A DBS survey of 800 people in 2014 showed that:
- 73 per cent of the people polled plan to retire between 55 and 65, with an average savings of $571,715.
- At the same time, more than 85 per cent of those polled expect to live on a retirement income of $3,500 per month for the next 15 to 20 years and more.
- However, there is a big gap between both sets of numbers as the average retirement savings amount would only last 13 years and not 15 to 20 years.
These statistics are worrying but fret not! The rest of this article explains the 4 reasons people underestimate how much retirement savings they need, which will give you greater clarity in planning for your future.
1. Length of retirement
Two things determine our length of retirement – life expectancy and retirement age. According to Department of Statistics Singapore, our life expectancy is 83 years. This means that if you desire to retire by age 60, your savings will need to last for 23 years. This is a huge 10 years difference with DBS’s survey findings!
However, when you actually retire might vary as many people choose to work part-time even after they stop full employment. For instance, many retirees become private tutors or piano teachers, or work part-time in their professions as consultants.
2. Not adjusting for inflation
It is important to note that the final sum you will actually need depends on when you will retire and the actual figure you will need to save because of inflation. Let’s say you desire to retire 30 years from now and will need to spend $3,500 monthly in today’s dollars, assuming an average inflation rate of 3%, your monthly expenses will grow to $8,500 in 30 years’ time.
On the other hand, if you’re planning to retire tomorrow, you won’t need that much as expenses today are definitely much less than they’ll be in a few decades’ time.
3. Overestimating investment returns
Some people belong to the group of more aggressive investors. Being human, they may tend to have optimism bias in terms of investing. Since your stocks have been performing well on the market over the past few years, you start to expect to enjoy a steady 5% return per year for the rest of your life. And everyone just assumes that property values will accrue over time, never mind that there’s a downtrend in the property market now.
When estimating your investment returns, it is best to project modest gains or you would risk getting a rude shock when you investments do not perform as well as expected and you have to delay your retirement plans.
4. Not accounting realistically for discretionary expenses
We may be able to survive on a few hundred dollars a month by eating bread and drinking water every day. But I’m sure nobody would think of living life like that when calculating how much we need to retire. Other than healthcare expenses and insurances, you might also want to spend on things like travel, stuff for your kids or grandchildren, your hobbies or simply the finer things in life. As much as you want to retire as early as possible, you have to be realistic about your spending.