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You mentioned that you are targeting to save $100,000 for your retirement. Presumably, that is based on today’s dollars. For the purpose of this response, let us work on the basis that you hope to have the funds in 16 years’ time when you turn 55.
It is good that you are aware that it is important to take into account the impact of inflation. Inflation will have an impact on your savings goal. The higher the average inflation rate per year, the more you will need to accumulate in order to have the same purchasing power. The table below provides a few examples.
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Required amount in 16 years’ time based on current dollars
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$100,000
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$100,000
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$100,000
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Assume average inflation rate over the next 16 years
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2% p.a.
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5% p.a.
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7% p.a.
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Required amount in 16 years’ time taking inflation into account*
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$132,278
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$218,287
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$295,216
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* The above figures are computed using a financial calculator or spreadsheet with future value and annuity payment functions. If you are not sure how to work out these figures, do check with someone familiar with such calculations or seek professional advice.
It is therefore advisable to review your savings goal at least once a year, to take into account current average inflation levels.
Once you have worked out your savings goal, you can compute how much you need to set aside regularly based on your estimated savings interest rate or investment return rate.
The table below gives you an idea of how much you need to set aside each year, depending on how much return you are able to earn on your savings or investments per annum. As an example, let us assume that you are working towards accumulating $218,287 at the end of 16 years.
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Assumed return per annum
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1%
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3%
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5%
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7%
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Amount you need to set aside each year*
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$12,648
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$10,829
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$9,227
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$7,826
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* The above figures are computed using a financial calculator or spreadsheet with future value and annuity payment functions. If you are not sure how to work out these figures, do check with someone familiar with such calculations or seek professional advice.
As you can see from the table above, the more return you can earn on your savings or investments, the less you need to set aside each year. However, do remember that the higher the potential return, the higher the risk. So, do not venture into investments solely based on promises of attractive potential returns.
If you are keen to invest your funds, do note that proper investment planning involves structuring a diversified portfolio with regular reviews and re-balancing. Investing regularly is a good way to help reduce the risk in your portfolio as you can purchase your investments at varying prices, both in good times as well as bad. Learn to tune out short-term noise and handle your emotions objectively. Monitor your investments. Take stock of your investment amount and savings goal at least once a year and make adjustments where appropriate. Do also take note that as you approach the end of your investment time horizon, you may want to take less investment risks.
If you are not sure how to go about structuring your investments, do seek professional advice. Do also make it a point to read all information regarding your investments, and keep abreast with economic and market developments. While your adviser can recommend investments to you, you have to still take responsibility for your investment decisions.
Posted by Association of Financial Advisers (Singapore) on 9/10/2008
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