I haven’t written in a while and was nearly thinking that maybe it was a sign that I should abandon this blog. However, an article in the local papers today prompted me to share some thoughts. Plotting my financial freedom is constantly on my mind and today, a young local journo posted an article that will probably provoke quite a few responses in the Singaporean online community.

Basically, Jonathan wrote an article saying that a young Singaporean (25 years old) who wants to retire at the official retirement age of 62 will need a million dollars. If you can, get your hands on the full article to understand how he arrived at the figure (basically he played around with a CPF calculator* and assumes a desired monthly income of $2000 in today’s dollars at retirement).

Now, this will sound like a stretch to many but a million dollars 37 years from today is not a big deal. In fact, a million dollars today is even less of a deal than 37 years ago. This, in basic economics, is the difference between nominal and real variables. Nominal refers to the dollar amount while real refers to the amount that your dollars can buy. For example, if a cup of kopi (local coffee) costs $0.50 twenty years ago but costs $1.00 today, we can say that there is a change in nominal value but essentially no change in real value. This is what we know as inflation. So in fact, what we should be concerned about is not the seemingly huge number of 1 million dollars 37 years later but what 1 million dollars 37 years later can buy us. Jonathan himself alluded to his in his article by quoting what the retirement calculator spat out to him,

“Similarly, the amount of $1.14 million at 62 is the equivalent of $381,000 in today’s dollars,” the site noted.

First, I applaud Jonathan for writing this because as he rightly points out that some of the attitudes of those fresh out of school are:

“Who has time to think about retirement?” many people around my age may ask.

“It’s so far away and right now I have so many immediate financial needs.”

He’s absolutely right to say that most people don’t give a thought about saving or retirement. At best, they would outsource the thinking, planning and execution to a ‘financial advisor’ forgetting Warren Buffet’s advice on ‘not asking a barber if you need a haircut’.

Plus, there are stories of professionals earning good money who are in debt (for example, see “35 and flat broke!”). These people have obviously fallen into the negative mental models of keeping up with the Tans (or Joneses for international readers).

It’s not hard to get some savings going. Just keep 1 coin out of every 10 you earn as advised in The Richest Man in Babylon (personally, I keep more).

That’s where my enthusiasm for Jonathan’s article ends. I don’t believe he’s right in selling the idea of retirement even though that’s what mainstream laymen usually think of. Retirement, to me, is an arcane concept that should be retired (pun intended). What we need is a paradigm shift towards financial independence where assets generate enough cashflow to meet daily expenses and the occasional (or maybe, not so occasional) drawdowns to meet expenses such as a new car or medical bills.

I’m saying this because life expectancy will only rise. Add to that the fact that a life expectancy is a mean (average) concept which means that if male life expectancy today is 83, there will be fully 50% of men who outlive 83 years. So to plan an endgame to your finances based on an ending number that applies to only half the population (in the mathematical sense) is stupid.

Retirees also tend to become net consumers rather than producers. Why should this be the case? I believe that if financial freedom was the goal, a person who achieves that sooner would then be less constrained to pursue productive activities that they would find more fulfilling. For example, a C-suite executive might then form a non-profit or become a teacher or social worker if he/she always felt that calling but was held back from doing so due to the concern over meeting obligations like a car loan, housing loan, children’s educational expenses and healthcare expenses.

Next, Jonathan’s worry over the $1 million number is because most people are financially illiterate. They cannot envision a return much higher than the interest returns on a savings account (which stands at a pathetic 0.05% as of writing). Is it no wonder that the local stock market has one of the world’s lowest retail participation rates?

I think Jonathan’s too hung up over the numbers. After all, this is the same guy who ran an article that it was possible for a young person earning an average income to obtain $100,000 before the age of 30 (to which I responded). Following that article, he basically embarked on some plan to spend less than $35 a day in order to get to his goal.

While it’s good to play defense, one needs to work on offense as well. In fact, I would go as far as to say that as long as one saves a decent amount and spends within his/her means, a good offense will more than make up for the defense. On the other hand, someone who plays a good defense but doesn’t work on the offense will never be able to escape being average. He or she will never pick up the skills necessary to force the financial advisory industry to lower their fees and provide products that transfer wealth from the client to the broker. After all, why don’t we hear of awards for financial advisors who help their clients achieve financial milestones like a $100,000 or $200,000 but rather their awards are based on the amount of sales they make? As they say, believe not what they say but what they do.

The focus on savings and retirement is passe. Let’s focus on financial literacy instead.

*One of the absurd assumptions in the calculator is that “The CPF site assumed an inflation rate of 3 per cent and investment returns during retirement of 4 per cent.” Now, a 3% inflation rate seems reasonable by historical standards but 4% investment return is terribly low. CPF needs to justify the measly interest rates it pays its account holders?