Retirement is not an age number, it’s about achieving the monetary number. Most people believe that achieving retirement is just working till the ripe age of 65. Working all the way to 65 only to realize they do not have what it takes to retire. Sad to say, but the amount of money does dictate whether you can quit your job and leave comfortably. Therefore, in this blog, we will deep dive into how much money you need to retire and if possible retire a bit earlier.
Why do you need to have money set aside?
More than half of American citizens say that they are behind on retirement savings. What’s worst, adult Americans have less than $1000 a month in their savings account. The problem with everyday people these days is that are affected by short-term temptation.
Yes, you are 30 years away from retirement!
Yes, you should spend most of your time in your youth traveling
Heck yeah you should enjoy and party while you are still young
However, as you grow older, you will need to have more things that cost money. This can be from raising kids, paying for housing, spending more time traveling, or paying medical expenses. At some point in time, you would start doing the adult thing of setting aside an emergency fund and starting investing. Your life doesn’t have to face a crisis or bad times to get you serious on saving for retirement. Therefore, this illustrates why it is so important to set aside a monthly portion of your income for retirement.
Understanding the Financing part?
To understand the financing part of retirement, we will break it down into different categories. Everyone will need to start by learning how to increase the savings rate, then read up and research ways they can achieve financial independence. Most of the time, these FIRE (financially independent retire early) activists will recommend investing or working hard on a side hustle to grow into a business. Everyone will have different takes on how they achieve financial independence, but they all do have one thing in common. There drive and passion to be financially independent.
Why you need to invest
At some point in your life, you will start to want to know more about investing. But for those of you in your 20s reading this, good for you. Choosing the right investment that you are passionate about can help you tremendously. There are multiple ways to invest your money. But for this blog, we recommend investing into a retirement account which usually are tax-free the moment you reach 65.
How much do you need?
The amount you require to retire solely depends on how much monthly expenses you require. Take note that the money you invest should be able to provide you with free cashflow, it could be from rental income, stock dividend and option premium. Free cashflow allows you to withdraw the money invest with affecting the principle, which is able to compound and provide you future income. If you would like to know more on investing, do click on Investing 101 at HustleVentureSG to learn more about investing.
Here is the math behind the amount you need for retirement:
Monthly Expenses = M
Using the FIRE Amount = M x 12 (months) x 25 (years)
Example if you require $3,000 a month to comfortably retire
FIRE Amount = $3,000 x 12 x 25 = $900,000
Why the FIRE amount is a good amount to retire on
The FIRE amount goes hand in hand with the 4% rule. The 4% rule allows you to withdraw 4% without affecting the principle invested that grows at 10% (Using S&P500 index fund as reference). So here is how to use the 4% rule to obtain your monthly expense amount.
4% of $900,000 = $3,000
Take note that the 4% rule applies only in the S&P500 index fund that historically provides a 10% annual compound interest. For other investment, find ways that you can obtain that $3,000 without having to work.
Why using a Tax-free retirement account can help you get there sooner?
In almost all country around the world, the government will set their own retirement account to help their citizen to promoting investing for retirement. For the state, it is the ROTH-IRA. Whereas in Singapore, we have the SRS (Supplementary Retirement Scheme) to invest. The reason these are great place to invest your money is they usually tax break and you get to invest the money that would have been taxed.
Why you should start planning your retirement ASAP
The two main powerhouses for investing early are having time and compound interest working for you. Compound interest is one of the 8th wonder of the world for a reason. Your money invest will grow exponentially over time. As you continue to invest, the compound gets larger and larger. A thousand dollar invested into the S&P500 for 25 years gets you a million dollar. But if you delayed investing, a thousand dollar invested for 15 years only gets you $381,000. Which is far from a million dollar.