Sunday, May 14, 2006

How much money do you need in a lifetime?

This post is updated in 2012.

Before we start talking about how to make our money earn money for ourselves, we must first ask ourselves, how much money do we need in a lifetime? For those of us who lived our lives running on treadmills (this blogger included) like rodents running in their spinning wheels, and have never given two seconds to think about it, the answer will be quite astonishing.

It will be around S$1,000,000 to S$3,000,000 for most Singaporeans. (Don't fall off your chair!)

Based on my simple and yet totally unrealistic calculations, assuming that you need S$800 to survive per month multiplied by, say, 60 years (I am assuming the youngest reader here should be around 20 years old, and expected to live until 80. If you intend to live till 95, you need to add a few years), this comes up to S$576,000. Assuming you live in the cheapest available HDB flat, which is around S$300,000. So you need S$870,000 for one lifetime (ok 12% short of a Million but you get the idea).

Oh, btw, we haven't factor in inflation. Once we put that in, it should cross the million dollar mark. In fact, probably by a huge margin.

Ok, we got the cost, now let's work on the income. For an average Singaporean, with a monthly pay of S$3k, and assuming that they work 40 years, in one lifetime, they can earn S$1,440,000. So there is a buffer of S$440,000, this will be needed to pay for insurance, children's education, parents' allowance and hospital bills, car loans, restaurant dinners, presents, medical fees, annual tours, gym fees (so that we can continue to run on treadmills obviously) and all the other indulgence in life. Of course, the biggest killer is inflation, over such long time frame, even if we just put in 2-3% inflation, the total cost would increase by 20-40%. Which means that a significant population of Singaporeans will not earn enough to support themselves in old age.

How did we get to the S$3 million number? Well assuming a more luxurious life (i.e. living in a condo and running on condo treadmills) will give you the S$3mn lifetime spending. Btw (ie by the way) an average condo now cost $1.5m in Singapore.

So that is the sad truth. We would need to be a millionaire just to scrape by this existence (well strictly speaking the comparison is wrong but anyways) and we will probably never have enough money to fulfill the 5C dream or any other dream that is worth dreaming unless we get a few important things right plus a lot of luck.

But how important is it to know how much you need? I would say that it helps to frame a lot of key financial matters so that we are at least aware of them. And this is different for everybody. For a start, it can help us to understand what is the minimum sum that we have to save and earn (which is why CPF has the much debated and controversial minimum sum) and the maximum potential that we can likely achieve in this lifetime, esp for those of us who are in the workforce for some time and can more or less calculate our lifetime earnings.

It must also be stressed that investment cannot make you filthy rich, for most of us, it will help us get incremental income. But to try to rely on investment return to replace income generation from our day jobs so as we can retire and be "financially free", will take a lot of time and effort and most will fail in trying to achieve that bcos the expectations and methodologies are incorrect or unsuitable. It is also said that the two years in life where people are most likely to die are: the year that we were born, and the year we retire.

So while we are at this retiring/financially free topic, I have to say that retiring is a bad option bcos we might just die or we lose income too early and risk running out of money before we die. But what is much less understood is that the whole concept of "financial freedom" is a gimmick that does not necessarily help us fulfill what we want in life. I have also discussed this in this post: "More on Financial Freedom".

To sum up, the answer to this question kind of requires us to think more holistically about issues involving not just income and savings but also whether condos and fast cars are really what we want, what about money for the kids, the parents and also ultimately what do we really want to do with our lives. Perhaps we should start thinking more critically.

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