You can’t just wake up one morning and decide to run a marathon. You set yourself a series of smaller goals before you can get there - from dragging yourself out of bed every morning to train, to building up your stamina and adding more miles to each run.
The same philosophy can be applied to saving for and becoming rich by retirement. It may feel almost too overwhelming to think about saving a million dollars for retirement, especially when it’s still decades away.
Time is your biggest ally here in building up a retirement nest egg. Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” Here is what setting a series of smaller savings goal can get you:
Age 22: You’ve just entered the workforce with a monthly salary of $3,400 and two months of annual bonus (median salary for fresh graduates in Singapore). You save 24% of your salary (average savings rate in Singapore) and have made the smart decision of investing your savings into an 80% stocks and 20% bonds portfolio.
Age 29: By diligently investing your savings every month, you have now reached your first small goal of saving over $100,000.
Age 40: You have just hit the $500,000 mark.
Age 47: Congratulations! You are now officially a millionaire.
Age 60: The effects of compounding have snowballed. You have now saved over $3 million.
Age 65: It’s time to enjoy the fruits of your labour - you can retire with a nest egg of over $4.5 million. Assuming annual inflation rates of 3%, this is equivalent to ~$1.26 million in today’s money. For Singaporeans, this excludes what you have in your CPF, where you have been saving 37% of your monthly salary until you were 55. Imagine how much more you could have to spend in your retirement if you had invested part of this.
This assumes your annual salary increases 3% per year and annualised long-term returns of ~7% per annum for your 80% stocks and 20% bonds portfolio. Returns in any given year are far from average, but we are investing over the long-term. As a reference, the average annualised returns for the S&P 500 since its inception in 1928 is ~10%.
There’s a nifty math shortcut to see approximately how long it will take to double your portfolio: just divide 72 by your rate of return. For example, if you can earn an annualized return of 7.2% on your portfolio, you will double your money every 10 years.
Doubling your money every 10 years by taking some market risk to become rich by retirement is totally doable.
Unfortunately, you can’t just wake up one morning and decide to be a millionaire today, a year later, or even 5 years later. Your get-rich-quick plan probably isn’t going to materialize. We have written about the impending pension crisis and how we should all prepare better for our retirement (read more: What keeps you up at night? It really should be the global pension crisis).
Start small. Start early.
Harness the power of time in the markets and the snowball effect of your money working for you.