Retirement Planning Seminar for United World College Teachers in Singapore – Part 1

I’ve been asked to talk to some teachers at United World College, Singapore  about planning for their retirements, and I thought I’d write out the basics here, with the hopes that some other people might find it helpful. 

I understand that most of UWC’s teachers are British.  My apologies, in advance, for using dollars instead of pounds.  It’s a keyboard thing.

The objective of my first talk is for people to be able to answer these two questions:

  1. How much money will you likely need to retire?
  2. How much money will you need to invest to reach that desired amount?

Q1. How much money will you need to retire?

Here’s a first step to take:

Imagine that you’re 60 years old, and you’re going to retire today.  How much income would you want to retire comfortably?  Would you be comfortable living on $40,000 a year?  Or would $80,000 annually be the figure you’d want?  If you’re going to be getting a small amount from the government, consider that gravy.  Considering that most teachers at United World College won’t be earning a typical teacher’s pension, the amount received from government assistance won’t likely be much.

Consider, also, whether you’ll have a mortgage-free roof over your head at age 60.  If you won’t, then you’ll have to consider mortgage payments or rental costs when figuring out a range of incomes that you’d aspire to if you were retiring today, at age 60.

Nobody can give you this answer because it’s so dependent on you.  But I’ll create a fictitious character for this scenario to show how the process could work.

Malcolm Elliot decides that he wants an income of $50,000 a year if he were retiring today.  He’ll have a roof over his head (mortgage free) and he’ll get some form of government assistance that he hopes to use for a bit of travelling, rather than needing it to buy groceries and pay his regular bills.

Year:  2011           

Malcolm wants:   $50,000 a year upon retirement

But Malcolm is only 40 years old today.  By the time he’s 60 years old, that $50,000 won’t go very far, thanks to the ravages of inflation.

So Malcolm needs to calculate the amount of income he’d need in the year 2031.

Nobody knows what levels of future inflation we’ll have.  We can only use the past rates to estimate the future.

Over the past 90 years, inflation in the developed world has averaged slightly more than 3% annually.  Let’s be safe, and assume that inflation will be 3.5% per year for the next 20 years.  Of course, it could end up being higher or lower, but for this purpose, we’ll calculate future inflation at 3.5% annually.

Now Malcolm needs to figure out how much “income” he’d need in 2031 (when he retires) to give him the same buying power that he’d get with $50,000 today.

An online compounding interest calculator would do the trick.

The following online calculator MoneyChimp is a nifty, simple tool for this: 

Current Principal: $
Annual Addition: $
Years to grow:  
Interest Rate:   %
Compound interest
time(s) annually
Make additions at
start
end of each compounding period
 
Results
Future Value: $
  1. In the current principal space, I typed in the amount of income that Malcolm would want, if he were retiring today.
  2. I left the annual addition at 0 because we’re just trying to figure out how much income would be needed in 2031, to give us the buying power of $50,000 today.
  3. The interest rate I used was 3.5%, as a rough guess of what inflation might be over the next 20 years.  As previously mentioned, this is very slightly higher than the 90 year historical average for developed countries, but we have had 20 year periods where inflation has been much higher. 

The future value that you see ($99,489.44) represents the income you’d require in 2031, if you wanted the same buying power that $50,000 would give you today (assuming 3.5% inflation)

So how much money will Malcolm need to provide $99,489 in annual income?  If he has total investments amounting to double that figure, it would only last him two years, right?

Malcolm plans to live until he’s 90 or 100.  He eats a lot of broccoli.

So what would the size of Malcolm’s investment portfolio need to be in order to provide him with income of $99,489 per year?

Studies show that if you want the highest chance of not running out of money as you age, the maximum amount that you should withdraw from your investments is 4% per year. 

Keep in mind that if you do this, you will also likely be able to give yourself “raises” to cover inflation, and based on historical probabilities, you won’t likely run out of money.

In this case, Malcolm would need an investment portfolio size of $2,487,236 in the year 2031.

By selling 4% of this portfolio, he’d be selling $99,489 worth.  And each year, he could give himself a 3.5% raise to cover inflation.  For example, in the first year he could sell $99,489 to live off.  And the second year, he could sell $102,971 for his living expenses.  The teachers’ pensions in the UK (as they are in many countries) are indexed to inflation, meaning that there are increments over time to allow for the increased costs of living.

That figure of $2,487,236 might look daunting.  But for teachers at United World College, it shouldn’t be.  Your incomes are solid, and there’s a reasonable probability of a 40 year old teacher at UWC attaining a portfolio of that size by the time they’re 60.

This leads us to our second question:

Q2. How much money will you need to invest to reach that desired amount?

Let’s use Malcolm to provide a further example.

At 40 years old, let’s assume that his current investments amount to $200,000.

Let’s also assume that his investments can make 8% annually for the next 20 years.  This is less than the UK markets/US markets/Canadian stock markets have averaged over the past 20 years, and it’s less than they have averaged over the last 90 years as well.  So it might be a decent assumption, going forward.  And we can always play with lower probabilities in case it isn’t.

