When we discuss retirement savings in Singapore, everyone seems to be focused on reaching the milestone $1 million mark.
Depending on your earning power, you can reach that goal at various ages. So, what if we are fortunate enough to amass $1 million in retirement funds by the time we are aged 35? While that would be an impressive achievement, we still need to think analytically about how much would that pot of money be worth by the time we retire at age 65?
Here are various scenarios to find out how much a $1 million retirement nest egg today could by the time we retire.
Understanding Rates Of Return
First off, we need to understand the rates of return on our $1 million in order to get the amount we’d have when we reach 65. Second, we also need to establish the investment time horizon – if we can save $1 million by 35, we would still have 30 years to compound our returns.
Finally, we need to recognise that keeping that $1 million in our bank accounts today will only earn us a nominal interest return – and our spending power will be chipped away by the rate of inflation. As a result, we need to think about investing our savings.
Three decades is a relatively long time to ride out market cycles and any volatility. Of course, the first port of call would be to establish what exactly your baseline rate of return would be.
Read Also: Making Your First $1 Million In Singapore: How Much You Need To Save Each Month?
Moving Out Of Our Comfort Zone
Many of us may still associate retirement savings with our CPF funds. For the purpose of this exercise, we can look at what a $1 million nest egg will grow into within the CPF scheme too.
Our CPF Ordinary Account (OA) will pay us a return of 2.5% p.a. – this too barely keeps up with inflation rate. With our Special Account (SA) we know that the floor rate we earn is 4.0% p.a., even if the current interest rate is slightly higher at 4.05%.
Earning 2.5% on the $1 million will only leave us with a nest egg of $2,097,567 in 30 years – nearly doubling our initial investment. However, if we are able to earn about 1.5% more per year, using the CPF SA return of 4.05% compounded over 30 years will give us a total of $3,290,504 at 65 – more than tripling our initial $1 million or 50% more than what earning 2.5% p.a. will earn us.
As a point to note, it may be close to impossible to accumulate up to $1 million in our CPF accounts by the time we turn 35, mainly due to contribution limits too.
Read Also: 1 Million at 65 Using CPF? Here’s The Math Behind The 1M65 Concept
Of course, these amounts are not something we should ever sniff at but it also may not be enough for retirement depending on our lifestyle and requirements, as well as inflation. We should think seriously about investing in assets that can potentially generate an even higher return.
Naturally, investing in global equities or stocks have a consistent track record of generating the highest average returns among all the asset classes.
What can we expect on an annualised basis investing in global stocks? Typically, global stocks have provided an average annualised return of 7-8% over the past century and closer to 10% since 1970.
Remember, that’s not a figure that you can expect to get every year as returns from the markets (as we all know) can vary wildly from year to year.
Indeed, US stocks (via the S&P 500 Index) have returned an average annualised 10.5% since 1971 according to data from Nobel Prize-winning economist Robert Shiller.
But again, the variations in returns from year to year are extremely dispersed, as the chart below illustrates. That’s highlighted by the fact that only six years over the 97-year period – from 1926-2023 – did US stocks actually deliver returns near the average.
S&P 500 Index annual returns, 1926-2023
Source: Dimensional Fund Advisors
So, based on that, where would our $1 million be if we looked at the average 8% return over 30 years? That would give us a grand total of just over $10 million – there’s that compounding in action.
If we moved further up the returns curve and looked at an average 10% return over 30 years, our total at age 65 would be $17,449,402. That’s over $7 million more just for an extra 2% in annualised returns per year.
Recognising The Impact Of Inflation On Returns
Those are all great sums of money but we need to remember the erosion to our portfolios that is caused by inflation.
Inflation directly impacts our purchasing power, i.e. our money today is going to be worth a lot less in say 20-30 years’ time. So, when we look at our retirement funds, we should also take into account inflation and look at the inflation-adjusted (also known as the “real) rate of return.
In Singapore, the latest inflation reading for July 2024 saw that core prices rose 2.5% year-on-year. However, on average, core inflation has been running at 3.1% year-on-year through the first seven months of 2024.
Inflation is likely to drop further in the short term but let’s be conservative and assume a long-term average inflation rate of 3% p.a., meaning we can take around 3% off the annualised return we derive from our retirement funds each year.
In the Credit Suisse Global Investment Returns Yearbook 2023, the investment firm found that over the last 123 years, the annualised real return of global equities was 5.0%, insinuating a long-term inflation rate of around 3% given global stocks’ long-term average annualised (nominal) return of 8%.
Various Growth Scenarios For $1 Million Over 30 Years (Assuming 3% Annual Inflation)
Annualised Return Of A $1 Million Nest Egg
Total nominal amount after 30 years
Inflation-Adjusted (real) Purchasing Power In 2054 (Annualised Return – 3% p.a.)
~0%
(Bank savings)
$1,000,000
$401,007
2.5%
(CPF OA)
$2,097,567
$860,384
4.05%
(CPF SA)
$3,290,504
$1,368,010
8%
(Potentially lower bound for global equities)
$10,062,656
$4,321,942
10%
(Potentially higher bound for global equities)
$17,449,402
$7,612,255
Source: Author calculations, investor.gov
As shown, our purchasing power in 2054 dollars is going to be severely crimped by the effects of inflation. The reality of this has been borne out by the data too.
If we don’t earn a return on our nest egg, our retirement savings account will be worth less than half of its value today.
Read Also: Retirement Planning In Singapore: How Much Do I Need To Save And Invest To Retire At 55?
Making Our Money Grow Efficiently
Overall, just putting our $1 million in retirement funds into the CPF SA may seem like a great idea initially but the reality is that, in inflation-adjusted terms, we won’t be able to grow that amount by very much over the next three decades.
Of course, investing into stocks involves taking on an element of investing risk. However, even if we could achieve an 8% annualised return over 30 years, we’d still be able to meaningfully grow our retirement portfolio and utilise the long investment horizon we have to compound our returns.
By looking at the various outcomes of investing our $1 million over 30 years, we can better understand the rates of return we need to obtain to ensure we can retire in line with our desired lifestyle.
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