Is $1 million enough to retire on?

WHO wants to be a millionaire? One million dollars is getting short shrift these days.

"$1 Million In Retirement May Not Be Enough", a Forbes article in 2011 warned readers. A personal finance columnist for finance website The Motley Fool penned an article in 2012 asking if the idea that "a million dollars is enough" today's "retirement myth".

Evening tabloids here have also picked up on the idea and cited calculations by financial planners to show how, hard as it might be to earn $1 million, that sum might not do.

Even Chinese Nobel literature prize laureate Mo Yan, after receiving his $8 million Swedish krona (S$1.5 million) cash award, said he wanted to buy a big house in Beijing but "people reminded me not to buy too big a house" as the money can only buy a 120 square metre property there - which is about the size of an older HDB five-room flat.

Singapore reportedly has the world's highest proportion of millionaire households. A Boston Consulting Group survey published in June 2012 estimated that there are 188,000 households with US$1 million (S$1.22 million) of private disposable wealth excluding businesses, property and luxury goods. That is more than one in six households here.

Yet with the price of a condominium in Singapore at around $1 million and up, and an overseas university education costing up to half a million dollars, people can be forgiven for thinking that even $1 million in the bank will not be enough for them to live on.

This, despite how $1 million in the bank is not an easy sum to amass by most standards. Many Singaporeans in their 50s and 60s are still paying off their HDB mortgages and might not even have $100,000 in retirement savings.

One million dollars, meanwhile, can be spent relatively quickly. A simple multiplication calculation will show that if one spends $4,000 a month, or around $50,000 a year, $1 million dollars will only last around 20 years if there is no inflation.

That is hardly encouraging. Even if this $4,000-a-month spender wins $1 million at the lottery, quitting work the very next day is likely not an advisable thing to do, financially speaking.

Are Singaporeans doomed to work until they drop, even with one million dollars in the bank?

Let us get back to reality here - reality being defined by the average Singaporean family living in a HDB flat, which more than 80 per cent of families here do.

The five-yearly Household Expenditure Survey, last conducted over 2007 and 2008, put the average monthly spending of HDB households at $3,100 a month.

This sum includes spending on usual items like food, transport, clothing and recreation, but excludes the rent people would otherwise have paid on their homes.

Singapore has become a bit more expensive since the last survey was conducted five years ago. Let us assume prices rose by 15 per cent - the estimated rise in the consumer price index these five years. This would put the average spending level of each HDB household at $3,600 a month.

Suppose one is ready to retire, having amassed this sum of money over the years.

Hypothetical millionaire, let us call him or her M, is the only breadwinner for a typical household of 3 or 4 individuals. This means that M is supporting a stay-at-home spouse and two children of school-going age. The family lives in a fully paid off HDB flat.

M, having reached the $1 million mark, is in his 50s or 60s and ready to retire. His family needs to spend $3,600 a month.

Let us suppose, furthermore, that M does not just leave that million dollars accumulating a paltry 0.25 per cent rate of interest in the bank, which is the current 12-month fixed deposit rate for accounts holding up to $1 million.

Rather, M invests that $1 million in the stock market and gets a return of 4 to 5 per cent a year. Data from Singapore Exchange (SGX) shows that stocks on the Straits Times Index returned 5 per cent a year on average in the last 10 years.

A similar yield can be obtained by renting out property - which has returned 5.8 per cent a year in the last 10 years, based on SGX data.

Let us conservatively assume that M earns 4 per cent on his investments in either stocks or property. On a $1 million principal, M will be watching rental payments or dividends roll in at a rate of $40,000 a year, or $3,300 a month.

That is a $300 shortfall every month. If M can somehow make up for it, he can theoretically maintain his family's lifestyle indefinitely while preserving his $1 million principal, assuming prices never rise.

Prices do rise, however. Let us add the effects of a rising cost of living, and assume M draws down on his principal amount instead of just living off the dividends.

We assume that core inflation, a measure of rising prices that excludes the volatile components of cars and housing, will continue at its historical rate of 2 per cent a year.

This means that the $3,600 spent a month by M's family might eventually rise to $5,200 a month by the 20th year and $6,400 a month by the 30th year - an admittedly scary thought.

Would $1 million be enough?

Without inflation, calculations show that M would need $750,000 to maintain his family's lifestyle for 30 years after he retires, assuming a 4 per cent yield on investments every year before the first annual withdrawal is made. With inflation of 2 per cent a year, the amount M would need to last 30 years is $954,000.

In short, with a million dollars, an average family now should be able to keep going for at least 30 years based on their current spending levels without any income from work coming in.

Thirty years is enough time for the children to grow up and start earning their own money. Family expenses will drop when the children start their own family and move out.

Of course, expensive private hospital fees, children's education costs at an overseas university, cars, branded goods and luxury holidays can quickly throw this equation off balance.

Households living in private property tend to spend more on education, private transport, and housing. A typical household living in a private flat, for example, will spend around $7,500 a month this year. To be able to spend at that level for 30 years, and assuming a 4 per cent rate of return on their investments, the amount they will need is doubled.

This family needs more than $1.5 million assuming zero inflation, and $2 million with 2 per cent inflation. A typical household living in landed property would need around $2.5 million to maintain their spending levels for 30 years with inflation.

So M will be happy with $1 million if his name is also Middle, Mainstream or Moderate, and his spending pattern follows that of the typical HDB household.

If his household spends like one living in a private flat or a landed property, or if he likes to call himself Maserati or Mont Blanc, probably not.

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