*[Updated 7:51pm, 6 Feb 2022: There was a mistake in the calculations (classic spreadsheet error!) for scenarios (B) and (C) in the earlier version of this post. I have fixed the mistake. Many thanks to the reader who alerted me to it.]*

I shared some brief thoughts on Kyith from Investment Moat’s post (Should You Retire at 30 Years Old with $1 Million or Retire at 40 Years Old with $10 Million (As a Singaporean)?) and that got me thinking about the likely choices an average Singaporean would face when thinking about working longer or retiring early.

If you read my earlier thoughts, I thought that the $1m vs. $10m tradeoff is something that hardly any working Singaporean would face. The next natural question was: What choices would an average Singaporean face?

## Assumptions

To model the average Singaporean, I will assume the following:

- Earns a median monthly income (excluding CPF contributions) of $4,500 (source)
- Saves 20% of their income
- Starting capital of $100,000
- Starting age of 30 years old

I’m fairly confident the first assumption makes sense. That amount is the median income earned by an employed resident (i.e. Singaporean or Permanent Resident (PR)) and therefore is representative of the average Singaporean. Furthermore, I have assumed a starting age of 30 years old for this hypothetical Singaporean so no one can quibble that fresh graduates won’t be earning the median income.

I believe the $100,000 starting capital assumption is not a far-fetched one. It may be a stretch for some but given how the $100K by 30 stretch goal has become popular in recent years, I believe this is also doable.

The second assumption is a little more tricky. I thought of using the Personal Savings Rate (PSR) that is officially calculated by Singstat. Dollars and Sense has an article that calculated the long-term average as 30.7%. However, if you look at Singstat’s definition of the Personal Savings Rate, you’ll realise that it depends on Personal Disposable Income (PDI) which really is more of a macro variable tracking the income of the household sector rather than the actual savings rate of the average household.

The PDI includes Contributions from Employees (which probably includes CPF) and Operating Surplus from charity and religious organisations. The latter distorts the PDI upwards and definitely doesn’t reflect the income of households. More importantly, I couldn’t find out whether the Contributions from Employees include CPF contributions or not but I believe it does. That would change the analysis quite a bit as CPF monies are typically used for housing and not investment. This would mean that the PSR isn’t a good proxy for calculating the actual cash savings that could be used for investments.

To make things simple, I decided to use a savings rate of 20% and the median income (after CPF contributions). This then assumes that my average Singaporean saves 20% of their monthly income net of CPF contributions. Whether this is too high or too low is up for debate but I use 20% since the 20% savings rate is part of the popular 50-30-20 budgeting rule.

I’ll check around informally with my friends if this makes sense but for now, I will assume that it does.

I then calculated the ending portfolio value for three options (work until 45 vs. 55 vs. 65) under three different rate of return scenarios (1% p.a. vs. 2.5% p.a. vs. 5.5% p.a.). I’ll explain why I chose those rates of return.

## Rates of Return

I looked at three rates of return scenarios – (A) 5.5% pa., (B) 2.5% p.a., and (C) 1% p.a

All three rates of return are real rates of return which means that I assume these are adjusted for inflation. For the sake of simple calculation, I also assume that wages increase at the same rate as inflation. This makes the calculation and interpretation easy as it means that any comparison between the numbers for retiring at 45 vs. 55 vs. 65 are ones that only concern purchasing power.

For example, this means that the decision to retire early at 45 with $100,000 vs, the decision to retire at 55 with $200,000 is really a question of whether one should give up $100,000 of purchasing power or work for another 10 years.

## (A) 5.5% p.a.

I chose this rate of return to illustrate the CAGR of savings invested completely in a portfolio of diversified index funds. A 5.5% real rate of return with an assumed 2% p.a. rate of inflation gets us a 7.5% p.a. nominal rate of return for equities.

I think this is reasonable since the 10-year yield on US government bonds is about 3.5%. Add to that an equity risk premium of 4% and that brings us to exactly 7.5%.

