Saturday, December 30, 2006

How much money do you need - Part 2

This is the sequel to my first post on this blog. There is actually another way to think about how much money you would need in a lifetime and it's quite logical (well at least to me...).

Assuming that you would be working 2/3 of the time in your entire life, you should be saving at least 1/3 of your pay. The key word here is AT LEAST. Bcos we must not forget inflation.

Now say if you are currently 30 yrs old, you earn $3000 per mth, you expect to retire at 60 and live until 75, i.e. you work 30 yrs out of 45 yrs of your life (2/3) and have no income for the last 15 yrs (1/3 of 45). You should be saving at least 1/3 of your pay i.e. $1000 in order to maintain your current lifestyle until the day you go to heaven (or wherever you want to go that won't need money from Earth... hehe).

Why is this so? Bcos the 1/3 that you save for 30 yrs (which amts to $1000 x 12 x 30 = $360,000) will be just enough to cover you for the next 15 yrs when you don't work at all ($360,000 /(15 x 12) = $2000 = the amt you are spending now every mth). That is assuming no inflation.

Hence similarly if you want to retire at 50 and die at 70 (which means you work 20 yrs and don't work 20 yrs) you would need to save at least 50% of your pay. Which probably means 90% of Singaporean cannot retire at 50 and die at 70, bcos if they want to retire at 50 they must die, say at 55 in order not to rely on their children or the state or any other entity to support them. How fun.

So what happens when we take inflation into account? Well it simply means you have to save more, or make your money work harder (i.e. invest lor). If inflation is 3%, then for every dollar you save, it must earn 3% every year until you retire. If you believe in this blog which says investment earns 8%, then all is well.

If you intend to cover inflation by saving more, it gets tricky bcos inflation goes on yearly but you only save the same amt every month. This means that for Year 1 you will need to save 3% x 30 (yrs) = 90% more and Year 2 you need to save 3% x 29 (yrs) = 87% more and so on (i.e. Year 1 you need to save $1900 per mth, Year 2 you need to save $1870 per mth and so on).

But you only earn $3000 per mth remember? How to save $1900? It cannot be done, so the answer is you should spend less, much lesser than the original $2000 per mth. As a rule of thumb, I think saving 50% of your salary should be quite ok. Which then means a lot of pple in Singapore are probably not ok... Count on me Singapore, count on me to go broke before 50!

See also Investment cannot make you filthy rich


  1. Hi 8percent,

    I like the way you write your blog in a very candid manner. It kinda allows the general public to have an idea of that is the minimal requirement if a person intends to stop working at the conventional retirement age. The key word here is minimum because if a person want to be sure of a totally secure future for the rest of their lifetime after retirement, they have to do a very precise calculation to factor in the inflation, the realistic return on their savings and so on. If not, by just saving 50% of whatever they earn to cater to their future, that is just the minimum requirement that is treading on the line. But I have to say it is good enough for the general public.

  2. When I was writing this post I realized that in order to calculate the exact % would need some high level excel work bcos each input influence the other and makes it quite complicated. Hence I came up with the general rule of 50%.

    But I think the better way to solve the money problem is to work longer. Retirement is a concept of the 20th century. In this age of decling birth and aging population, working should continue as long as we are mentally and physically able.

    A lot of people view work as simply a means of bringing home the bread. Hence they want to stop and retire, at 55. I think work is an essential part of life, and if you find work that you like, you won't mind to work until 75 right?

  3. Hi 8percent, I agree that in this age, retirement at 55 is an idea of the past, at least at this time in point, pretty much like using the pure Grahamite investment method at today situation.

    And retirement should not force a really capable guy to retire because as a person ages, it is more likely that he can be able to contribute more efficiently.

    Definitely, i do not have a plan to stop doing what i enjoy doing for the rest of my life as long as I am mentally capable of doing what I have been doing.

    I recall an Indian tycoon, if I am not wrong, he is one of the two Mittal brothers who remarked, "Find a "work" that you enjoy and you will not feel that you have to work a single day of your life thereafter." I totally agree with that, once you get a passion, things fall in place and retirement is not even an option.

  4. I can contribute one more option to make it three ~~^^
    (1)Save 50%
    (2)Earn an amount that you can live just on its interest from fixed deposit
    (3)Gat a job you can be passionate about

    hmmmm, I am sure there are other options...Anyone knows?

  5. and... Happy New Year also!

  6. Not too long ago The Straits Times reported how a $10,000 investment in Raffles Education would return over $1 million based on the latest stock price.

    Hence maybe the answer to the million dollar question of money not enough is to do really damn well for investment! Not just 8percentpa!

    And I agree with Berkshire. Great blog 8percentpa! I truly enjoy reading it!

  7. Thanks a lot, I have already linked you up!~