Thursday, 4 September 2014

How to save $400,000 in 60 years

You may have read this story: about how a 74-year old cleaner managed to save $400,000 and lose it all to con artists.

What some people found unbelievable, was how a cleaner was able to save $400,000.

In 60 years. Or slightly over.

She's 74 now and (according to the news report) she started working when she was 10. Sixty-four years to save $400,000. Assuming 0% interest, that's $200k in 32 years, $100k in 16 years. Or about $60k in 10 years. $6k per year for 64 years?

Or about $600 per month.

Straight-line savings with minimal or no interest.

That's the back-of-the-envelope calculations.

And immediately, you would say, it is not possible for a 10 year old to save $600 a month in 1950. In the 1970s, a police officer with secondary schooling MIGHT earn $300 (based on anecdotal evidence). Maybe less.

So what could an uneducated person earn? In the Fifties?

So, at this point, I'd spent more time thinking about how a 74 year old uneducated cleaner might've save $400k, than I actually care to. I mean, I believed she managed to. As for how, I sort of understood she lived thriftily and did not splurge on luxuries. Or even necessities.

Then I went nuts and went into details. If this interests you, here's the more complicated computation.

[Note: I do not know her, so all the facts of her life is based on the news article, or assumptions.]

She's 74, so 19 years ago, she was 55 and if she had any CPF, she would have withdrawn it when she was 55, and possibly at 62 (her draw down age).

Did she have CPF? (CPF was established in 1955 - when she was 15.)

She was a factory worker for a while. For how long? No info. Not stated in the news article.

Age 15 to 40

Without needing to go to school, she could have (lied about her age and) started working in garment factory from age 15 (in 1955), until the late 70s or early 80s when the garment manufacturing industry left Singapore for cheaper countries. For ease of computation, let's assume she worked from 1955 to 1980 in a garment factory - 25 years.

Let's assume that her average monthly wage over those 25 years was $300. Or $3600 a year. Over 25 years, it would be $90,000. Assume she saved 50% of that, and that's $45,000 in cash (50% savings is a low estimate. The article reported that she saved as much as 70% of her income.)

[How I decided on $300. In 1980, I believe $300 for a factory worker with 25 years experience is probably a low estimate. I have been searching the internet for some reference, but all I have is the per capita GDP in 1970 was about $320. This isn't very useful, but it sets a reality benchmark. By 1980, she would likely have been earning more than $300, but how much more? In 1955, $300 would be very unlikely. So the $300 is supposed to be an average over those 25 years.

Also if the factory retrenched her in 1980, there would be retrenchment benefits. so that might "raise" the average over the 25 years.]

CPF - shall we say an average of about 20% of income, or about $18,000 in those 25 years?

CPF contribution in 1955 was only 10% (5% each from employer and employee). This was raised to 13% in 1968, 16% in 1970, then rapidly to 20% (71), 24% (72) 26% (73) and 30% (74). There was a breather, then the contributions rose to 31% (77), 33% (78), 37% (79), and finally 38.5% in 1980.

With interests over 40 years (from 1955 to 1995, compounded), this $18,000 might have become $30k (rough estimate. If anyone can advise a more accurate figure...).

In any case, we have not considered the 13th month bonus which is practically mandatory. And we are ignoring all her extra jobs she took on - cleaning, washing, etc. 

From age 40 to 55

In 1980 when she might have lost her garment factory job, she would have been 40 (if she was retrenched, she would have gotten benefits). For the next 15 years (until age 55, in 1995) let's assume that she worked as a cleaner, for an average wage of... $700.

Or an annual wage of about $8,400, or about $126,000 in 15 years (again, not counting 13th month bonus). Again, we assume she saves 50% of that, or about $63,000.

CPF contributions would be close to 40%, or about $50,000. With interest over 15 years, lets assume about $60,000. (Too little?)

So at the age of 55, she would have $108,000 in cash, and about $90,000 in CPF. Or about $198,000.

In 1995, the CPF Minimum sum was $40,000 of which $4,000 can be cash, and the rest be covered by property. So, her CPF would not have been significantly affected by the Minimum Sum Scheme.

Based on the year of her birth, her draw down age would be 62. Or about 12 years ago. Before CPF Life. So she would have drawn down all her CPF minimum sum by now.

What this means is that in 1995, she would have quite a sum of money and at that point, likely would have started to put her money in Fixed Deposits, if she had not started previously.

