Inflation And The Impact Towards Your Retirement Portfolio

While I was doing some forward projection of how much I need to have in my portfolio when I retire, I came across the shocking impact of inflation.

Inflation, as most of us might be familiar with, is basically the increase in annual prices and subsequently, the decrease of the purchasing power of own money. Hence the saying, a dollar today is worth more than a dollar tomorrow.

Let’s assume a person with a monthly expenses of S$3000 today, 30 years old today, with a projected portfolio of 1M in 10 years time and he is looking to retire at the age of 40.

Every year when he retire, he will need to withdraw an increasing amount for his living expenses, and every year, that expense increases due to inflation.

Here’s how his portfolio will look:

Age Year Annual expense at 2.57% inflation Start of Year Portfolio
End of year withdrawal
30 2019 $36,000.00
31 2020 $36,925.20
32 2021 $37,874.18
33 2022 $38,847.54
34 2023 $39,845.93
35 2024 $40,869.97
36 2025 $41,920.32
37 2026 $42,997.68
38 2027 $44,102.72
39 2028 $45,236.16
40 2029 $46,398.73 $1,000,000.00 $953,601.27
41 2030 $47,591.17 $953,601.27 $906,010.10
42 2031 $48,814.27 $906,010.10 $857,195.83
43 2032 $50,068.79 $857,195.83 $807,127.04
44 2033 $51,355.56 $807,127.04 $755,771.48
45 2034 $52,675.40 $755,771.48 $703,096.08
46 2035 $54,029.16 $703,096.08 $649,066.92
47 2036 $55,417.71 $649,066.92 $593,649.22
48 2037 $56,841.94 $593,649.22 $536,807.28
49 2038 $58,302.78 $536,807.28 $478,504.50
50 2039 $59,801.16 $478,504.50 $418,703.34
51 2040 $61,338.05 $418,703.34 $357,365.29
52 2041 $62,914.44 $357,365.29 $294,450.85
53 2042 $64,531.34 $294,450.85 $229,919.51
54 2043 $66,189.79 $229,919.51 $163,729.72
55 2044 $67,890.87 $163,729.72 $95,838.84
56 2045 $69,635.67 $95,838.84 $26,203.18
57 2046 $71,425.30 $26,203.18 -$45,222.13

If you look at this, in just 17 years, he will have run out of money!

When the numbers came out, I was shocked to see that even with S$1,000,000 at age 40, one cant retire with a monthly purchasing power equivalent to S$3,000 today and that he will outlive his retirement fund!

The fund can only last him 17 years.

The reason is because, the money is decreasing at an increasing rate due to inflation. Each year you are spending more and more because prices increase.

The average Inflation Rate in Singapore averaged 2.57 percent from 1962 until 2019.

What about a current 40 years old with S$1,000,000 retirement fund today? How long before his retirement fund runs out?

Age Year Annual expense at 2.57% inflation Start of Year Portfolio
End of year withdrawal
40 2019 $36,000.00 $1,000,000.00 $964,000.00
41 2020 $36,925.20 $964,000.00 $927,074.80
42 2021 $37,874.18 $927,074.80 $889,200.62
43 2022 $38,847.54 $889,200.62 $850,353.08
44 2023 $39,845.93 $850,353.08 $810,507.15
45 2024 $40,869.97 $810,507.15 $769,637.19
46 2025 $41,920.32 $769,637.19 $727,716.86
47 2026 $42,997.68 $727,716.86 $684,719.19
48 2027 $44,102.72 $684,719.19 $640,616.47
49 2028 $45,236.16 $640,616.47 $595,380.31
50 2029 $46,398.73 $595,380.31 $548,981.59
51 2030 $47,591.17 $548,981.59 $501,390.41
52 2031 $48,814.27 $501,390.41 $452,576.15
53 2032 $50,068.79 $452,576.15 $402,507.35
54 2033 $51,355.56 $402,507.35 $351,151.79
55 2034 $52,675.40 $351,151.79 $298,476.39
56 2035 $54,029.16 $298,476.39 $244,447.24
57 2036 $55,417.71 $244,447.24 $189,029.53
58 2037 $56,841.94 $189,029.53 $132,187.59
59 2038 $58,302.78 $132,187.59 $73,884.81
60 2039 $59,801.16 $73,884.81 $14,083.65
61 2040 $61,338.05 $14,083.65 -$47,254.40

He would have run out of money at age 61! The fund will only last him 21 years.

