The Millennial’s Guide to How Much Does It Cost to Retire Early in Singapore

lifefinance
August 4, 2020
8
CPF, Investing, Saving, Spending, Withdrawal

How much does it cost to become financially independent and retire early in expensive Singapore? The idea of Financial Independence Retire Early (FIRE) has been around since the 1990’s, loosely based off the 4 percent rule. Curiously, the concept of early retirement has been associated more with the Millennials, rather than the Boomers or Gen-Xers. Perhaps it did not materialise for the Boomers and Gen-Xers because financial markets failed to perform well enough until the past decade, as we show here.

In earlier posts, we have written quite extensively about the 4 percent rule, and whether it works in Singapore. We have found that it does depend a lot on the local context. We have also worked out how a combination of the an investment portfolio, and an annuity like CPF Life works even better for retirement, early or conventional:

But knowing how to spend from your retirement savings is one thing. The other is how much to spend, and we have also delved quite a bit into this topic:

So, we have the pieces to work out how much does it cost a Millennial to retire early in Singapore. Let’s dive right in!

Is this your idea of early retirement in Singapore?

How much is needed to retire early in Singapore?

Let’s start by looking at how much is required to live in Singapore. While some who aim for early retirement believe in “Lean FIRE“, which has requirements such as:

Living in a cramped studio, van, or trailer
Living in a very low cost location, which doesn’t have the same level of entertainment, culture, food, and activities as superstar cities

It just doesn’t seem to be possible to do so in Singapore. So let’s just look at what families in Singapore actually spend. This is based on the Department of Statistics’ Household Expenditure Survey 2017/18. We reproduce this below:

Average monthly household spending (excluding housing/mortgage costs) by age of main income earner 2017/18

30 – 34	35 – 39	40 – 44	45 – 49	50 – 54
$5,229	$5,563	$6,040	$5,733	$5,738

Source: Department of Statistics Singapore

Based on the Household survey, a household between the age of 30 – 55 (average family size of 3.6 persons) spends $5,665 per month. Now, our assumption is that trying to retire early with young children who need to be taken care of financially for many more years is simply out of reach for the average married couple. So let’s assume that the couple retiring early are childless (which seems to fit the mould of the Millennial FIRE types in the US). We further assume that such a couple spends 70% of what the average household does, or $3,965 a month. We’ll just round this up to $4,000 a month to account for the inflation of the past couple of years.

Hence, to retire early, a couple needs to have an income of $4,000 a month immediately (not including housing or mortgage costs), or $48,000 a year. Furthermore, this needs to be adjusted for inflation annually thereafter (we’ll assume 2%, the historical rate, until the age of 60, and 1% after that) as well, as we have shown in our earlier longitudinal study here.

Don’t forget to top up CPF as well!

To generate a real income of $4,000 a month forever, the couple aiming for early retirement can depend on their investments. However, in the Singapore context, we need to put something aside for CPF Life as well, as the Escalating Plan under CPF Life is a best source for generating inflation adjusted income in the future. To work this into the analysis, given the Full Retirement Sum (FRS) of $181,000 today in 2020, we’ll assume that the FRS which the couple will need to meet in the future when they turn 55 will grow at 3% annually from today’s FRS.

To meet this future FRS requirement individually for him and for her, the couple needs to put something aside now which will earn an interest rate of between 4% to 5% in the CPF Special Account. In return, they will be able to supplement the income from their investment portfolio with the CPF Life payouts when they turn 65.

Additionally, we recommend putting aside the minimum sum (currently $60,000) for the Medisave account immediately as well. This ensures that the Medishield Life premiums for hospitalization and surgical procedures will be met throughout retirement, which is a key part of retirement planning. This is especially critical given the high inflation in healthcare costs. Also, for those between ages 30 to 40, this will help pay for the Careshield Life coverage as well.

Early Retirement for the 50-year old Gen-Xer

Let’s start with an easy, warm-up case. How much does it cost a 50-year old Gen-X couple to retire on $4,000 per month, rising with inflation forever?

First, let’s look at the CPF balances they need at age 50 in order to hit their Full Retirement Sum at age 55. Based on the current FRS in 2020 of $181,000, if this increases by 3% per year, the FRS will be around $209,830 in 5 years’ time. And if this couple have stashed all their CPF balances in their Special Accounts (SA) which grows at 5% per annum for the first $60,000 balance, and 4% per annum for the rest, they should each need $169,530 in their CPF SA now to meet this target.

