“Average Singaporeans” cannot retire early – findings from OCBC Financial Wellness Index

The “average Singaporeans” cannot retire early… Well… that’s not good. That’s an interesting conclusion that I came to after looking at the results of what OCBC released this past week.

(This is not a sponsored post.)

On Monday 15th July 2019 OCBC released what they called “Singapore’s First Financial Wellness Index.”

The study involved a survey of over 2,000 respondents – ages between 21 and 65 – answering 44 questions meant to assess their financial wellness.

These questions were formulated from a list of 10 pillars that OCBC’s financial experts find important for determining one’s financial wellness.

These 10 pillars were then broken down into 26 indicators which informed the questions of the survey.

The claim that OCBC is making here is that these indicators, when taken together, provides a good profile of one’s financial life.

Although I’m not 100% sure how valid these indicators are in assessing a person’s financial wellness, it resulted in quite a bit of interesting data to look into – and of course I couldn’t resist!

(If you’d like to read the entire set of 37 slides, you can download it from OCBC’s website here.)

So let’s take a look at the implications of some of the findings below! Here’s a summary:

1. The “Average Singaporean” cannot retire early
2. Singaporeans in their 20s will likely only be able to retire in their 80s but could actually retire by in their 40s if they play their cards right
3. Those between 40 to 54 are far behind and unlikely to retire at all

TL;DR

Singaporeans has great potential to be financially independent and retiring early. All the pre-requisites are there – relatively high savings rate, seems to know that they need to invest, and many are planning for retirement.

However, there’s a lack of investment knowledge. It seems that Singaporeans tend to either be overly conservative with their savings or when they’re not, they are excessively speculating their money away.

With just an adjustment to a better investment approach, retirement and financial independence would be within reach for many.

Interesting, huh? Here are the gory details (that’s what you’re here for right?!)

The “Average Singaporean” cannot retire early

So what makes me say this? Well, let’s take a look at the first finding.

Savings Rate

How much are the average Singapore resident saving? Here’s OCBC’s findings:

The savings rate of an average person seems to be about 26% of their salary. According to OCBC, that seems to be “good” basics. Now, OCBC never clarified whether this is including the employee CPF contribution or not, however I’d assume not. If it included CPF contribution, I would not consider 26% as “good.”

So based on this, we can also deduce that an average Singaporean is spending up to 74% of their monthly income.

Once the money is saved, let’s take a look to see how many of the people actually invest to grow the money instead of just hiding it under a mattress.

Investment Rate

Hmm, 34% of the average Singaporean do not invest – which means 66% does. However, 36% feels that their investments are not performing up to their expectation and 27% of the people speculate excessively.

Unfortunately we don’t know what the actual returns of the investments are and what resulted from the speculations (potentially negative.)

Although we don’t have a lot of information, with the savings rate and investment rate, we can do some analysis to determine how long it would likely take the average Singaporean to have enough to retire.

Time to Retirement

Let’s assume that, based on the saving number above, the average Singaporean must spend 74% of their monthly income as living expense. This means – using our trusty 4% rule – we can estimate that the average Singaporean will need 22,200% of their monthly income in investments before being able to fund a 30-year retirement.

Given that 34% of the average Singaporeans do not invest, we can assume that the non-investors placed the funds into the SSB earning enough to off-set inflation (assume inflation is exactly the same as the SSB rate.) Here’s how long it would take for the non-investor to save enough to retire:

75 years

In fact, we can do the same calculations for all the possible savings rate:

Assuming that the average Singaporean started saving at the age of 25, they’d be 100 before having enough to retire. Practically never.

(Luckily we’re not saving just 5% of our income right? Who’d want to be able to retire only after turning 500 years old, phew!)

What about those who actually invests?

“Well” you might say, “that’s just the people that does not invest! Of course since their money is never grown, it would take forever. What about the other 66% that saves?”

And you’re right, so let’s do that calculation.

Let’s assume that for the remaining 66% who do invest are getting a good 7% average real rate of return (adjusted for inflation.) How long would it take now? Here’s the same chart with 7% real return:

Much better! Looks like if the investing group can manage a 7% return above inflation annually on average, then at 26% savings rate, the investor will be able to afford to retire after 26-27 years!

