The official retirement age of 65 may not be the right fit for you. Here are two alternative scenarios to consider when planning your retirement.
Ask what the “correct” retirement age is, and someone is bound to say “65, duh!” But that’s not the “correct” retirement age – that’s just the official number. In reality, retirement age isn’t defined by the number of years you’ve been around. Here’s how it works:
Don’t Think of Retirement as a Fixed Number
There are people who are past 70 who still work, and there are people who retire in their 40s or even earlier. However, because the country’s official retirement age is 65, we persist in thinking that’s when it happens – we even build our financial plans with age 65 as the end goal.
There are two, more realistic ways to determine the right retirement age.
1) Base Your Retirement on How Much Money You Have
This is the soundest way to decide when to retire: by not using your age, but your cash reserves. After all, if you have a S$50 million by age 30, then you can probably quit working right there and then.
Another way to think of it is this: you’re retired when you work because you want to, not because you have to. Billionaire Warren Buffet is 87 years old at the time we write this; he still works, but it’s certainly not because he needs the money.
To work out your “retirement age” this way, you need to calculate your desired Income Replacement Rate (IRR). This is the percentage of your current income, which you want to have when you’re retired.
For example, say you earn S$60,000 per annum. As a rule of thumb, you need to retire with an IRR of about 70 per cent, to maintain more or less the same standard of living. In this case, that would mean a post-retirement income of S$42,000 per annum.
Once you have this figure, you can work out how much you need to last till the age of 90. In the above example, say you manage to amass S$1.26 million, by the age of 60 (through clever investing, downsizing your house, saving a lot, etc). In such a case, you’d have S$42,000 per annum until you’re 90, and it could be viable to retire at that point.
(But note that the S$1.26 million also needs to be invested in a way that grows at three to five per cent per annum, to keep up with inflation. Speak to a financial advisor for more details).
What’s Your Desired Lifestyle?
Note that, if you’re happy to live a more spartan lifestyle, this also means you can retire earlier. For example, say you earn S$60,000 per annum, but are happy to live a simple life (no overseas vacations, no eating out every day, etc.) You just need an IRR of 50 per cent.
In such a case, you could retire as early as around 52 – you’d only need S$30,000 per annum, so you just need S$1.14 million; less than the S$1.26 million you’ve already saved.
You could also try to be more ambitious. For example, some people aim to have a 100 per cent IRR. Let’s say you run your own business, to get an income of S$60,000 a year. You could then pick the retirement age of 70, after which your S$1.26 million could provide the full S$60,000 a year, until you’re age 90.
By thinking of your retirement as a monetary number, rather than a fixed age, it’s easier to plan for the lifestyle you want. The “correct” retirement age is thus dependent on how you want to live.
2) You May Have No Choice But to Stop Working
You may not have a say in when you retire. Sometimes, life events such as a stroke, or a terminal illness, dictate when you stop work. While tragic, these are not impossible to prepare for.
It’s important to be well covered by a life insurance policy, with sufficient payouts in such situations. Never plan to work till a specific retirement age, and then simply assume life will let you get there.
Besides life insurance, there’s another way to prepare for a forced retirement: that’s to find alternative income streams. Money from stock dividends, bond coupons, or rental properties are all forms of passive income. They can continue to provide money, even if you’re forced to stop working.
As such, it’s important to invest and build up such assets, while you’re healthy and able.
Retirement thus comes down to three things: comprehensive insurance, passive income streams, and a certain amount of accumulated wealth. It would pay to think of your correct “retirement age” along those parameters, rather than as a fixed age.
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By Ryan Ong
Ryan has been writing about finance for the last 10 years. He also has his fingers in a lot of other pies, having written for publications such as Men’s Health, Her World, Esquire, and Yahoo! Finance.