Are You Planning Your Retirement Right?

I was watching this CNA documentary titled "Tips On How To Calculate & Reach Your Long-Term Saving Targets" last weekend. In this documentary, Kyith from Investment Moats is featured. His sharing is insightful as always. What I didn't expect was the nature of comments from the various viewers.

A common thread running across most of the comments revolves around the frugal living of Kyith. He stayed in a humble 5-room HDB flat alone with minimal expenses. In fact, his targeted monthly expenses is just SGD $2,000 (which falls below the expectations of many). Some lamented that such frugal living or FIRE isn't worth it and even downplayed his achievement of being able to achieve FIRE at a young age.

I wondered how many of us could even achieve frugal FIRE if we wanted to.

Kyith's portfolio achievement is of no mean feat. He achieved a portfolio amount of nearly $800K when he was 38 or 39 years old.

Again, I wondered how many of us have that amount in our portfolio at such an age.

This leads me to think of a question. If so many viewers scoff at his "Frugal FIRE", how many of us are really on track to our own desired retirement? Or rather, are we even planning our retirement right?

Now, retirement is kinda like a holy grail in personal finance. All the understanding about savings, investing, lifestyle management etc all typically leads to this single end point of retirement. Some want to retire early hence FIRE. Some want to retire in style hence FAT FIRE. Some like Kyith are okay with a more minimalist lifestyle hence lean FIRE. No matter what shape or form it takes, it's all relating to the same end goal of retirement.

For someone to be planning his/her retirement right, he/she needs to be able to understand two important elements.

• How much is their savings

• What is their expected annual return of portfolio

Savings is typically the more important element which most people do not talk about.

Typically, the difficult thing to understand about savings is to know what your saving ratio is. Saving ratio represents the percentage of your earned income that you actually saved. In simple mathematical terms, it's just subtracting your expenditures from your earned income. The number for your earned income is easy. Everyone knows how much he/she is earning. What's usually difficult is understanding how much are you spending. Some of us just simply spend without keeping track.

WhenI I ran a poll recently, it was quite alarming that 35% of the respondents do not track their personal expenses.

If you don't measure something, you can't optimize it.

So if you don't measure your personal expenses, you will not be able to keep it under an amount which you like so as to keep your savings ratio health. And savings ratio is a very important topic you have to understand to achieve retirement.

If you save 0 percent of your earned income, you will never get to retire. If you can save 100% of your earned income, you can techniaclly already retire. For most of us, our savings ratio is likely somewhere in between.

In case you are wondering what a typical savings ratio is, I once ran such a poll in my Telegram group too. Here are the results.

Most people tend to save around 30-40% of their earned income. While this might look like a good savings rate as you are saving about one-third of your pay cheque, retirement might still seem like a lofty goal if you are starting with zero net worth. Even if you start investing now with a 5% annual return (after inflation) from your portfolio, you will likely still need around 25 years before you can reach your retirement goal. Retirement here represents getting your portfolio to an amount where you could do a 4% safe withdrawal rate.

The next time you are thinking of inflating your lifestyle, you got to sit down and really think about the number of years you are adding to your retirement age. Lifestyle creep is often the culprit. When you start to spend more, you are reducing your savings ratio. Large spendings like property and car often also involve debts which will further add to your annual expenses and cause you to require an even higher retirement sum. So purchases with debts are often a little of a double whammy here. Unless of course if it's an asset which can appreciate over time like certain properties.

Annual return rate of your portfolio is of course also important. But that's a whole different topic which I will not discuss in this article. For most people, achieving an annual 5% return (after inflation) is already an amazing feat so we got to be really realistic about our chances here. If you can achieve an annual return of 20%, retirement is of course not too far away. But really, can you achieve such a return every year?

Personally, I think the savings ratio is something that we have better control over. This is also the reason why most established financial bloggers/YouTubers focus a lot on controlling their spending and not spend extravagantly. Instead of exchanging their money for material comfort, they use it to build their portfolio. They know that a high saving rate allows them to build their net worth faster and reduce their expected annual expenses further hence allowing them to reach their retirement goal sooner. I believe Kyith could easily inflate lifestyle to purchase more material comforts but he's probably well aware that this will be a slippery rabbit hole that will throw his retirement plans in disarray.

An ideal retirement can also be one where you could spend your time freely in meaningful ways with little material comforts. It could also be one where you retire in a lavish lifestyle. To each his own. If you have already determined what is the ideal kind of retirement life you want, then I think the really important question that you need to ask yourself again is this.

Are you planning your retirement right?

I also do share additional content in my Telegram channel. 250+ like-minded investors have already joined this channel. What are you waiting for?