Category Archives for Retirement

If you want to retire, double your savings rate!

Everyone’s situation is different. The data from World Bank shows that Singapore has a gross savings rate of 47%, one of the highest in the world. Gross savings are calculated as gross national income less total consumption, plus net transfers.

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Considering that the average working Singaporeans before the age of 50 contributes 37% of their monthly salary to their CPF account, it means only 10% of their disposable account is allocated to savings. That’s just not good enough if you are planning to retire earlier than the retirement age set by our government.

How to calculate your Personal Savings Rate

Here are the standard steps to calculate your personal savings rate:

Step 1: Add up your net savings (or losses) by adding both your non-retirement savings and your retirement savings for the year (all personal retirement contributions + all employer retirement contributions). I would not factor in capital gains or losses unless it is something that you can replicate every year. This number could end up being negative as well, if you had net debt for the time period, instead of savings.
Step 2: Calculate your total total income by adding your total take home income (after tax income) to your employer retirement savings.
Step 3: Find your Personal Savings Rate by dividing your total savings/debt (in Step 1) with your total income (Step 2).

Personally, I don’t include my retirement contributions to CPF when calculating my Personal Savings Rate because:

  1. The retirement contributions in my CPF accounts can only be unlocked at the age of 65. I want to retire before that so I need to build a retirement nest on top of the money in my CPF accounts.
  2. A significant portion of my retirement contributions is used to pay for my mortgage so I work on the assumption that they cancel out each other when I calculate both my savings and expenses.

Making small sacrifices will reap huge rewards

If you save 5% of your income, you can take 1 year off every time you work 19 years. On the flip side, if you save 90% of your income, you can take 9 years off every time you work 1 year! Here’s a chart from Go Curry Cracker that shows how many working years you would need, based on your savings rate.

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Your money needs to work for you

After saving a large sum of your monthly salary, it’s time to make your money work for you. In order to retire early, you need to improve your financial status. If you currently have a credit card debt to clear, keep hacking at it by paying it off every month till it’s gone. If you are clear of high interest debts, build your investment portfolio by increasing your holdings every month.

Your money is no good sitting in the bank, earning a pathetic interest rate. The first rule of cash flow in cloud-based personal budgeting software, You Need A Budget is to give every dollar a job. Each dollar in your savings need a clear purpose and rolex. For example, 20% of your savings could go into an emergency fund in a bank account and the remaining 80% would be injected into your investment capital.

Increasing my Personal Savings Rate in 2015

Last year, I achieved a monthly Personal Savings Rate of 72.59% although most of that going into my real estate investment in Cambodia. With a small salary bump this year and a reduction in personal income tax, I increased my Personal Savings Rate to 81% because all the salary increase and tax savings is going into savings instead of adding new debts like buying a new car. As you work hard to grow your income, there’s no reason for your expenses to increase in proportionally to negate your income growth.

What is your personal savings rate?

6 suggestions to get the most out of your bonus

So you worked hard all year in your job and your manager is happy with your performance. Your reward at the end of the financial year as an employee, will be a monetary reward like a performance or year-end bonus. Congratulations! In the current economy, the extra dollars can be hard to come by and can go a long way – that is, if you use them wisely.

Here are 6 suggestions for getting the most out of your bonus.

Pay off debt

If you have a credit card debt or a personal loan that you are repaying every month, using your bonus to pay it off would be your best bet to getting yourself out of the red and into the black. Even if your bonus cannot fully pay off your debts, it reduces the principle amount of your debt and allows you to pay it off much earlier.

Build an emergency fund

Financial experts usually recommend setting aside 3 to 6 months worth of household expenses as an emergency fund. Personally, I maintain an emergency fund of up to 3 months worth of household expenses simply because of the employability of my job. That said, I’m still optimising my monthly expenses to reduce my spendings. If your current job has a low employability and you think you would need more than 3 months to find a new job, I suggest that you stick to the general rule of having 6 months worth of household expenses as an emergency fund. If you’re just starting to build your emergency fund, your bonus can play a substantial role in building the fund.

