There are any number of financial advisors who will say you need $1 million to retire in Singapore. But remember, those advisors are talking about (1) Singaporeans who are working till age 65, and (2) who have some other sort of ongoing, slow-diminishing income. If you’re one of the early retirement crowd, or try to retire with literally just $1 million, you’ll find it’s a really bad idea (unless your retirement dream involves living like a 13th century monk in a cloister, then it should only be marginally more miserable). Here’s what to consider:
How long will $1 million last anyway?
On its own, in a developed country like Singapore, a typical estimate is 15 to 20 years.
As of 2018 (probably higher today), Singstat said the average Singaporean household spends about $4,906 per month on goods and services. That’s about $58,872 per year.
Before accounting for inflation and unexpected emergencies, that lasts roughly around 17 years. Once we add the effect of (effectively) losing another three per cent per year (the core inflation rate in Singapore), this drops to around 12 years.
And just in case you’re unfamiliar with how bad inflation can get, consider that – at the current inflation rate of three per cent per annum – prices of most goods will double in around 23 years. So in two or three decades from now, Singaporeans will be surprised if most 5-room flats don’t sell for a million dollars.
It also means that, if you win $1 million in Toto at age 40 and immediately quit your job without investments, you’ll be dodging NParks officers and living in Changi Beach shelters by the time you’re 52.
Even if you’re low-maintenance, $1 million probably won’t last
Let’s say you live a truly hermit-like existence, where your only two destinations are the coffee shop and your flat. You somehow spend just $50 a day on food and other needs ($18,250 a year).
That should last you 52 years excluding inflation, right?
No, because as you grow older, you’ll face more costs:
- Healthcare bills go up, as you develop more conditions
- You may need to hire a live-in helper
- Your stuff gets old and needs replacing too – light bulbs, TV sets, mobile phones, etc.
- Some bills never go away, like utilities, conservancy charges, phone bills, etc.
Quite often, the bills of other people you care about become an issue. Your spouse runs out of cash, your children can’t work for medical reasons, or you have ageing friends who also need help
An especially common problem in Singapore is the elderly who have moved in with their children
Say you previously pooled your resources with children (sold your home and moved into a bigger property with them), and now can’t stand them. Maybe they’re not raising the grandchildren right, are abusive to you, find Jocelyn Chia funny, etc.
Attempting to extricate yourself and find a new home will likely wipe out whatever’s left of your million dollars. And if you count in inflation, remember what I said above: the prices of goods would have about doubled in 23 years, and that includes the price of a flat.
Simply put, even your ability to live free and independently has a cost. And that cost goes up as you age.
Then why do financial advisors, wealth managers, etc. claim you just need around $1 million to retire?
Because they assume you’re going to hire them, or some other big-brained finance person, to build you a portfolio that’s constantly generating money.
The idea is to live off the returns generated by this portfolio, while only rarely touching the portfolio assets themselves. Or as the saying goes, “spend the interest, not the principal.”
If you manage to invest $1,000,000 into a portfolio that maintains around five per cent returns, assuming inflation stays at three per cent, you can live off a constant withdrawal rate of 1.9 per cent. This means you can take around $20,000 a year in investment returns.
If inflation increases in future, this becomes much worse.
If inflation were four per cent, for example, and your portfolio returns are still just five per cent, you can withdraw around 0.95 per cent per annum while maintaining your portfolio. This means living off just around $10,000 per year, at which point your MP has to start claiming you collect cardboard just for the exercise.
This is why most portfolios target a return that’s two per cent above the core inflation rate; and as inflation increases, your portfolio needs to be amended accordingly.
Living off $1 million requires discipline, even with a solid portfolio
This is the main reason why single-digit millionaires – especially those with just their first million – rarely feel rich.
Going by the above example (a portfolio with returns of five per cent, at core inflation of three per cent), the withdrawals of $20,000 per year are quite rigid. Try to take out more from your portfolio, and you risk getting even less in subsequent months or years.
It can be quite frustrating to live off around $1,667 per month, when you can see you have a million dollars sitting right there. This is where it’s important to break out the financial planning tools, and consider if you need a portfolio that can do better – or maybe if your retirement fund needs to target a more ambitious sum.
Reach out to us at Single Digit Millionaire if you have more questions, as well as stories from fellow single-digit millionaires.
