How much will I need for retirement?
How much will I need for my retirement? A simple question, but one which many, including financial advisors, struggle to answer. And also one which is the source of a misleading myth that expenses will fall in retirement. In general, because of lifestyle inflation and habituation, we cannot possibly know for sure how much our expenses may be in the future. After all, many of those who are preparing for retirement now did not even have the inkling that the smart phone would exist in the future even when they were 40 years of age, and already close to retirement. How is it possible to know how much we will spend in retirement when we are only in our 30s?
5 years ago, we tried to tackle this question by looking at the Household Expenditure data for Singapore. This data is published every 5 years, and there is the accumulated data from the 4 surveys done in 2002/2003, 2007/2008, 2012/2013 and 2017/2018 respectively. We detail the results in our blogpost How much will I spend in Retirement?, where we show that contrary to the received wisdom, our expenses do not fall when we retire. In fact, they continue to go up at around the rate of inflation!
This contradicts what much writing on this topic advises, simply because they make the mistake of not using a longitudinal study of expenditure instead of the commonly used cross sectional study. A longitudinal study basically compares the spending of each cohort as they age over time, instead of comparing between cohorts at the same point in time. This makes a difference because each court come into the workforce and accumulate wealth at different times, and their spending is dependent on what they are used to in their formative years. Clearly someone who is in their 50’s now will consume far more physical goods and services and less virtual goods and services compared to someone in their 30’s!
Apart from revealing that our expenditures do not fall in retirement, we also discover that on average, our expenditure during our working years also tends to go up by a bit more than the rate of inflation every year, until they flatten out (in real, inflation-adjusted terms) in our late 50’s and early 60’s, right before retirement. Hence, the best way to project future retirement expenditures is not to work out detailed costs and spending on every possible one of the goods and services we may need in the future, but to project into the future based on inflation and income growth over our lifetimes!
Now that the latest Household Expenditure Survey for 2022/2023 has been published, are there any changes to our previous conclusions? This seems a good point to update our results!
Spending in Retirement?
How Much are Households Spending?
We start by looking at how much households in Singapore have been spending in 2022/2023, and how it compares to previous years in the chart below:
How much are households in Singapore spending?
Source: Department of Statistics Singapore
On average, households are spending at least 20% in 2022/2023 more compared to the level of spending in 2017/2018. The highest increases are in the households aged 55 – 59 years of age, with a 40% increase! On average, this increase in spending over 5 years works out to be roughly at least 4% a year, although this has been over a period of higher inflation, averaging some 2.9% a year. In other words, in real terms, households spent some 1.1% more every year between 2017/2018 to 2022/2023.
This increase in household expenditure trails the growth in nominal GDP (33%) and real GDP (15%) over the same period. Perhaps households are saving more instead, or investing in assets, so it is not a cause to worry. Just as before, looking across the 5 different Household Expenditure Surveys done 5 years apart, we see some consistent trends:
- Expenditure peaks between the ages of 35 to 55 and falls thereafter all the way to retirement at age 65
- Expenditure (and income) has increased across all age groups over time
Retirement spending as a proportion of current spending
A common way of working out “How much will I need in retirement?” is to benchmark it off current spending. A rough rule of thumb used for financial planning is to assume that spending in retirement will be around 70% of current spending. This approach, in some ways, is similar to the notion of the replacement ratio. Or, how much income is needed in retirement as a ratio of last drawn income. And this is borne out by evidence from the Household Expenditure Surveys:
Spending after retirement compared to spending before retirement – Cross Sectional Analysis (2002 – 2023)
Source: Department of Statistics Singapore
Perhaps the COVID-19 episode and the uncertainty of retirement income from investments have tempered the spending of retirees in Singapore somewhat, as they spent a bit less compared to what pre-retirees are spending. But it is still in line with the rules-of-thumb commonly used.
A better estimate of spending in retirement 1: Spending patterns by cohorts
But as we argued previously, there is a better way to estimate post-retirement spending. And that is by using a longitudinal study instead of a cross-sectional study. Basically this means that we should not compare the spending levels and patterns of the generation which grew up drinking kopi siew dai, teh-c and eating kaya toast with that of the generation swilling Starbucks lattes, bubble tea and eating smashed avocado toast?
So, there is no point comparing the spending of the people aged 65+ today with the spending of their younger counterparts. Instead, we should compare the spending of the people aged 65+ today, with their younger selves aged 60-64 back in 2017/2018, and again with their younger selves aged 55-59 back in 2012/2013 and so on. This is what we illustrate below:
Change in Average Household Expenditure over time – Longitudinal Analysis
Source: Department of Statistics Singapore
And in hard spending numbers, when we do the comparison like this are as follows:
Average Household Expenditure by Age of Main Income Earner (2002 – 2022)
Source: Department of Statistics Singapore
A better estimate of spending in retirement 2: Household vs Individual Spending
The table above shows that when we compare cohorts of Singapore households to their earlier selves 5 years ago, spending actually goes down as they age. Is this then proof that our expenses will go down when we retire? Not quite!
In Singapore, the average size of a household where the parent(s) work is 3.6 persons. A retiree household, on the other hand, only has 1.93 persons on average. Let’s assume that the size of the household starts off at 3.6 persons when the head of the household is between 50-54, then drops to 3.3 persons five years later as the children start leaving for school or work, then to 2.8 persons after another five years, and finally to 1.93 persons when they are 65+. When we do so, the per person household expenditure looks like this:
Average Per Person Household Expenditure by Age of Main Income Earner (2002 – 2022)
Source: Department of Statistics Singapore
Now we see that just as we show for the previous survey’s result, spending on an individual basis does not go down in retirement. And this time, we see it across 3 cohorts of households as they move into retirement.
A better estimate of spending in retirement 3: Adjusting for Retirement
The last adjustment that we need to do is for inflation. Clearly, the figures in the Household Expenditure Surveys which we show above include the effect of inflation over time.
The inflation rate in Singapore for the periods which the Household Expenditure Surveys covers are:
- 2002 to 2007: 0.7% per year
- 2007 to 2012: 4.0% per year
- 2012 to 2017: 0.6% per year
- 2017 to 2022: 2.9% per year
When we adjust for inflation, the real growth in individual spending over time is as follows:
Average Growth of Per Person Household Expenditure by Age of Main Income Earner (2002 – 2022)
Source: Department of Statistics Singapore
So, with one additional cohort/survey of data, we see that our conclusions from the last instalment 5 years ago has only gotten stronger:
- On average, per person expenditure tends to grow over time in real terms, by about 1% a year. This is on top of inflation, and generally reflects growing affluence due to GDP growth as well as pay increments and promotions.
- As a person transitions into retirement, we see that on average, expenditure does not grow any more in real terms, but will still continue to go up due to inflation. Hence it is important that any plans for retirement income from annuities or investments take into account how inflation will evolve over the very long period of retirement. Having a fixed sum for retirement is planning for failure!