Assuming the same age of starting to save, then the average investing Singaporean should be able to retire by the age of 51-52! Pretty good – and relatively early!

A more realistic rate of return

However, as we see above:

1. 36% of investors are not performing up to their expectations.
2. 27% are speculating excessively – which means they have higher risk of generating lower return (but also could get much higher returns.) However, consistently outperforming is unlikely as we know from many research that 85% of professional fund managers underperform the index returns. It’s unlikely that the average investor will outperform here when speculating excessively.

So let’s assume that these investors only manages to generate 4% in real return – 3% less than our benchmark of 7%:

At this rate of return – about 2% above the CPF SA – the average Singaporean will be able to retire at around 60. Just nice, but I wouldn’t call that early.

However, this is probably the best case scenario.

If we assume that people’s income increases over time and the 26% is their “current” savings rate, it’s likely that they were saving much less before (their expense making up more than 26% of their previous income) or they are spending more now (if they maintain their 26% savings rate but their income increased, it means their expense has grown with their income.)

In both of these cases, it actually extends the time needed to achieve the retirement amount.

So in the best case, at 26% savings rate, some of the average Singaporeans could potentially retire at age 52. However most aren’t in the “best case”:

However, due to lack of investing, bad investing behaviour and increasing expenses, 73% of the average Singaporean are not on track with their retirement plans and 65% are behind in accumulating enough funds to maintain their lifestyle.

This means that our conclusion – that the majority of average Singaporeans can only afford to retire after 60 – is still a tad too optimistic!

Of course, there’s no such thing as an “Average Singaporean.” The “Average Human” has 1 breast and 1 testicle, but no real human is like that. Different age groups possess different savings and investing behavior.

It’s best to narrow the analysis down a little bit to a more realistic.

The other age group I could find in the report is for those in their 20s, so let’s take a look at what it could tell us!

Singaporeans in their 20s will likely retire closer to their 80s but could retire in their 50s if they play their cards right

Based on the report, those in their 20s have a 31% savings rate – 5% higher than the average! That’s really good given that they are likely to be the lowest income earner! If they could stay away from lifestyle inflation, they could really boost that savings rate once their income increases.

However, this could also be due to the fact that people in their 20s are still living with their parents and thus do not need to spend on housing which could really eat into the savings rate.

Another great thing to see is that 56% have investment products, but what kinds and at which allocation?

Hmmm… doesn’t look great. Although the majority has investments, there are quite a number of issues:

1. They are holding a lot of the savings in cash (35% for males and 55% for females.)
2. Very low proportion is invested in stock & shares (24% for males and 8% for females.)
3. Some of the amounts are in Insurance, which aren’t that great of an investment (11% for males and 9% for females.)
4. 32% of those who have investment products are speculating excessively and some even lost money instead of making money (much more likely outcome when speculating.)

So although the full potential of a 30+% savings rate – if you start saving at 25 – is to be able to achieve retirement by the time you turn 48-49 based on this chart:

It’s more likely that due to the bad investing habits and such a low allocation to stocks and shares – and horrible returns from speculations – they are likely to take closer to 58-59 years! That means they’ll only be ready at 83-84 years old!

In order for those in their 20s to increase their chances of retiring sooner, they will need to:

1. Invest more of their savings. Having between 35% to 55% in cash is way too conservative. The benefit of being young is how long they have to allow the magic of compounding to work.
2. Remove speculation completely from the equation and sticking to the index fund and following the 3-Fund Portfolio. Having more exposure to equities and bonds – broad index, not individual stocks – decreases risk and at the same time capitalizes on the growth of the global economy.
3. Steer away from lifestyle creep. If they are able to keep their current living expenses low as their income increases, they can push their savings rate up – potentially higher than 50%.

By following all of these suggestions, those in their 20s should be able to retire between 40-50!

I think that’s a pretty bright future if you ask me!

Those between 40 to 54 are far behind and unlikely to retire at all

This is one of the most worrying aspects of the findings. If you take a look at this slide:

We can see that 50% of the age group struggle to meet the needs of their children or parents. If you’re struggling support your family, it’s very unlikely that you’ll have much savings in the bank. Or else you’d already be using it to help out your parents and children. It’s very likely that this group of people are ill-prepared for their retirements.

