There is no reason why the official retirement age (currently 62) should be the “right” age for everyone to retire on. All of us have different ideas about retirement, and different standards of living. If you can get by on less, you may be able to retire.
Here we look at two different standards of living and how much you need to get to them at the age of 45:
Working out how much money you need
Let’s start by working out how much money you’ll need per day. We’ll assume a 3% annual rate of inflation and assume you are now 21 years old. How much will you need in your retirement fund to stop working at 45?
Let’s look at two variants:
- A spartan lifestyle with few luxuries
- A typical middle-income lifestyle
A caveat: As everyone has different needs and responsibilities, the best that we can give you is a rough (but reasoned) estimate. Take what you see here with a grain of salt and err on the side of caution – if you think you wold need more, you probably do. If you’re not 21, simply adjust the amount of inflation taken into account.
As an aside, it’s very rare for 45-year-old retirees to fully stop working. In our experience, most do continue to work casually. A little bit of continued income, along with compounding returns in a well-balanced portfolio, can make big retirement funds more possible than you think.
A spartan lifestyle with few luxuries
We will start with the price today and work backwards. Some of the things you might spend on every month are:
- Meals at $3.50 each for $315 a month
- Utility bills, water bills, and conservancy charges for a three-room flat at $150 a month
- Public transport at around $50 a month
- $300 a month discretionary income to spend on anything you like
- About $50 a month in healthcare averaged out over a year
- About $50 a month in home maintenance (plumbing, buying a new fan or TV and so forth). We also average this out over a year.
This comes to about $915 a month in today’s money, or $10,980 a year. Projecting forward 24 years to when you would be 45, this is about $22,320 per annum.
(For how we arrived at this, please see our earlier article, How much will your lifestyle cost in 2047?)
Now we know that a retirement fund can probably last till the end of your life, if you withdraw only 4% of your fund per year. So if $22,320 represents a 4% withdrawal, you would need at least $558,000 in your retirement fund to retire at 45.
However, we need to pad this amount by at least 30 per cent. This is to account for various factors, one of which is inflation (it won’t stop just because you’re 45!). We also need to consider medical emergencies, market crashes that eat into your retirement portfolio or other potential crises. This would raise the safe retirement amount to about $725,400.
This is a sizeable sum, but it is possible to reach it by 45 if you’re a disciplined saver and investor.
A typical middle-income lifestyle
This is the ideal standard of living that most of us have, when it comes to retirement. Even before we get into this, we’re going to tell you this won’t be easy – most people aim to reach this retirement standard after working and saving till the age of 55 or 65. But let’s see how much it takes to get there by 45:
- Meals at $10 each for $900 a month
- Utility bills, water bills, conservancy charges for a four-room flat at $350 a month
- Car including petrol, parking, ERP, insurance, road tax, etc. at around $1500 per month
- $500 per month discretionary income (this is the typical retail spend every month for many Singaporeans)
- About $80 a month in healthcare, averaged out over a year (we assume you pick B2 class hospital wards or occasionally opt for a specialist)
- About $60 a month in home maintenance (plumbing, buying a new fan or TV and so forth). This should cost a little more with a bigger flat.
- Annual holiday at $4,500 which works out to $375 a month
This comes to around $3,800 per month, which is in the median income for most Singaporeans today ($3,700 to $4,000). This is about $45,600 per annum. If that represents 4% of your retirement fund, you would need at least $1,140,000 to retire by 45.
As before, we need to pad this amount by 30 per cent due to the significant time between ages 45 and 90. This brings the needed retirement fund to a massive $1,482,000.
If you could aside at least $5,000 a month and rely on compounding returns to enhance the savings, you could reach this sum in 24 years. But we suspect your life will be harsh, if you must set aside $5,000 a month on top of your existing overheads.
How is it possible to save so much?
It isn’t possible for most people.
There’s an absolute limit to how much you can budget. If you want to retire at 45 by just scrimping and saving, our advice is to forget it. You need to be putting at least $5,000 or more into your retirement fund per month; that’s more than the average Singaporean’s entire monthly income.
If you want any hope of retiring early, your best bet is to grow and invest your money today. Like the ancient Chinese proverb says: “The best time to plant a tree was 20 years ago. The second best time is now.”