How much should you invest and what returns should you aim for so you can retire comfortably?

Updated: Aug 1

Table of Contents

  1. Why do you need to invest?

  2. How much money do you really need to get started?

  3. First, we need to determine what is our financial goal

  4. How much will you be worth if you invest $10 a day and compound it at 15% per year for the next 34 years?

  5. Some important assumptions and things to consider beforehand.

  6. Your source of income which will finance your lifestyle after you retire.

  7. Option 1: Close all your positions and move them into defensive assets which pay dividends.

  8. Option 2: Continue to stay invested in the companies you bought into 34 years ago.

  9. The wonder of Compound interest

  10. How do you generate up to 15% per year?

  11. The growing Goose which lays golden “snowball” eggs.

  12. Should you focus on increasing your amount saved every month, or focus on increasing your returns?.

  13. A. Increase savings by $100.

  14. B. Increase returns by 1%.

  15. C. Increase both savings and returns.

  16. Aim not to engage in frequent trading- active buying & selling in hopes to achieve higher returns.

  17. Time is our best friend: How much extra would you have gained if you started investing 5 years earlier?.

  18. If you start at 25, instead of 30 years old with the same plan ($305 per month and compound it at 15% yearly returns).

  19. Start while at high school.

  20. Newly weds can do this to prepare for their children's tertiary education funds too.

  21. For people who are slightly older.

  22. Closing

Disclaimer: This communication is provided for information purposes only and is not intended as a recommendation or a solicitation to buy, sell or hold any investment product. Readers are solely responsible for their own investment decisions.

1. Why do you need to invest?

There are 2 main reasons why we should really consider investing our money: i. To prepare us for retirement: So we can achieve a level of financial stability when we choose to retire one day, it is not realistic to think that we can work forever until the day we die. We need to build a nest egg which can provide us some recurring income to support our lifestyle when we do retire one day. And with investing, perhaps that will allow us to retire earlier.

ii. To hedge against inflation

Even if you are a very high-income earner, or already have a high amount of net worth, With inflation rate of 2% per year, your net worth will be halved in 33 years time.

In many countries, inflation rate can actually be higher than 2%, hence it takes an even less amount of time for our money to be halve the value.

What happens when we forget about the weakening purchasing power our money due to inflation.

This is an online calculator you can use to calculate how inflation affect the value of money:

One of the main deterrent which stops people from investing is that they say “Investing is Risky”, or if they carry the mindset that if they “do not invest, they will not lose any money”, and also a popular Cantonese saying "淡淡定定,有錢(💰)剩" many Chinese may be familiar with.

What we often forget to realize is that if we do not do any form of investments, we will lose our hard-earned money for sure, since Inflation is close to inevitable. They just happen so gradually and in such intangible form that we rarely feel the pinch in the short to medium run.

Investing our money is actually a form of “damage control” against inflation.
Inflation, a silent killer.

“Investing” is only risky when what the other person really is doing is “Speculating” Speculating happens when the person “invests” in a speculative manner. When they:

  • Buy into companies purely based on “hear say”, “stock tips” without:

  • Basic understanding of the companies

  • When they have no simple idea about their business model and the revenue sources of the companies and their future growth potential.

  • Perform frequent trading (buying and selling of the same instrument) or attempting to “Time the market”

  • hoping to make some “quick gains”

  • Not having an idea on the basic financial health (amount of Debt) and performance of the companies

These actions will result in a lack of conviction in the investors’ theses for the companies they bought into, which will deter them from holding the stock long term with a sense of emotional stability.

When stock prices fall, they may panic and sell out their positions instead of dollar-cost averaging (buying more) to take advantage of the cheaper valuations.

However, with a desire to be financially-free in the future (very important requirement!), and equipped with some basic knowledge:

  1. Contrary to popular beliefs, investing successfully is not difficult

  2. It can be quite an enjoyable and fulfilling process, knowing that you are utilizing your hard-earned money to work hard (or in the most optimal manner possible) for you.

Often times, one of the most common remarks I’ve heard from people once they learnt some basics about investing is that they’ve only wished they have learnt it sooner and regretted not taking action (and investing) soon enough.