Maximise your tax contributions

In Singapore, your bonus becomes part of your taxable income. Therefore it’s worth doing some calculations to tally your taxable income for the year to see how much your bonus is going to cost you in taxes next year. For example, if your current taxable income is $80,000, a $5,000 bonus would cost you an additional $575 (11.5%) in taxes. While income tax rates in Singapore is relatively low compared to other developed countries, you will need to ask yourself if there’s a need to use your bonus to maximise your tax contributions to reduce next year’s income tax.

Invest in your retirement portfolio

If you don’t have any immediate need to spend your bonus, consider adding some money to your retirement to build up the nest. That gives your retirement nest some time to compound some returns before you retire. With a 4% annual return on your retirement investment portfolio, every dollar you add to your retirement nest today would double its value in 20 years.

Invest in yourself

Apart from investing in investment vehicles to grow your assets, is there any course or certification that you have been thinking about taking to better yourself? It could be a Master’s degree to progress to the next level of your career, or skill-based courses like cooking classes to improve your cooking skills so that you can prepare restaurant-quality dinners at home instead of dining in restaurants on weekends.

Reward yourself

All work and no play makes Jack a dull boy. After working hard for a full year, think about rewarding yourself with some indulgence. While spending all your bonus money on indulgence may sound irresponsible, how does allocating 10-20% of your bonus money on a vacation sound to you? The allocated amount of money may not get you to the travel destination of your choice, but it could be a start to building your vacation saving goal.

How I’m allocating my bonus next month

With a bonus of $5,000 coming in next month for last year’s performance, I intend to allocate 90% of the money to my SRS contribution for 2015 to keep my taxable income low and 10% to my vacation saving goal. As an avid backpacker, $500 could probably cover my budget return flight within Asia and I’ll need to save a bit more for the trip itself.

How are you allocating your bonus money?

How much do you need to retire?

“Am I ready to retire?”

This is a question that many people ask themselves when they are thinking of quitting a job and wishing to travel the world for the rest of their life. When I say ‘them’, I’m kind of referring to me. 🙂

The Rule of 300

The Rule of 300 is basically an explanation of having a 4% safe-withdrawal rate (SWR). The 4% SWR is a guideline for a sustainable rate of spending during a 30-year retirement. So, if you have $1.2 million invested, you could take out $48,000 during the first year. That provides you with $4,000 per month.

The Department of Statistics Singapore highlighted in their Household Expenditure Survey 2012/13 that on an average, a family spends $4,724 per month. That means a family’s annual expenses is $56,688 ($4724 x 12). To make sure that they have enough to retire, we need to multiply this amount by 25 which brings us up to $1,417,200.

Now, they are able to withdraw 4% of this $1,417,200 portfolio in their first year which is $56,688. They can then divide this money up by month to derive $4,724 per month (notice that this is the same amount we started with).

You’re probably thinking, ‘Would I run out of money in my investment portfolio if I keep withdrawing 4% each year?’ A study using data from the past few decades shows your investment portfolio will not run dry if you maintain a conservative withdrawal rate of 4% for 30 years. It is important to note that past performance doesn’t necessary represent future performances.

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As time goes on the portfolio balance will continue to increase as the markets increase. The question is, what allocation should your investment portfolio be so that when utilizing the 4% SWR, your portfolio balance should never bottom out. So this means that if you had 300 times your monthly spending at age 20 it would last forever. It would work equally as well for someone retiring in their 40s, 50s or 60s.

What do you need to do to retire early?

  • Take control of your expenses. If you can reduce your annual expenses, your SWR would much lesser and it would be much easier to achieve your investment portfolio size.
  • Focus on increasing your monthly saving ratio. If you diligently put your monthly savings into your investment portfolio, it will grow and reward you in time to come.
  • Eliminate debt. Growing your investment returns is useless if your debts are holding you back.

So let me ask you now this, are you ready to retire?