This is shown to be true in the following slides:

Sure enough, the 50% which are struggling to satisfy the needs of their family are behind target or have yet to start planning.

There are also 2 surprising things on this slide:

1. Of the 50% that can meet their children and parent’s needs 47% of them are behind or have yet to start their retirement plans.
2. None of the age group listed equities or an investment portfolio as their top 3 retirement plan!

From the list of investment vehicles, the most popular seems to be:

1. Just regular savings (not going to beat inflation.)
2. Fixed Deposits (also not likely to beat inflation.)
3. CPF LIFE (I guess it’s possible they are investing their CPF funds, but I doubt it.)
4. Interest from Savings (same as #1.)
5. Whole Life Insurance (this really isn’t a good investment.)

This is ridiculously conservative. The funds will slowly erode away due to inflation and underperform a well-balanced investment portfolio over time.

Let’s take a look at the only savings rate for this group that was provided by OCBC:

The best 50% of this age group are saving 28% of their monthly income, only slightly more than the average. The other 50% likely aren’t saving anywhere near as much.

Given these facts, it’s very likely that those in this age group will end up with no ability to retire!

According to the chart above, the majority of those between 40 to 54 will take another 60 years to retire. Again, practically never!

Let’s take the most diligent group, the 50% that can afford to pay for their children and parent’s needs:

• Their target retirement amount is S$800,000
• They are currently earning on average S$8,600 per month
• They are saving 28% of this (equals to S$2,408 per month)

Here are the number of years it would take this group to get to their desired S$800,000 if they start from scratch:

If this group could save and invest their funds at 7% real rate of return, they would be able to reach their desired retirement amount within 16 years, or between 56-70 years old. Not too bad.

However, if they stick with their savings account and fixed deposit, it’s likely that they will need at least another 28 years to get there given the rate of inflation. They would already be between 68 and 82 years old, way too late.

Where you park your funds for retirement matters. Being overly conservative could detrimentally derail your retirement plans. It’s also important to start investing as early as possible to give your money time to grow.

If you’d like to read more analysis of the OCBC Financial Wellness Index, Kyith of Investment Moats did a pretty good post that goes into the other aspects of the report.

Conclusion and Final Notes on Savings Rate

There you have it! My take on what we can glean from OCBC’s Financial Wellness Index. Overall I found it quite interesting and I hope you agree!

If you’re observant, you’d have noticed that the above charts never mentions how much a person earns. You only see the savings rate.

In fact, how much you earn is irrelevant to when you can afford to retire. That’s right, the time it takes for you to get to retirement does not depend on how much you earn. The only important thing is how many percent of your income can you manage to save. So a person earning S$100k and saves S$50k is going to retire at exactly the same time as somebody who earns S$300k and saves S$150k.

“How does that make sense?” you might ask. Well, here are the reason.

A person who can save 50% of their income can obviously afford to live on just the other 50% – this is true no matter if you earn S$100k or S$300k. If you earn more, you spend more, you need more money in retirement. If you earn less and spend less, you need less in retirement.

So the less of your income you need, the more of it can be saved – allowing you to retire sooner.

Also, notice that as your savings rate increases, the time it takes to get to retire drops exponentially. This is due to the dual benefits of increasing savings rate. When you increase savings rate, you’re reducing the amount you need to live on as a proportion of your income and also you’re increasing the amount you’re able to save per month.

This is why in the FIRE community, there’s a lot of focus on getting as high a savings rate as possible – ideally above 50%. That’s when you get into the less than 15 years to retirement territory.

So remember, save and invest as much as you can, as early and as often as you can. Having time on your side to let the compounding to do its magic is crucial.

I personally wish I had started a decade earlier. If I did, I might be ready to retire right now, but alas here we are haha. I’ll just have to settle for retiring at 40 instead of 35!

I hope that this was as interesting for you to read as it was for me! I’d love to hear your thoughts on the findings above. Are you worried about the average Singaporean and their ability to retire?

Are you doing better or worse than the average Singaporean? What else can you do to boost your own savings rate to allow you to reach your retirement number sooner?

I’d love to hear from you, so feel free to tweet at me @firepathlion or add your comments down below!

Until next time.

FPL