Tips to an early retirement for young adults
Singaporeans have one of the highest life expectancies in the world, at 81.4 and 85.7 years old for men and women respectively. With the official retirement age at 62, and most people hoping to retire early, retirement planning is now more crucial than ever. After all, CPF LIFE is only paid out from the age of 65. If you were to retire earlier, at say, 55, what will you do with no CPF LIFE payouts for a decade?
Is retiring early really possible?
If you are a working adult, chances are that you belong to a sandwich generation. You will likely need to juggle the pressure of supporting both your parents and children.
On top of these financial difficulties, you will also need to ensure a stable income flow in an uncertain COVID-19 environment where job stability may be an issue. It does not help that property prices and living costs are increasing as well, with a 9% impending GST hike in Singapore. All these can make early retirement seem like a faraway and unachievable goal.
How much do I need before I can retire?
Knowing how much retirement money you need is simple. You just have to calculate how much money you need every year, as well as how many years you plan to retire for.
(Total Retirement Amount Needed) = (Desired Annual Retirement Income) X (Years in Retirement)
When determining your desired annual retirement income, be sure to take into account factors such as inflation, medical requirements, medical emergencies, quality of life, and more. It can be difficult for a young adult to make accurate predictions, but there is a need to at least try.
You will also need to buffer some additional money since it is difficult to predict what age you will pass on, or how your health will be like 30, 40, or 50 years down the road. It is also difficult to ascertain for sure if there will be someone actively present to take care of you in your golden years.
How can I save up to reach my retirement goals?
Many people have the misconception that you need to have the total retirement amount at the start of your retirement. However, that is not true. In fact, it can be difficult to have the full sum of money up front at the inception of your retirement.
The trick is this - You simply need to get your hands on the retirement sum that you need on a monthly basis.
You just have to be able to safely withdraw a stable monthly income throughout the retirement period. These income can come in many forms, not limited to dividend payouts, rental income, spaced out bond expiries, fixed deposit interests, and more.
Owning property as an asset allows you to collect rental income, depending on the property market.
All you need are passive income streams. You can achieve this by investing in something that generates returns over time with little effort so that you can be as hands off as possible when you are old. You may be very sharp and excited about the stock market today, or you can be a brilliant day trader, but 30 years down the road your enthusiasm may grow muted. Your interests and priorities may change, and your health may not allow you to trade that actively.
One way to be more hands off in your investment journey is to seek the help of a professional financial advisor. Not only can he/she help you plan out a path to reach your retirement goals, your financial advisor can also manage your portfolio and rebalance them according to market conditions, saving you both time and resources. By having someone manage your wealth, you get to focus more on life.
I’m conservative. I don’t want to invest, can I just stick to saving?
First and foremost, not all investments involve high risks and high returns. A common misconception is that investing is always a risky endeavour. However, that is not true. Yes, there are wildly fluctuating stocks, unit trusts, REITs, ETFs, cryptocurrencies, and more. However, there are many traditional or conservative investments that are comparatively safe such as the Singapore Savings Bond (SSB), certain fixed deposits, and more.
It is not wrong to budget wisely and stick to just saving for your retirement. However, if you were to rely solely on the interest rate in your savings account to grow your wealth, things will most definitely be slow. You may feel discouraged, although compound interest does make your money grow.
Also, depending on your savings account type and the amount of interest rate that you are entitled to, you may not even be able to cover the costs of inflation. Without proper returns, your money pot will dwindle and become smaller over time.
It is hence important to make money work for you through investments. The trick is to begin your investment journey early so that you get a headstart in wealth building. After all, planning for retirement cannot be a last minute effort. The earlier you start, the more your money can grow through the magic of compounding, making it easier and smoother for you to achieve your dreams. If you are unsure of exactly how to start, approach one of our financial advisors at Life First Advisory today.