How much do I have to invest?
If you are just starting out in your career, you might not have a significant amount of capital to invest. However, investing is no longer “expensive” in today’s context. With a minimum sum of as low as S$50, you can be investing regularly through a Regular Savings Plan (RSP) or through Robo-Advisors (platforms that uses algorithms in the investment process).
How much do I need to retire?
This varies from individual to individual. A common rule would be the “Multiply by 25” rule, which estimates how much you will need in retirement by multiplying your desired annual income by 25.
For example, let’s assume that you will like to have $50,000 in annual income by the time you retire. You will hence need a retirement fund of (S$50,000 * 25 = $1.25m)
If you have S$1.25m in your portfolio that generates a real after-inflation return of 4%/annum (S$1.25m * 1.04 = S$1.3m), then you will never run-out of money.
Adjusting for inflation
Here’s an important follow-up detail: You will need to adjust these numbers for inflation, especially if you’re several decades away from retirement. Here’s a quick summary:
- If you’re 10 years from retirement, multiply by 1.48.
- If you’re 15 years from retirement, multiply by 1.8.
- If you’re 20 years from retirement, multiply by 2.19.
- If you’re 25 years from retirement, multiply by 2.67.
Assume that you want to withdraw $50,000 per year from your retirement portfolio, and you’re 25 years away from retirement. Multiply $50,000 x 2.67 = $133,500 to arrive at your inflation-adjusted target.
These numbers seem scary, but don’t let that deter you in planning for your retirement.
How long is my investment horizon and what do I want to achieve from my investment?
Is your investment for capital appreciation to fund future expenses or are you investing to prepare yourself for retirement?
These are questions that you need to ask yourself. I believe that one should start off their investment journey in a prudent manner by first learning the ropes.
Investing should be seen as a marathon and not as a sprint. If you do have a long investing horizon, you should expect your returns to generate an annualised return of around 6-7%.
By starting early, you will have a long runway to compound your returns, letting the 8th “wonders of the world” show you its magic.
Do I want to do it myself or engage a professional?
A Do-It-Yourself (DIY) approach will entail a potentially steep learning curve as well as time to becoming an investment expert. Do you have the necessary resources (time, monetary etc) to engage in active management of your own investment or should you be hiring a professional?
With the proliferation of low-cost investment assets such as ETFs and index funds, a DIY approach should no longer be seen as an expensive one.
Alternatively, you can also engage a robo-advisor to start your investment journey.
How much are you willing to lose?
Are you a conservative or aggressive investor? For those who are starting off early with a long run-way to retirement, you might tend to be less risk-averse and engage in more “risky” investment assets such as equity vs. someone nearing retirement that will need to ensure his/her capital is well preserved.
Do see if you are more suited as a PASSIVE investor or an ACTIVE one. Either way, the key is to start your investing journey AS SOON AS POSSIBLE.
