Can You Afford To Retire?

Date: November 7, 2013

When people are young they don’t necessarily want to think about retirement because it is something that won’t happen for a while. But when they get older, they don’t want to think about retirement either, because it is probably too depressing.

But we should seriously think about our retirement. And the sooner we plan for the day when we decide to stop work, the better. That’s because according to a recent survey by Manulife, we Asians could, on average, face a six-year shortfall in our retirement savings.

In Singapore, the shortfall is slightly worse than the Asian average – it’s around seven years. Elsewhere, Indonesians face a shortfall of 10 years, while the situation is most acute for Japanese savers. They face a shortfall of 13 years.

It seems that Singaporeans expect to draw on their retirement fund for around 18 years once they stop work. But on average, people in Singapore believe they only have enough money to last for 12 years. That is a shortfall, which in today’s money, amounts to S$250,000.

To run out of money in retirement is a frightening prospect. It is as terrifying as running out of petrol on a deserted road but with one big difference – the AA won’t be coming to your rescue with a can of fuel.

Running out of money in retirement can be avoided, though. But to sidestep poverty in old age, savers need to think about being investors. That’s because the study into Asian retirement identified two worrying facts. The first was that investors have grown increasingly pessimistic over equities. It would seem that stock market volatility has dampened investor appetite for shares.

The second, and perhaps not unrelated finding, was that Asians held an average of 22 months’ personal income in cash. In Singapore, it can be as high as 39 months of income.

Cash might, on the face of it, seem like a smart asset to hold. But Warren Buffett once cautioned: “Today, people who hold cash feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing, and is certain to depreciate in value.”

The thing to remember is that the stock market might, in the short term, appear volatile and not a place to entrust your retirement savings. But that is the nature of the beast.

In the short-term, stock market volatility is the result of the polarising emotions of fear and greed. When more people want to buy shares, then share prices could rise. But when more people want to sell shares, then prices could fall.

What rarely changes, though, is intrinsic value, which is a function of a company’s ability to generate earnings over the long term. That doesn’t alter from minute to minute or from day to day.

Influential British investor Jeremy Grantham once said: “Volatility is a symptom that people have no idea of the underlying value.”

This is where level-headed and savvy investors can steal a march on short-term punters who don’t have a clue about the underlying value of shares they are trading. One of the best ways of capitalising on their stock market ignorance is to simply add money continually to the market.

Since 1987, the Straits Times Index has risen from 824 points to around 3,200 points. That is an increase of 5% every year for 26 years. When dividends are included, the annual total return is a nominal 8%.

In other words, a monthly contribution of S$250 into a low-cost Singapore stock market index tracker over the 26 years could have turned into more than S$250,000. Interestingly, that is the pension shortfall that Singapore savers were worried that could face when they retire.

So, instead of spending time worrying about a potential pension shortfall, keep investing little and often to make sure the shortfall doesn’t happen.

To your investing

David Kuo

This article is contributed by The Motley Fool Singapore