The question to ask next is, how can I not fall into that trap?

Surely a $1,000,000 portfolio is enough for me to retire?

To ensure that you have enough fund that outlives you, you need to actively manage your retirement fund and ensure that the portfolio is still in a yield portfolio.

Assuming your retirement fund grows at 3%, here’s how the numbers looked like:

Age Year Annual expense at 2.57% inflation 3% fund growth rate Start of Year Portfolio End of year withdrawal
40 2019 $36,000.00 $30,000.00 $1,000,000.00 $994,000.00
41 2020 $36,925.20 $29,820.00 $994,000.00 $986,894.80
42 2021 $37,874.18 $29,606.84 $986,894.80 $978,627.47
43 2022 $38,847.54 $29,358.82 $978,627.47 $969,138.75
44 2023 $39,845.93 $29,074.16 $969,138.75 $958,366.98
45 2024 $40,869.97 $28,751.01 $958,366.98 $946,248.03
46 2025 $41,920.32 $28,387.44 $946,248.03 $932,715.14
47 2026 $42,997.68 $27,981.45 $932,715.14 $917,698.92
48 2027 $44,102.72 $27,530.97 $917,698.92 $901,127.17
49 2028 $45,236.16 $27,033.82 $901,127.17 $882,924.83
50 2029 $46,398.73 $26,487.74 $882,924.83 $863,013.85
51 2030 $47,591.17 $25,890.42 $863,013.85 $841,313.09
52 2031 $48,814.27 $25,239.39 $841,313.09 $817,738.22
53 2032 $50,068.79 $24,532.15 $817,738.22 $792,201.57
54 2033 $51,355.56 $23,766.05 $792,201.57 $764,612.06
55 2034 $52,675.40 $22,938.36 $764,612.06 $734,875.02
56 2035 $54,029.16 $22,046.25 $734,875.02 $702,892.11
57 2036 $55,417.71 $21,086.76 $702,892.11 $668,561.17
58 2037 $56,841.94 $20,056.84 $668,561.17 $631,776.06
59 2038 $58,302.78 $18,953.28 $631,776.06 $592,426.57
60 2039 $59,801.16 $17,772.80 $592,426.57 $550,398.20
61 2040 $61,338.05 $16,511.95 $550,398.20 $505,572.10
62 2041 $62,914.44 $15,167.16 $505,572.10 $457,824.82
63 2042 $64,531.34 $13,734.74 $457,824.82 $407,028.23
64 2043 $66,189.79 $12,210.85 $407,028.23 $353,049.28
65 2044 $67,890.87 $10,591.48 $353,049.28 $295,749.89
66 2045 $69,635.67 $8,872.50 $295,749.89 $234,986.72
67 2046 $71,425.30 $7,049.60 $234,986.72 $170,611.01
68 2047 $73,260.93 $5,118.33 $170,611.01 $102,468.41
69 2048 $75,143.74 $3,074.05 $102,468.41 $30,398.72
70 2049 $77,074.93 $911.96 $30,398.72 -$45,764.25
71 2050 $79,055.76 -$1,372.93 -$45,764.25 -$126,192.94
72 2051 $81,087.49 -$3,785.79 -$126,192.94 -$211,066.22

With a 3% fund growth rate, the fund can now last 30 years instead of 21 years.

Even so, if he retires at 40 years old, he will run out of money at age 70. The average life span of Singaporean is 85, one of the longest in the world. If you retire at 65, your portfolio needs to provide you for another 20 years.

Of course, there are other safeguard in place, such as CPF LIFE which gives a decent annuity.

However, CPF LIFE only allow individuals born before 1978 to do forward projection of how much payout they are eligible. I think the reason is because even they are worried that if we project our CPF LIFE payouts, it will be vastly different from the actual payouts 30-40 years later due to inflation.

I wonder if people are actively thinking about topics like this, or even our parents or retirees.

Do they really have enough to retire?

Is their retirement fund parked in a yield generating account?

For us planning for retirement, can we get more than S$1,000,000 in our retirement fund?

Are we confident in generating 3% return for our retirement fund?

Shrugs.

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