Here’s Malcolm’s profile:

  • Age:  40
  • Current portfolio size (current principal):  $200,000
  • Amount that he invests annually (annual addition):  $30,000
  • Wants to retire in:  20 years
  • Assumed rate of return:  8% annually
  • Malcolm’s portfolio goal size:  $2,487,236

You can see by the compound interest calculations below, that Malcolm could reach his goal if he invested $30,000 per year, and if his investments made 8% annually.

Here it is, based on that compound interest calculator we used before.

Inputs
Current Principal: $
Annual Addition: $
Years to grow:  
Interest Rate:   %
Compound interest
time(s) annually
Make additions at
start
end of each compounding period
 
Results
Future Value: $

 

However, if his investments make just 6% annually (which is entirely possible) then Malcolm won’t reach his target of $2.4 million while investing $30,000 a year.  For this reason, he may want to invest more, to give himself a margin of safety.  Here’s what the same thing looks like below, assuming that Malcolm makes 6% interest.  Instead of $2.4 million, he’d end up with $1.8 million.

Inputs
Current Principal: $
Annual Addition: $
Years to grow:  
Interest Rate:   %
Compound interest
time(s) annually
Make additions at
start
end of each compounding period
 
Results
Future Value: $

 As you can see above, the difference between making 8% annually and 6% annually is substantial.  For Malcolm to reach $2.4 million, assuming a 6% annual growth, he’d have to invest roughly $46,000 a year, as you can see below:

 
Inputs
Current Principal: $
Annual Addition: $
Years to grow:  
Interest Rate:   %
Compound interest
time(s) annually
Make additions at
start
end of each compounding period
 
Results
Future Value: $
 

Small percentage differences of investment returns (ie. 6% vs 8%) can make significant long term differences.

Here are the questions you’ll need to find answers to:

  1. What would I want, in terms of annual income, if I was retiring today?______________________
  2. What does this equate to, considering 3.5% inflation, at the planned year of my retirement?______________________
  3. Considering that you’ll be selling 4% of your investment portfolio each year (while providing small raises for yourself to cover inflation) how much will your investment portfolio need to be worth when you retire?_______________________________
  4. Based on your current portfolio size, and assuming a rate of investment return of 8% annually, how much will you need to invest each year to reach your goal? __________________________
  5. Based on your current portfolio size, and assuming a rate of investment return of 6% annually, how much will you need to invest each year to reach your goal?__________________________
  6. Assuming a future return of 8% annually, are you currently investing enough to reach your goal?_________________________________
  7. Assuming a future return of 6% annually, are you currently investing enough to reach your goal?_________________________________

At my second session, I’ll provide evidence based strategies to give you the highest statistical odds of investment success, while providing safety at the same time.

 Cheers,

Andrew Hallam





Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I'm happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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11 Responses

  1. DIY Investor says:

    This is really excellent. You have laid out the right questions to ask and that's key. I would just add that this can be somewhat of a Rubik's cube type of situation with all the moving parts and that people should be encouraged to revisit the calculations at least every couple of years. For my part I'm afraid our inflation assumptions might prove to be too optimistic and therefore need to be revisited.

  2. The Dividend Ninja says:

    Andrew, an excellent article! You are a pro – wish I had a seminar like that when I was younger. Imagine if this type of knowledge became part of the education system in general.

  3. Mike says:

    Hey Andrew,

    I was just commenting on my blog (replying to Kevin) that one of the biggest things we all underestimate is just how much we need to save at retirement to sustain a comfortable retirement.

    This is an excellent post. I can tell you put a lot of effort into this. I think you may have stumbled across a niche as you'll now be speaking on the topic. I am a pension consultant and studies say that only 15-20% of people, really know how much they need to save or have at retirement. So, kudos to you for picking up on this. Again, very useful post!

    By the way, how was the trip last month? Take Care, Mike

  4. @DIY Investor

    Thanks for the compliment Robert,

    And I entirely agree that this process needs revisiting as factors change. Inflation can be one of them. Also, people might decide that they want more money in the future….or they might decide that they need less. So they could adjust how much they put away.

    For those who want more money than they initially planned for, or for those who find that inflation is taking bigger bites than they might have thought, there's one possible consolation/solution. As they get paid more (while their careers advance or while natural inflation adjusted salary advances take place) the investor could invest more money with each pay increment, to cover any potential surprises. It's better to have too much money than too little, I'd say. I never hear anyone complaining about the former.

  5. @The Dividend Ninja

    Thanks Ninja,

    I think this kind of course/seminar should be mandatory for people entering the work force. It might be a tough sell on a bunch of high school kids. But as a nation-wide weekend course for every college/university graduate or tradesperson, I think it could go a long way.

