| Standard Chartered Bank |
WHEN I ask my circle of 30-year-old friends if they have started saving for their retirement, they give me a funny look. Some answer that there’s the compulsory five per cent Employees Trust Fund (TAP) deductions to their monthly salary and about 3.5 per cent Supplemental Contributory Pension (SCP) from their employers monthly – which they assume is enough. But, is it really enough? Should we start our own retirement savings? How much should be saved each month to have an ideal retirement?
When it comes to how much savings you’ll need for retirement, there are several important questions and factors to be taken into account as you plan your retirement savings, either with or without the assistance of an experienced retirement planner:
What do you want for your retirement?
How does your ideal retirement life look like? Does it look like the life you have now? Or would you want it to be better and be able to afford lots of travelling? Alternatively, you may desire an earlier retirement with a lower standard of living. Or, you might already own a house which is fully paid for and that certainly helps to contribute to your retirement plans. There’s no right or wrong answer here, but your desired retirement lifestyle is a critical factor in answering the “How much retirement savings is needed?” question.
How much do you earn today?
Your current monthly income is a useful starting point for calculating your retirement planning savings needs. Generally, the more you make today, the more savings you’ll need in retirement – thanks to the lifestyle creep prevalent in today’s society. If you’re different than the majority, congratulations – you can probably have fewer saving for your ideal retirement. But, it probably won’t matter because you are already saving more than you need for your simple retired life. For the rest of us who want a better retirement lifestyle, we have to save more and start saving early.
Most important of all, we should avoid using any part our retirement savings. This also means you need to lay out rules of how much you can spend per month during your retired life.
How much will you collect from TAP and SCP when you retire? Will you receive any pension benefits during retirement?
These monthly pension benefit payments can subtract substantially from the total amount you may need to save. Getting a good estimate of these payments is invaluable as you plan your retirement and determine how much savings you would need.
When will you retire?
The younger you are when you retire, the longer you can expect to live during retirement. This means you’ll need more saved. If you wait longer until retirement, not only will you be retired for a shorter amount of time, but you will also work more years, meaning you can save more. A simple calculation is: if you are 30 years now and expect to work till you reach 60 years, you have 30 years to save for your retirement. Next you will have to figure out how much you need during your retirement and calculate from there. A good estimate is how much money you spend per month now.
How will you invest?
Your banker will be able to help you to understand your risk profile before you start your investment. Your risk profile will guide you on what are the type of investment products and their risk return that is acceptable to you. In general, investment product with higher return tends to attract higher risk and vis-versa. Furthermore, your investment portfolio needs to be review every six months to ensure that it is still in line with your objective.
How much have you saved already and how old are you now?
The younger you are and the more you have saved, the less you’ll need to save in the future to achieve the same retirement standard of living as someone older or with less money saved up until this point. This also depends on when you plan to retire.
As you can see, there isn’t a one size fits all answer to how much you should save for your retirement. However, there is a general rule of thumb that you can follow to determine how much you need to save. Decide how much you need per month during your retired life. If it is BND1,000, multiply this by 12 to obtain the annual retirement savings; BND12,000.
Let’s estimate that your retirement lasts 30 years, hence multiply BND12,000 with 30 and you’ll need to save BND360,000. But, if you will be receiving pension benefits, subtract the pension amount and you will obtain how much you should save monthly now until you retire. However, always include about two per cent to five per cent more for emergencies.
This certainly is not the golden rule which will ensure you an ideal retirement lifestyle but it is a good starting point. Moreover, everyone’s retirement goals are personal and subjective to their own needs and requirements. Ultimately it’s about finding the level of savings you need to match your retirement needs. In any case, it is worthy to note that no one gets into trouble because they saved too much too soon.
This article is for general information purposes only and while the information in it is believed to be reliable, it has not been independently verified by us. You are advised to exercise your own independent judgement with the contents in this article.