2. How much money do you really need to get started?

How much money do you need to get started? Assuming you are 30 years old, with 0 savings. You will need $10 a day, or $305 a month.

Invested properly over the next 34 years, you can have up to $3.85 million which will be enough for you to retire adequately.

3. First, we need to determine what is our financial goal,

If you, like most young people who are just starting your career and is working towards building your retirement funds, your investment strategy will be different to someone who is more financially established and are focused on wealth preservation.

People who fall in the latter category will choose asset groups which are more defensive in nature. ie companies which are more established, hence less volatile and may tend to pay more dividends.

This is where many people missed out on, the most important first step is to determine what are your financial goals (What are you trying to achieve financially), that will help determine your Investment goals, which will give you an idea what sort of returns you should be aiming for.

So, how much yearly returns should you aim for if you fall into the first group?

You should be aiming for at least 15% yearly returns.

With 15% yearly compounded returns, we can double our capital in 5 years’ time.

4. How much will you be worth if you invest $10 a day and compound it at 15% per year for the next 34 years?

If you invest $305 every month (or an average of $10 per day) through dollar-cost averaging method from January 2021, and compound them at a yearly return of 15%.

You capital would grow to a total of $3,853,198 by the end of your 33th year (when you are turning 64 years old).

Not too shabby at all.

Table 1: Monthly investments of $305 at 15% per annum.

This is the excel file I created which you can use to perform the calculation, you just need to fill in the cells in green (*Age, *Monthly contribution amount, *Yearly targeted returns, etc) and it will auto-calculate the values for you.

Investment returns calculator
Download XLSX • 111KB

I encourage you to experiment around with the figures in the file and see how much the total figures will change when you amend the figures and the total investment balance will be updated automatically and you can view the yearly balances similar to table 1 above for the yearly balance.

Table 1.1: Fill in the cells colored in green to calculate your expected returns.

Doing so will give you a clearer idea how much faster you can reach your goals if you either increased your *monthly contribution amount or if you increased *your yearly investment returns.

Now, although many of us would prefer to retire at an earlier age, compared to 64 years old

But let us just assume the “worst-case” scenario- which is not really that bad, especially if we have a job which we are interested in contributing towards and look forward to everyday, and we really have to work until 65 years old.

The real “worst thing” is that if we are unable to retire once we reach that age.

My most important objective of writing this article is to help you become financially self-sustainable when you reach your retirement age, so you can enjoy your golden years with a peace of mind.

Instead of needing to continue working until your elderly age - around 80 years old , or feel guilty having to rely on other family members to support you financially at that age, adding burdens to your loved ones.

A form of stress that none of us deserve at our golden years.

If you are someone who would prefer to find jobs which are not that strenuous and more suitable for you when you become a senior citizen (i.e. 60 age and above). And do not mind having a pay cut to transition into a job which provides you more work life balance by then.

Here are some of the best part time for senior citizens,

This is also why I chose the $305 monthly contribution amount which is more sustainable even at an older age. Or when working a job which pay a lower salary.

However if you would like to fast track your journey and reach your financial goals sooner, so you can retire earlier. There are some things you can do (which I will cover at the later part of this article) on how you can achieve that.

5. Some important assumptions and things to consider beforehand.

The global average life expectancy is 72.6 years old and 82.9 for Singaporeans

With improved medical care and easier access to better nutrition in the future.

Let us play it safe and assume that you will live until 100 years old.

Which is 17 years above the average life expectancy.

And assume the worst-case scenario that you can only lead a lifestyle which costs $3,000 per month (in today’s money value) at your 100th year.

6. Your source of income which will finance your lifestyle after you retire.

Now that we have the numbers we want to achieve (that we will have enough to lead a lifestyle which cost $3,000* per month when we reach 100* years old), we can work backwards to calculate the amount we need to reach our financial goals while accounting for inflation.

First, we need to determine how much would $3,000 cost in year 2091 (presumably the year you turn 100 years old) ?

Because both the CPI and GDP deflator (measures of inflation) have been increasing at a cagr of 2% in the past 50 years, we can assume that inflation rate will continue to maintain at an average 2% per year going forward.

