Is it too early to think about retirement when you are still in university? Not at all! Everything you do now has a big impact on the future. Think of the difference between 1.140 and 0.940. A small difference now makes a huge difference when compounded 40 times, roughly the same number of years you will be working from graduation to retirement.
Let’s say you would want to have $3500 a month for retirement. Not a big amount, but sufficient for you to spend comfortably and occasionally go some for little luxuries in your life, such as an overseas holidays.
And let’s say you live for 20 years after retirement to the average life expectancy of 85 years old, then you will need to earn $840,000 (3500x12x20=840,000), almost a million, before you stop working!
And don’t forget about the effect of inflation! The average inflation rate in Singapore in the last 50 years is 2.8%. Assuming the same inflation rate for the next 50 years, your one dollar of money now will worth only 72 cents one year down the road. Money just disappears. Hence you need to earn more than one million in order to reach your retirement target.
Scary? If you don’t have a few million dollars in your bank account, don’t panic. You can still manage to retire comfortably if you manage your money smart.
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Lottery: Easy money doesn’t come easily
But how to do so? Buying lottery? That sounds easy. A few dollars of a lottery ticket always bring people hope, except that for 99.9% of us, that hope never translates into gain. Statistically speaking, the expected gain from buying lottery is negative. That means on average, you will pay more to the lottery sellers than they pay you, if any.
But what if I’m the lucky one? Well, everybody thinks he/she is. While Digital Senior cannot predict your level of luck, it is safe to say that you stand to lose more than you gain, on average. Hence buying lottery is not a good way to finance your retirement.
A piece of property is a piece of wealth
Buying a property? Well, property is always a hot topic in the land-scarce Singapore. The property market in Singapore is always a good investment, despite periodic cooling measures that control the price. You stand to gain capital appreciation and rental income from owning property.
But the problem is that it is very hard to afford a piece of property for investment for an average Singaporean who stays in HDB. Most of us have a flat for our own living and that’s all. Hence having a property may not be a good option, as the upfront investment is huge.
If you can’t invest in the property market, you can choose to invest in the financial markets instead. There are two main assets in the financial markets: bonds and stock.
Bonds: Bound to pay you
Bonds are debt offered by the government or the companies. They issue bonds in exchange for an up-front payment from you. Then they pay you coupons every 6 months or a year as your interest payment. At the end of the borrowing period, the company repays you the original upfront payment you made.
Sounds good? Getting guaranteed interest! But the problem is the bonds in Singapore are issued in the unit of 10K. Individual investors normally cannot afford to have meaningful amount of investment. Hence bonds are usually bought by for institutional investors (think of GIC or Temasek).
Stock: Become an owner of a company
Then the other option is to invest in stock. Companies in Singapore issue stock on the Singapore Stock Exchange. A stock is a piece of ownership in the company. You can profit from the stock’s dividend as it pays periodic payment to investor, and capital gain, as the stock price goes up.
But investment in stock is a risky business. Think of capital gain. The reverse is capital loss. If you don’t do a careful selection of stocks, your stock may lose value as the companies perform worse. You will never be able to get back the money that disappears!
Hence if you don’t have the time or knowledge to carefully select stock, you are generally advised not to invest directly. But you can still benefit from the stock market by two means.
Invest in 2 Less risky ways
The first is to put your money with an asset management firm. Such firms have professional money managers who invest on your behalf. But you’ve got to pay them a fee to manage your money. So you need to select the manager who can still give you positive return after they have deducted the fee from your pocket.
Alternatively, you can invest in the index funds. The most famous index in Singapore is the Straits Time Index. It is a composite of the 30 largest companies in Singapore (UOB, Semcorp, sounds familiar?). An index fund tracks such index and therefore moves in tandem with the overall performance of the general market. Then how does the general market perform? The return to STI over the last ten years is around 5-7%. So investing in an index fund won’t give you eye-catching return that promises a landed property on Sentosa, but it does give you a steady return that makes affordable a trip to a nice restaurant and a yearly overseas holidays (not to an overseas casino of course).
The above are some of the most common ways to manage your money. Remember that your aim is to have a comfortable retirement, not a high-flying lifestyle. Comfortable retirement is possible at most income level, if you know how to make your money work for you.