Above are some of the estimates that I've done in order for us to save a million dollars when we're 65. The assumed annual rate of return is 7% in this example. So a 20 year old would need to save slightly less than $10 a day to save a million dollars when he/she is 65. This doesn't seem to hard, does it?
$10 a day is not much, less than the price of 2 Starbucks coffee or the difference between a meal at a cafe and a hawker centre. Instead of spending on these regular daily indulgences, we would be able to save enough money to build an entire retirement fund. But then we have to start early, as I've covered in Key to Growing Wealth, the magic is in the compounding effect.
By looking at the above graph, which is the daily savings that we would have to make in order to reach a million dollars by 65 when we start at the different ages, we will notice that the graph is increasing exponentially. This is due to the returns that we are able to make on our savings if we invest it early on. The rate of return of 7% is also around the average return of the STI, so it's an achievable rate of return.
So, as long as we are able to start saving early, our million-dollar retirement fund dream doesn't really seem too out of reach. The problem is maintaining our discipline in investing the savings and sticking to the fixed amount of savings day in day out.
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Think quite a number of investment and financial bloggers in Singapore at today dollar value have already realized this dream. Right?
ReplyDeleteHi Uncle8888,
DeleteI know at least some have, I'm still on my own journey there though :)
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Hi JSI,
ReplyDeleteYea, the earlier we start, the easier it becomes. Expecially when you can get a high rate of return (which is not that difficult if you stick to rules).
Hi investing wolf,
DeleteI agree, but there are many people who can't stick to the same rules for such a long time, it's human tendency to buy high and sell low due to fear and greed. I think that we just need to control these emotions to retire comfortably
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The problem is by the time u get 1 million in the future, it won't be worth much anymore! U should treat the returns as real returns after inflation. So 7% - 4% and u get 3%. So how much should one save to get a million now? The 4% will also include some of the cost of investing, if u find inflation rate of 3% too high.
ReplyDeleteHi la papillon,
DeleteI guess so, when it comes my turn to retire I think I'm going to need a lot more than a million to retire, but I think that it's a good place to start.
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If i am not wrong, your figure is back loaded. Meaning you saved the most due to compiled inflation in 60s. That's right, a million has to be today value and not when you are at 60 because it could be 2-3 Millions by then.
ReplyDeleteHi Cory,
DeleteYes, I agree with you that one million today is worth more than one million in the future due to the effects of inflation so for us to retire we definitely need more than a million, maybe even a few million (or 3.25 as mentioned by la papillion below), but I just wanted to illustrate that we can aspire to reach the one million mark (because I think that there are people who think that it is out of their reach)
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^Sorry, la papillion mentioned 3.26 and not 3.25 million
DeleteGreat reminder on the magic of compounding.
ReplyDeleteI checked out some other figures a while back and amazingly even saving as little as 1$ a day can make you a millionaire. It just takes 70 years (still easily within today's life-expectancy and maybe your parents started saving for us when we were born).
By the way I read somewhere that the first person reaching an age of 150 years might be already born today. That's how confident science is on prolonging life. And what does that tell us in regards to our retirement duration? It might 'last' longer than we anticipate in our wildest dreams.
To get around the evils of inflation I believe it is mandatory to increase your 1$ a day savings in line with the inflation rate. Like in sync with ones salary increments.
But it makes all the difference! Assuming you're 25 yrs old, by the time you retire at 65, and you had accumulated 1 million of today's money by then, it'll really just be worth 300k then, assuming inflation of 3% pa. This means your simulation is not realistic at all.
ReplyDeleteIf you want to retire a millionaire at age 65, you should use 3.26 million (again, assuming you're 25 and will retire at 65, inflation 3% pa). So to acquire 3.26 million, you are going to need a lot more than $13 per day. I did some sums and I assume you only invest once a year at a rate of 7% pa, you'll need $1.2k per month to reach that elusive 3.25 million.
Personally, I think if you want a million dollars in today's time by the time you retire, it's not going to be easy. You need lots of discipline and hard work to get that. If it's so easy, everyone will be a millionaire and we don't see that happening. The best advice is to save around 50% of income and channel it into safe instruments bearing 4 to 5% pa real returns. 7%? That's a little too optimistic in my opinion.
Hi la papillion,
DeleteAgree with you that a million is definitely not enough for us to retire on in 40 years (it may just barely be enough even now). The effects of inflation would make this illustration unrealistic for those looking to it for retirement if they're currently 25 and plan to retire at 65. This illustration was just to show that it is possible for many of us to retire as millionaires, some people place that mental barrier in front of them that they can't reach the seven-digits so this illustration is just going to show that it is possible for the majority of us to do so :)
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