So, by meeting the FRS in 5 years’ time, and having the CPF Life Escalating Plan kick in for them in 15 years’ time (at age 65), how does their spending profile in the years to come look like? We show this below:

Spending profile for a 50-year old couple over time

How much does it cost a 30-year old couple to retire early

From the chart above, the Gen-X couple will need their investments to do the heavy lifting from the age of 50 to 65. Once CPF Life kicks in, it will become easier to sustain the spending they are accustomed to, even after inflation adjustment. So how much do they need in investments to sustain their early retirement?

Once again, we run our decumulation engine which we featured previously here and here. We assume the investments are allocated 80% in a Yield Shield equity portfolio, and 20% in high quality bonds. The assumptions for the returns on these investments are:

80-20 portfolio returns and risk assumptions

	Annual Returns	Standard Deviation	Annual Fees
Stocks	3.32%	26.32%	1.00%
Dividends	4.55%	0.00%	N.A.
Bonds	4.00%	0.00%	N.A.
Inflation	2.0% (to age 60)	0.00%	N.A.
	1.0% (from age 60)	0.00%	N.A.

From the decumulation engine, the amount in investments required is:

Starting value (age 50) : $850,000
Ending value (age 95) : $548,000

So putting all this together, this 50 year old Gen-X couple needs:

Category	Amount
Investments	$850,000
CPF Special Account (2 persons)	$339,000
CPF Medisave Acct (2 persons)	$120,000
Total Needed	$1,309,000

Note that a withdrawal amount of $4,000 a month, or $48,000 a year, is a 5.65% withdrawal rate. How can this be possible, especially since we have always warned that a 4% withdrawal rate, or the 4 percent rule, may not be safe for retirement in Singapore?

Well, the answer to this is the CPF Life Escalating Plan, which kicks in at age 65 (15 years into retirement). As the Escalating Plan is possibly the best solution to address inflation over time in retirement, this takes a lot of the burden off the returns on the investment portfolio to do so in the future, and hence we can afford a higher safe withdrawal rate from the investment portfolio (including spending down some of the capital value), mainly to get us through the first 15 years of retirement. This is pretty evident from the chart of sources of retirement income shown earlier.

A 50-year old Gen-X couple will need a bit more than $1.3 million in order to retire early with $4,000 a month, rising with inflation over time

Early Retirement for the 40-year old Millennial

So a comfortable early retirement for a Gen-X couple looks attainable. What about for the Millennials. How much does it cost a 40-year old Millennial couple need to retire early on $4,000 per month, rising with inflation forever?

Once again, let’s look at the CPF balances they need at age 40 in order to hit their Full Retirement Sum at age 55. Based on the current FRS in 2020 of $181,000, if this increases by 3% per year, the FRS will be around $282,000 in 15 years’ time. Using the compounding power of their Special Accounts, they should each need $147,320 in their CPF now to meet this target. Having done so, how will their spending profile in the years to come look like? We show this below:

Spending profile for a 40-year old couple over time

From the chart above, the Millennial couple will need their investments to do the heavy lifting from the age of 40 to 65. How much do they need in investments to sustain the first 25 years of early retirement?

From the decumulation engine, the amount that is required is: $1,270,000. Curiously enough, the median ending value of their investment portfolio after 25 years (when CPF Life starts to kick in) is $1,188,000, which is roughly twice what they would need in investments from that point onwards. But there are no real shortcuts – they need to start off with a higher amount at age 40 simply to ensure that they can overcome Sequence of Returns Risk in the first 25 years of retirement.

So putting all this together, how much does it cost this 40-year old Millennial couple to retire early:

Category	Amount
Investments	$1,270,000
CPF Special Account (2 persons)	$295,000
CPF Medisave Acct (2 persons)	$120,000
Total Needed	$1,685,000

Somewhat surprisingly, the 40-year old Millennial couple only need around $400,000 more than the 50-year old Gen-X couple to cover an additional 10 years of early retirement. It appears that there are economies of scale at work here, mainly because the compounded growth of the CPF SA relieves the Millennials of worry about the funds and expenses needed after the age of 65.