## (B) 2.5% p.a.

This rate is meant to reflect the rate of return one could get from the CPF SA/MA. As every Singaporean knows, the CPF Special Account (SA) and Medical Account (MA) pay 4% p.a. (slightly more since there is an extra 1% paid on the first $60K in Ordinary Account (OA) SA.) but I’ve just given this a real rate of return of 2.5% p.a. to reflect the slightly better than the cash rate.

## (C) 1% p.a.

This is meant to represent the cash/short-term bills rate. I know cash has been earning next to nothing or even negative returns but this assumes that this form of savings/investment will earn its long-term rate of return. Basically, something to conserve/minimally increase purchasing power over time.

## Findings

Options | Final Nest Egg (A) | Final Nest Egg (B) | Final Nest Egg (C) |

Retire at 45 | $465,261.21 | $338,494.62 | $289,943.37 |

Retire at 55 | $933,787.19 | $554,298.26 | $433,269.75 |

Retire at 65 | $1,734,097.23 | $830,545.16 | $591,591.25 |

PV = $100,000, N = 15/25/35, R = 5.5%/2.5%/1%, PMT = $4,500 x 12 x 20%

My takeaway from the table is:

~~(1) If you earn a low rate of return on your savings (B and C), an extra 10 years of work hardly does anything for your wealth. Someone who works an additional 10 years is only 17.7%-34.3% (in scenarios C and B respectively) better off in terms of real wealth.~~

(1) If you earn a low rate of return on your savings (B and C), an extra 10 or 20 years of work makes you anywhere from 0.5-2.5 times better off in purchasing power. I imagine this could be the difference between remaining in the middle class vs. moving into the upper-middle class.

(2) If you earn a higher rate of return (e.g. (A)), that equation changes drastically because you are looking at anywhere between 2-3.7 times more in terms of purchasing power. That is a huge tradeoff but still nowhere near the ten times difference in ten years that was assumed in Kyith’s post.

(3) In (A), the early retirement scenario (first row) gets the average Singaporean a decent nest egg of almost half a million Singapore dollars. This also excludes the amount in his/her CPF account which will either be in cash or in the form of property. By the standards of almost anyone else in the world, this is a lot of money.

Based on the calculations above, it appears that in all scenarios, the average Singaporean could be very well off in retirement. Retiring with $591,000-$830,000 at 65 years of age is quite good by global standards so why is it that many Singaporeans still worry about not being able to retire?

Is it because many Singaporeans don’t save anything beyond the forced contributions to CPF? After all, contributions to CPF make up roughly 20% of their income so to expect the average Singaporean to save another 20% of the remainder seems like a tall order. And if many Singaporeans use their CPF monies (mostly) for housing and that amount grows at the same rate as in Scenario B, then it could mean that many Singaporeans reach the level of wealth in the table above but the problem is that wealth remains locked in their homes.

## To conclude

I’m pretty sure that many people will quibble with the assumptions or numbers that I’ve used. For example, some people earning the median monthly income may say that it’s impossible to save 20% of their income. That could very well be true if you are the sole breadwinner for a family of three or four.

On the other hand, I’m sure that there will be some in the Singapore Finlit space who think that the numbers presented are too low since there seem to be finfluencers in Singapore who are aiming for a million dollars by age 35 or 40. These guys probably have incredibly high savings rates (way higher than the 20% used here) and/or have experienced rates of return much higher that the 5.5% p.a. real rate that I’ve used here.

At the end of the day, retiring early or not is a very personal decision. What I’ve shown here is that given more realistic assumptions of the various real rates of return, the cost-benefit analysis comes down to more of whether you should claim your time back or spend it to be able to buy more stuff in the future.

What I hope my post gives is a more realistic expectation of the kind of wealth the average Singaporean should be able to accumulate. This will also provide a better idea of the trade-off involved between retiring early or working for a little longer.

Also, I’m curious. Are my calculations for the levels of real wealth achievable by the average Singaporean realistic? Let me know if the comments below.

Im not too sure if your calculations are close to accurate.

Starting with 100k, even without compounding interest, saving like 12k a year for 15 years, you would already end up with at least 280k at age 45?

How can the final nest egg be 130k only??

You are right. There was an error in my spreadsheet. Will fix this asap

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