Make 5 year plans for your retirement, S$100k min TNW at age 30 (within 5 years)

A month ago i decided to embark on a mini project with the goal of ultimately having sufficient cash flow when i retire. I threw around some ideas and figures in my head, and this is what i came up with so far.

1. Life expectancy

Just last week the Straits Times had mentioned that life expectancy was 80 for a male and 85 for a female. This meant that an average male at 60 in 2012, could expect to live for another 20 years. I like to have some buffer in my estimations and ended up with a life expectancy of 95. 

I also chose a retirement age of 65 because firstly, it gives more time to build up an adequate retirement fund and secondly, it is currently the upper end of the retirement age. According to the Retirement and Re-employment Act, the statutory minimum retirement age is 62 with employers required to offer re-employment on a contract basis up to age 65.

2. Income yearly at retirement

On top of having to pay the usual food and utilities, a retiree would also have to consider the higher medical costs. While modern medicine prolongs our lives, it fails to cure medical conditions such as diabetes, heart disease etc. Aside from these necessities, the ideal life would include having a car, a maid and the ability to go on holiday several times a year.

I thus arbitrarily picked having a yearly income of S$100k, which meant a target of S$3.0m at age 65.

3. A dollar today isn't the same as a dollar tomorrow

At the age of 25, a person would still have 40 years to go and assuming an inflation of 3% per year, he would need an even bigger sum of S$9.78m at 65! 

We also have to note that at the age of 65 we will still have to put a portion of the sum into investment and FDs to offset inflation and maintain a constant cashflow of equivalent value.

4. 5 Year Plan

Faced with having to build up such a sizeable sum, the next logical thing to do is to see how far your income can take you. As it gets hard to predict your salary many years down the road, i consider a 5 year projection feasible (like the old Soviet 5 year plans).

Let's assume a person called John has a salary of S$3k per month at 25. To be on the conservative side, i discounted the CPF contribution and deducted S$50 for tax purposes to get S$2.35k.

To continue, John works in the same firm from 25 - 30 and gets a 2 month bonus every year. He also gets a 3% annual increment, except at 27 and 29 where he gets promoted and gets an 8% increment instead. 

5. Savings/Expenditure/Investment

Once you project your salary you need set goals on how much you will spend, invest and save and most importantly be realistic about it.

John being in his 20s will most likely spend on food, entertainment, utilities and travelling. He also makes an occasional splurge to reward himself for hardwork. As he only makes S$2.35k after CPF, he spends 60% of his pay and tries his best to invest 30% and save the remaining 10%.

6. Investment return spread
You next need to target an achievable investment return over the next 5 years based on your own abilities and track record. I stress that it needs to be achievable so that in the event you outperform the yearly target, you will be encouraged to do even better the next year and ultimately make returns that exceed expectation over the 5 year period.

Once, you have a number in mind, whether its 5%, 15%, or better than Warren Buffet's 22% return, you next need to do an investment return spread which will clearly define your yearly goals.

While John has a degree in finance along withsome practical experience in investing, he feels that his investment skills can improve further and sets a modest target of 12%, just slightly above the annualised long term market return of about 10%. He also sets the spread range from 4% to 15% with the rationale as follows:

7. The 5 year plan

With the income projected and investment targets set, we will now have to combine them both together and add in 10% yearly savings to obtain Year end TNW figures that will serve as your financial guide over the next 5 years. Of course, we will also have to differentiate the TNW at each level of invest returns. The following shows the 5 year plan at each level of John's spread:

If John's expenditure ratio remains the same over the next 5 years, he will have obtained a minimum S$100k TNW at an annual investment return of 4% (Not including CPF).

While this may seem like a large sum to some, it may be like pocket change to others. However, the point here is not to duplicate John's plan but to create your own based on your own expectations and abilities.

8. The Grand Plan

Is a 5 year plan enough? Of course it's good to have a medium term target. But we do want to focus on the long term retirement target and as such, we will need to incorporate this 5 year plan into a bigger scheme - The Grand Plan.

As you can see John's grand plan to obtain the ultimate goal of S$9.79m at retirement is still not planned out fully yet. This doesn't mean that it should be left uncompleted. As John progresses in his investment journey, he will get new ideas, better estimates that will contribute to the model.

9. What's next?

While retirement may be a good 40 years away for some of us, a long term model, despite its inherent flaws, will force us to think and plan ahead for different periods of our lives. In the process of doing so, we will figure out what we want. It is really essentially a self discovery thing as you go through your dreams, put it down in paper and finally into numbers. This plan will sets a platform for you to achieve those targets and guide you along the way. It doesn't have to have the most precise numbers, but hey, at least you'll have a rough target that you know you put some good thought into and that you can work towards.