In theory, it really isn’t that complicated to achieve an early retirement.
For this post’s sake, let’s agree that early is defined as below 45 years of age. This is reasonable and also considered pretty early for most, considering official retirement age in Singapore is currently 65. And by retirement, what I mean is that one is no longer obliged to work for a living.
Here are the three steps involved:
1. Save 50%* of your total income (inclusive of bonuses)
2. Invest in a basket of dividend stocks that returns 7-8% (3% to cover inflation and 4%-5% returned as dividends)
3. Continue doing this for about 17* years
Then voila! If that individual continues to live on the same amount of expenses, he would no longer have to work at a job he despises just to bring home the bacon. Isn’t the steps above simple? But the problem is that simple does not mean that it is easy. Here are some reasons why I think most Singaporeans will not retire early.
“One more year” syndrome
For some, the retirement years should be closer to the utopia of an endless vacation rather than the life they had while working. Such retirements are not called golden for nothing. They are especially costly.
So one is tempted to postpone it by working for another year, and then another. There’s nothing inherently wrong with that, since it’s just a trade-off. But no one can guarantee that you will still be alive or energetic enough to enjoy that “more luxurious” retirement after that one more year.
And then there are others who would simply not contemplate retirement until they have achieved a 5-figure monthly passive income. Using the same example, that would amount to a need to accumulate $3 million in retirement assets and the household would need to earn an average of $20,000 a month over that 17 years if we maintain the 50% savings rate. Realistically, only the top quintile of income earners would come close to this income.
Believe that investing is like gambling
Most people still treat the stock market like a casino. The successes of market timing or catching the next growth stock dominates the lunchtime chat of white collar workers (that is if they are not talking about the latest celebrity divorce or lives of characters from the latest serial dramas). They are enamoured by the fact that their friend managed to purchase Blumont shares at 11 cents on 17 Oct and then sold them at 24 cents just four days later. Achieving >100% return over the weekend! (I would bet that the friend didn’t tell you he bought some of the same shares one month before too.)
Nobody likes hearing about the slow, boring returns of local telcos or REITs. (What?! It’s not even 10 or 12%???!!!!) Because of this mindset, they would never be keen to save 50% of their salary to build a more conservative portfolio that is expected to return an average of <10% a year.
Not willing to reduce expenditure
It doesn’t matter if the person is earning $3,000, $10,000 or even $30,000 a month. Most people find it hard to save 50% of their income (actually if you save most of your bonuses, the ratio could be lower than 40% of the month paycheck). And that is even if they are earning a few times of what their parents had done. If we rightfully exclude “savings” used for money bombs (this and that), it becomes even more difficult.
Instead, most would use their 10% of the income saved to punt either 4-D/TOTO or penny stocks, hoping to make a quick and big gain. And as we all know, the odds for these “investments” (more like lotteries) are less than favourable.
There’s actually a significant segment of the population that earns below $25,000 a year. Although saving 50% of their income is not impossible, it would require much more effort. The lower the income, the higher the amount of effort required. (Have to admit even I would struggle to save anything if I earn <$10,000 a year) But the fact remains that most of them are either unable/unwilling to increase their income or unable/unwilling to learn to put in that extra effort.
Early retirement is not enticing enough
For some, the option of early retirement is just not worth the above “sacrifices”. Perhaps they don’t really detest their jobs (or simply won’t admit to it) as much as me, or they do not know what to do with the additional time at hand if they didn’t had to work.
My wife actually belongs to the latter camp and she actually found it depressing to “have nothing to do” in her teenage years (too bad for her that I hadn’t started dating her). She worked during all her summer holidays after a one to two weeks break. Therefore, it’s also not surprising that she doesn’t feel the same urgency as I have to save even more than what we currently do.
But luckily for me, she is generally happy with our current lifestyle and is already starting to feel that most aspects of lifestyle upgrades are just inefficient and a waste of both our money as well as natural resources.
*If 50% is too much (maybe you should just give it a try), or you think 17 years is too long (way to go, bro!), you can refer to this post from Mr Money Mustache to re-calibrate the targets.