Also, the initial withdrawal rate of $4,000 a month amounts to a 3.78% withdrawal rate from investments. As the period which they have to live off their investments is longer (25 years) for the Millennials, this conforms to our previous findings that the 4 percent rule may not be safe for retirement in Singapore.

A 40-year old Millennial couple will need almost $1.7 million in order to retire early with $4,000 a month, rising with inflation over time

Early Retirement for the 30-year old Millennial

Finally, we get to the holy grail of the FIRE movement. How much does it cost for a 30-year old Millennial couple to retire on $4,000 per month, rising with inflation forever?

Let’s work out the CPF balances they need at age 30 in order to hit their FRS at age 55. We project the FRS will be around $379,000 in 25 years’ time. With their Special Accounts, they should each need $126,000 in their CPF now to meet this target. How will their spending profile in the years to come look like? We show this below:

Spending profile for a 30-year old couple over time

From the decumulation engine, to meet the spending for the first 35 years entirely from the investment portfolio, we require $1,650,000. This represents a pretty low Safe Withdrawal Rate of 2.9%. Moreover, the median value of the investment portfolio after 35 years (when CPF Life starts to kick in) is a staggering $2.3 million! This is way more than they would need in investments from age 65 onwards. Again, it is the price to pay to make sure they survive the initial 35 years of sequence risk.

Of course, if they start out with this high level of investments, they can review their situation every 10 years or so, to see if they have a surplus over what they need minimally, and adjust their lifestyles up if they wanted to. The converse of this is that they can also start with a lower amount of investments, but be prepared to go back into the workforce to rebuild their finances should they get hit with Sequence of Returns Risk in their early retirement. This second option is probably far more applicable to a 30-year old Millennial couple than a 40-year old one.

Anyway, this 30-year old Millennial couple needs around $350,000 more than a 40-year old couple for early retirement:

Category	Amount
Investments	$1,650,000
CPF Special Account (2 persons)	$252,000
CPF Medisave Acct (2 persons)	$120,000
Total Needed	$2,022,000

A 30-year old Millennial couple will need a bit more than $2 million in order to retire early with $4,000 a month, rising with inflation over time

Are we missing something here? What about kids, and mortgage payments?

So, there we have it, how much does it cost to retire early. It requires $2 million for a 30-year old couple to retire early with $4,000 to spend every month, rising with inflation. It also requires $1.7 million for a 40-year old couple to do the same thing, and $1.3 million for a 50-year old couple. But wait! What about kids? How about the mortgage? What about bequests? As noted earlier, these spending figures are for a couple without children and a mortgage (or rent for that matter). So what can we do about these inconveniences on the journey to FIRE?

For a start, the figures for the investment portfolio part are scalable, in the sense that if you decided to retire early, spending $5,000 a month instead of $4,000 (because you have a child, or a mortgage), then all you need to do is to bump up the figures by 25%.

You may not need to bump up the CPF Special Account portion for this additional spending, since it is quite unlikely that you would still need to spend on children or a mortgage after the age of 65. But if you decide that you would still like to enjoy a higher standard of living post-65, then you can increase the CPF Special Account amounts by the same ratio. After all, we have projected the CPF SA requirement for meeting the Full Retirement Sum only. Since the Enhanced Retirement Sum (ERS) is 50% higher than the FRS, there is plenty of headroom to scale up the CPF SA balances.

Concluding thoughts

To conclude, rather than to dish out findings such as “you can spend 4% of your net worth if you retire early”, we have taken a different approach here. This is to work out how much does it cost to retire early and maintain a middle class lifestyle in Singapore. After all, it doesn’t quite make much sense to have to downgrade your lifestyle to enjoy early retirement. We should aim to upgrade our net worth instead, to make the transition from working life to retirement lifestyle seamless.

The bottom line, though, is that it is not cheap to retire too early (in a sustainable way) in Singapore. This is primarily because there is no Low Cost of Living location which we can retire to! Finally, this is a guide as to how much you need to start retirement. What happens after you are retired and start to wonder if you still have enough to carry on, especially after going through a market downturn? We address this question here.

*Here’s an update on how the Yield Shield Portfolio for 2020 survived the first 6 months of the COVID-19 pandemic!