This means at inflation rate of 2%, it will require $12,239 in year 2091 to achieve an amount which is equivalent to $3,000 today. (Future value formula = $3,000 x (1 + 2%)^71 years)

N: 71 years is derived from year 2091 minus 2020.

This is crazy isn’t it? To be able to predict and see how expensive a mere $3,000 today will cost 70 years later.

In your 34th year of investing, your investment capital should be worth at least $3,853,198. You have two options of:

Option 1: Close all your positions and move them into defensive assets which pay dividends.

Such as Reits, Bonds, Fixed Deposits or Dividend stocks which can yield up to 4% of pay outs per year.

Assuming if there are no capital gains for these investments and

With 4% of dividend payout out of your total capital of $3,853,198, that would yield you a monthly income of $12,844 every single month. (which is more than the required $12,239 amount to sustain your “$3,000” lifestyle when you reach 100 years old.)

Investing your capital in assets which pays out 4% dividends every year with no capital gains.

When these monthly pay outs are converted into present value, it would be equivalent to an average of $4,598 per month, which should be a pretty decent amount to live a comfortable life for your golden years.

In year 2091, you would still receive a monthly income worth $3,148 even if you overspent the excess incomes in the earlier years after you retire.

Option 2: Continue to stay invested in the companies you bought into 34 years ago

If at this point if you are still holding onto most of the companies you invested in 34 years ago,

which should be way more established now and may start paying out some of their profits as dividends to shareholders.

If their underlying fundamentals are still intact- meaning, if they are still great businesses to own at that point of time (although they may not be growing (sales) at such a fast rate anymore).

They may still continue to provide up to 5% of capital gains per year,

and if you receive a 3% dividend yields from them per year.

Your investment capital will achieve a total of $23,432,868 when you are 100 years old,

And you would have an average monthly income worth $8,936 for your retirement years from the dividend yields.

Investing in assets with 5% yearly capital gains and 3% dividends.

3% dividend yield is a conservative number here.

Because if you would have bought these stocks earlier at a cheaper price many years ago, your dividend yields will be much higher compared to investors who invest at a later stage at a higher price.

Example: If you would start performing dollar-cost averaging in Microsoft 10 years after they went listed (in 1996) until 2020, your average entry price would be at $41.55

Today (end of 2020) Microsoft is paying a dividend of 1% at their trading price of $222.75 = $2.22 per stock.

Now because your average entry price is at $41.55, your dividend yield will be 5.34% instead ($2.22 divided by $41.55).

And by the time your life presumably ends at 100 years old, you would not have touched your investment capital of $3,854,198 (or $23,432,868 if you stayed invested in the companies) at all.

You can either leave these monies for your next generation, your charity of choice

Or you could withdraw a portion of your investment capital for use if you would like to increase your lifestyle expenses throughout your retirement years.

Free from financial worries, relaxed.

7. The wonder of Compound interest

This is one of the reasons the rich get richer.

Because they understand and utilize the power of compound interests.

Eisntein’s quote about the fantastic abilities of compound interest.

The column bar graph illustrates how rapidly your total gains will compound overtime, even though you just maintain the reasonable (achievable) $305 investment amount every month (or $10 a day).

Total investment capital if you maintain the monthly investment amount of $305 and compound it over a duration of 35 years at a rate of 15%.

At the end of the 33th year, your monthly investment contribution of $305 would sum up to total of $124,440 (12 months x $305 x 34 years).

And your total investment gains would be $3,728,758 ($3,853,198 minus $124,440).

That is 29.96x total returns of investment!

In other words, that is an equivalent to $9,139 of “additional/ free” monthly income during your whole career, although your monthly investment is merely $305.

You’ve worked hard for your money, it’s time to make your hard-earned money work hard for you.

8. How do you generate up to 15% per year?

Before we proceed, please note that I am a huge proponent of investing for the long-term. And I am very against attempting to “time the market” and engaging in frequent trading (buying and selling of stocks).

There have been too many studies and also attested by my own experience that long-term investing (instead of frequent buying and selling- trading, attempting to time the market) yields the best results over the long run.

Here is a great article about the significance of investing and holding great companies for the long-term.

Own great businesses with great potential to grow at sensible valuations and hold them for long period of time.