How Much of My Salary Should I Invest?

There are many ways to decide how much of your salary goes to investments. At the end, it all comes down to what your financial goals are.

Many Singaporeans want to know how much of their salary should go to investments. There are many approaches to deciding this. In the end, what it comes down to are your individual financial goals. If you want to retire with five houses and a yacht, you will have to invest much more aggressively than someone willing to retire in a rental flat.

Here are some ways to work it out:

Method 1: Work Backwards From the Amount You Want

This is the most common method, and many Financial Advisors or wealth managers can do this for you. To decide how much you need to invest, you first work out how much you want to save. You then work backwards from this amount.

For example, let’s say you want an income of S$2,000 a month when you retire. You want it to stretch from the age of 65 to 80. You would need about $24,000 a year, or about $360,000. If that seems too easy to be true, it is: the real amount you need will be a lot higher, because of the effect of inflation.

Let’s assume you are 25 years old right now, and that the rate of inflation will be more or less three per cent throughout the next 40 years (most developed countries have an inflation rate of about two to three per cent).

Now over 40 years, S$360,000 will decrease in purchasing power. In fact, by the time you are 65, it will only have as much purchasing power as around S$110,360 today*. That’s not what you want; you want to have the equivalent purchasing power of S$2,000 a month today, at the time you’re retired.

So you need to aim a lot higher. You’d need to have, more or less, S$1.174 million by today’s standards**, in order to have the same purchasing power as S$360,000 in 40 years.

Now we can start working out how much you need to invest:

Let’s say you build a balanced, diversified portfolio that earns returns of five per cent per annum***. If you can set aside $10,000 a year to invest (about S$830 a month), you could potentially reach this goal in about 39.5 years.

So that being said, the general idea is to work out the amount you need post-retirement, factoring in inflation. Once you have the required retirement amount, and you know what returns your investment portfolio provides, you can decide how much you need to set aside to invest.

*retirement amount / (1 + inflation rate) ^ number of years

**retirement amount x (1 + inflation rate) ^ number of years

*** Your CPF Special Account can pay out this rate of return, and you can make voluntary contributions to enhance it