    As a school teacher, I've been taught that I need to have objectives. When starting a new unit or a new lesson I have to know a few things:

    1. What's my objective?

    2. What do I expect my students to learn?

    3. How will I know that this learning has occurred?

    Planning is essential. But we aren't taught how to plan for our futures: how to set objectives, how we expect to meet them, and how we know when our goals/objectives are being met.

    Culturally, not having this sort of thing educationally formalized has always puzzled me a bit. But it feels great to help people who haven't learned this stuff.

  6. @Mike

    Thanks Mike,

    I didn't know that you were a pension consultant. I feel especially pleased that you like what I've put together then! Thank you!

    And thanks for asking about the trip. We had a super time. I really should write about it and put some pictures on my blog. You would have loved it! The students were amazing, so it was a bit like being on a holiday. The Himalayan region is beautiful and we had a few cloudless hiking days that made for some spectacular long range scenery.

    The group we used was called Snow Leopard, and I highly recommend them. At night, they gave us hot water bottles for our sleeping bags (it got really cold at night!) and in the morning, they'd knock on our tent "doors" and have trays of hot chocolate. We had two people in each tent, so considering that there were 22 of us in total, that was a lot of running about in the cold to make us happy. It was incredible what kinds of foods these guys could whip up while we were in the middle of nowhere. A team of guys would hike hard to get ahead of the students. They'd get to a place, mid-day, and then they'd cook up a storm of Indian food that was as good as anything you'd get at a restaurant. It was incredible. I'm not used to 5 star camping like this, but I have to admit, it sure was nice.

  7. Mike says:

    Andrew,

    In my experience working with defined contribution (mainly 401k) plans, the big missing link is this: We can get people saving (say for example 2 or 3%) tell them to get out of debt, etc, etc. But most people do not realize just how much they need to be saving today in order to (realistically) live a comfortable retirement. They just sorta "shoot, fire, aim" with the aiming (planning) beginng when they've let 15-20 years go by. Then it becomes a matter of playing catch up. Mix in a bad market cycle and people become a bit panicked.

    So, this "simple equation" above and the questions you're asking are very important (moreso than whether to go with an active or passive investment approach, IMO) Like I said, I think you have come across something that is a major need in this space – I'd encourage you to run with it. I think you'll find it to be welcomed as people are looking for direction.

    Sounds like the trip was a blast. It would be cool to see the pics and read more about that!

    Take Care, Mike

  8. @Mike

    Thanks Mike,

    I really think you're right about the importance of saving. It doesn't matter if you can compound money at 6% or 16% annually, in one respect. The person starting earlier, investing 20% of their salary, and making just 6% a year is going to come out far ahead of the procrastinator who waits, and waits, then invests 8% of their salary, despite making a much higher return.

    Thanks for the enouragement Mike.

  9. @Andrew Hallam

    To further emphasize Mike's point, here are two scenarios:

    Person A starts investing at age 30. She invests $2000 a year and makes 8% per year as an average. In total, after 30 years of investing, she has invested $60,000 and the account would be worth $226,566

    Person B starts investing at age 45. He invests $6000 a year, and makes 8% per year as an average. In total, during his 15 years of investing, he invests $90,000, and at age 60, despite investing far more, his account would only be worth $162,912.

    So if you start earlier, you can end up saving less overall, but making far more money.

    Mike's other point deals with risk. We know that the stock markets have grown by about 9%-10% annually as an average over the past 100 years. But over shorter periods of time, they might not. They could grow faster or slower than that. Someone with just a 15 year investment horizon has to hope that the markets are generous during that 15 year period. Whereas, if you start investing earlier, and you invest for a long time, you have higher odds of getting that average return of 10% or so, which can elude many short-term investors, at times (such as during the period from 2000 to 2011).

  10. Steve says:

    Hey Andrew!

    Just got through reading your book and love the simplicity of your investment approach. Wish I had read it 20 years ago!

    I'm new to Singapore, 41 years old and a teacher – no investments to speak of and no property owned back in the UK. My wife and I would like to buy a house in France to retire to…do we invest a little each month as well as buying a property or do we put all spare cash into paying off the property as quickly as possible? Have only been teaching for a few years so not much pension banked in the UK. Would be great to meet sometime and well done on a fabulous book!

    Thanks for all the great info.

    • Many thanks for the kind words about the book Steve.

      Your question is certainly one that gets hammered about quite a bit: Should you pour money into paying off a mortgage and/or invest instead?

      The argument for investing money (as well as paying your mortgage) is that the long term investment returns will likely be higher than your mortgage costs.

      However, there's no feeling like being debt free…with a roof you can climb under, regardless of your employment situation.

      Personally, I tend to be a bit wimpy. When I have debts, I pay them off.

      My answer to your question, then, becomes a very personal one–certainly not something everyone would agree with, but it represents my personality.

      If I were you, and I knew exactly where I wanted to live eventually, I would buy that home and pay it down as aggressively as possible without investing anything. Being mortgage free is an amazing feeling!

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