WARNING: Sponsored content by the Association of Banks in Singapore.
Here’s something that we know millennials don’t exactly want to hear – that the youngest of us today isn’t 18, or 21 even. They’re 27.
Not only does that mean planking or the mannequin challenge has been uncool for a long time, it also means that most of our generation are entering what is typically the peak career stage in the next five years.
Let’s talk about the good news first.
For starters, with more of us in senior roles, we will finally be earning money that our broke selves in 2012 could only have imagined.
Maybe you can even legitimately afford to go on that trip to Tomorrowland without feeling too guilty, if COVID ever goes away.
Now, the bad news.
You only have a limited time before the zoomers catch up and give us a run for our money – in the same way we made some peeps obsolete, the same will happen to us, and the good times will not last forever.
Make no mistake: For millennials, starting retirement planning in 2021 is no longer considered ‘early.’
That said, if you’re late to the party, don’t worry. It’s not game over, yet.
What you’ll need to do though, is avoid the pitfalls that many people fall into when starting their financial journey. And plan for the future long before retrenchment or wage stagnation even has the chance to knock on your door.
And that’s what we’re here for. Here are six mistakes that in our opinion, hold people back the most.
In the words of everyone’s favourite 23-year-old 10-year-old…
You gotta avoid them all!
Underestimating the effects of inflation
One popular variant of personal finance articles goes like this:
Save x amount of money for x years and they will have one million dollars at retirement.
What they don’t mention though, is that a million dollars isn’t what it used to be, and will be worth even less in 40 years when you account for inflation.
Adjusting for inflation, a million bucks in 2061 will be worth approximately $450,000 today.
For some perspective, based on the 4% rule, for $450,000 to last you 30 years, you’d need to keep your spending to about $1,500 a month. Not exactly the high life – in Singapore, you’d need at least $1,379 for a basic standard of living.
Here’s a table with a nifty guide on how much you’ll need. Keep in mind that this excludes medical costs and your parent’s/kid’s needs. So you might wanna bump them up even more.
|How much you spend today||Amount you need in 40 years (2061), assuming 2% inflation|
Completely misunderstanding CPF
For some reason, CPF is a widely misunderstood product, and there are two extreme ways it manifests.
The first is people thinking CPF will be able to provide them with a luxurious retirement.
Someone needs to say this, but your CPF will only provide you with a ‘basic to decent’ standard of living in Singapore.
If you’re expecting to blow today’s equivalent of $5,000 per month during retirement, it’s sure to disappoint – the highest CPF Life Plan currently pays out $2,180 monthly.
What this means is that if you want to have a retirement that involves frequent vacations and fine dining, you will need to do your own planning in addition to CPF.
On the other extreme, we have people thinking that ‘CPF is not their money’ so they don’t make the most out of it
Look, we get that it’s annoying to not be able to withdraw a large sum of money for decades. But it’s no excuse to spend the money poorly, because CPF is indeed still your money and is part of your net worth (just not as liquid as you’d like it to be.)
Some smaller mistakes you might wanna avoid here are:
- Paying for your home entirely with your CPF, then leaving little or no savings for your own retirement
- Leaving the money in your Ordinary Account to grow at 2.5% when it could be doing 4% in your Special Account
Waiting till your 40s to start financial planning
We all have that one friend who’s like ‘aiya next time I earn more I will plan.’
But here are three facts:
Being financially responsible is a habit.
Being financially irresponsible is a habit.
Old habits die hard.
Once you’re past a certain age, it will take drastic action to change one’s financial course. In addition, your investments (if any) have quite a short runway to compound.
If you invest $1,000 per month when you’re 30, you get $1,227,087 when you’re 60 at 7% p.a.
If you invest $1,000 per month when you’re 40, you get $523,965 when you’re 60 at 7% p.a.
That’s more than double the results, fyi. Do the math here.
On top of that, increased commitments and reduced job security make both earning and saving difficult.
Our take? Spread the pain of prudence evenly throughout the decades, because hustling and saving intensely as a 40-year-old is rough on both the mind and body.
Thinking your children will save you
Money-wise, children are at best a speculative investment. Much like doge-coin. Or sneakers.
You either win big, or lose big.
If sole financial freedom is your goal: instead of having kids so that ‘someone can look after you in the future’, your money is best put into the stock market, or even your CPF Special Account, where it compounds at 4% p.a.
As we’ve said before, overburdening your children with your financial needs can lead to resentment, poor relationships and in extreme cases, abandonment. We’re not joking.
But you probably already know this. The Sandwich Generation is very real.
So sure, some of our parents might have raised us to be their retirement plan – it doesn’t mean we need to continue the cycle.
Letting your parents handle your money
I’ve heard this story more than once before: Your dad tells you that he’s really good with money and will invest it for you.
Look, it can be comforting to think that you can still rely on your parents and their wisdom.
But our parents grew up in the era of ever-appreciating HDB flats. Many of them equate the stock market to gambling and have a love affair with fixed deposits.
If anyone knows what to do moving forward, it’s us, not them.
Confusing high income for wealth
You might not believe this, but there is no law stating that you must ‘upgrade’ to a condo if you earn more than $14,000.
Lots of people get a pay raise and immediately upgrade their lifestyles, thinking that the good times last forever.
What do they do? They don’t save, they don’t invest and they get into debt at levels that only the wealthy can afford.
But here’s the thing: earning $14,000 today doesn’t mean you’ll keep on that streak for the rest of your life.
Income should not be the only consideration when buying that new house or a car. Net worth is equally, if not more important.
For that reason, we would not spend more than 10% of our net worth on a car and we’d use PropertySoul’s 3-3-5 rule when buying a house.
Remember people, it’s pretty simple:
Spend within your means = remain at the status quo
Spend below your means = grow richer
Spend above your means = go broke
Rich Dad Poor Dad’s Kiyosaki might have fallen from grace in the past decade, but he was right about one thing:
‘It’s not about how much you make, it’s about how much you keep’.
Thinking ‘retirement’ has to mean taking it chill
It’s easy to be skeptical about people who are enthusiastic about retirement, especially at this time of our lives.
One common comment we often get is ‘Why start so early? What if you retire early and have your mind waste away slowly?’
What they don’t get is that many of us are not pursuing retirement per se. We are pursuing the choice of being able to retire when we’re 40, 50 or 60.
There’s a difference.
At the same time, we’d like to also suggest what retirement could be like. You see, it’s true that many people think retirement involves chilling on the beach somewhere.
But it’s also equally true that many people spend their golden years working on passion projects or meaningful work that don’t necessarily earn a lot of money.
This could be in the form of activities like wildlife conservation, or uplifting disadvantaged groups via education.
So, how about this?
Start planning today.
Secure your basic retirement needs.
Work and fight for the causes you believe in.
Because how can you help others, when you can’t even help yourself?
Stay Woke, Salaryman
Other retirement mistakes we have written about it before:
- Playing it too safe with money
- Buying a house you cannot afford
- Not getting proper health insurance early
- Paying with CPF but then not investing
- Not diversifying your income
- Not understanding what you buy
- Not investing enough
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