend less, save and invest more. This concept is something that we have been stressing upon. It is not new — we just have to find time and make the effort to internalise within us. Start from your end goal and work backwards and do not procrastinate while time is still your friend.

Are you well on track?