Note that the $198k is a LOW estimate. Other than CPF interests, we have not considered
a) interest on her cash savings, assuming she started putting money in a savings account (say POSB) from around 1970, she would have been earning 4% interest (interest rates then was quite high), up til the early 80s;

b) annual bonus payments, which in the late 70s and early 80s were quite generous at times; and
c) her other jobs which is difficult to account for.
For (a), I'm not very good at estimating interest rates, so let me just assume that over 40 years, the "compounded" interest was just 10%. So $108k cash in bank becomes $118k. Plus $90k CPF (which I have imputed some interests), the total is $208k.

For (b), the 13th month works out to about 1/12 of the annual salary or about 8.3%. So 8.3% of $208k (savings) = about $17k. Or $225k (this includes any interest earned).

The 13th month is the basic annual supplement. There is no years that I recall when the 13th month was not given. But there were quite a few years (particularly in the 70s and early 80s, when bonuses above the 13th month were quite spectacular. Say those added another $10k in 40 years of employment (that works out to an average of $250 bonus per year - not extravagant).

Total $235k.

The last component (c), is harder to account for. If her other jobs supplemented her income by say 20% (a conservative estimate), then her total savings would also be raised by 20% or about $47k of the $235k.

Total now $282k.

From Age 55 until today

From 1995 (age 55) to 2014 (now, age 74), there is another 19 years during which time her ability to work has been reduced. BUT wages has gone up so she would have been able to earn more. In fact, her current wage as a PART-TIME cleaner is $700. Assuming she has been a full-time/part-time cleaner over the last 19 years earning an average of $700 a month, she would have earned about $156,000 in the last 19 years.

If she saved 50% of that, that would be $78,000.

CPF for members over 55 is a lot lower - say an average of 15% - or about $22,000. We'll assume she withdrew she CPF regularly, and so the money was not sitting in the CPF long enough to earn any significant interests.

So in the last 19 years, she added $100k.

Add to the $282k, total $382k. Close to the $400k.

[And we have not considered bonuses for the last 19 years. But we have hit the $400k mark or close to it.

Also we had assumed a savings rate of only 50%. She claimed a 50% to 70% savings rate. I have ignored her income and savings from age 10 to 15 which is likely to be insignificant.

Also, it is likely that she bought a flat at some point and then downgraded to a studio apartment (where she now lives as reported in the news article) and that would have provided her with a boost in her savings. If she bought 3-rm flat direct from HDB (say, in the late 70s) it might have cost about $30k? (Less? More?) Then at 62 - in 2002 - she might have downgraded and sold her 3 room flat for about $150k to buy a studio apartment for about $80k (?). That would have increased her savings by $80k for an initial investment (HDB flat purchase) of $30k.]

So $400k savings in 60 years is probable within the parameters of her story.

What has been irksome are those who do not believe a cleaner can save $400k. In 60 years.

Their disbelief tells me
a) these are people have never had to save for anything in their lives;
b) they are short-term, short-sighted people;
c) they are likely the future of SG. Except, SG would have no future with them in charge.

Mdm Goh is a child of the past. Where one saves for one wants. The disbelievers are the children of today. The credit card generation. Get what you want today. Pay for it tomorrow. On installment.

Did I say children of today? I meant children of "I'll pay for it tomorrow".

Or am I being too harsh? Too judgmental?

Will you see a million dollars in your lifetime?

Or rather, will you earn a million dollars in your lifetime?

If you are mildly optimistic, your answer should be yes.

Say you are a diploma holder. At the age of 25, you get a job that pays you $2500.

Too much?

Ok. $2000.

In one year you earn $26,000 (including 13th month). In 10 years, $260,000. In 40 years, at the age of 65 (the new retirement age), you would have earned more than $1m.

That's assuming you are never get promoted, and your salary doesn't increase at all in all those 40 years, and you only get 13th month bonus.

Yes, that's $1m earned, and yes, since you have expenses, you can't save all your income and have a million dollars at 65.

Wanna have $400,000 by the time you are 65?

Save 40% of your salary. $800 a month. That's less than the 50% Mdm Goh saved.

Actually, you don't even have to try so hard. If you include what you are required to save into CPF, there's already 20% contribution. And another 16% (soon to be 17%) from your employer. But think of your employer's contribution as basically going to your Special Account and Medisave account (i.e. for your retirement and healthcare needs in the future) and ignore that. There's just too many conditions, to access that.

Up to age 50, your 20% goes towards your Ordinary account. You just need to save another 20%. Or about another $400 per month until the age of 50, and then after that save a little more to make up for the lower CPF contributions you will be making. In other words, you save whatever additional income you get from the decrease in CPF contribution. Your discretionary income remains the same.

The assumptions are kept simple to facilitate calculations. Think of the $2000 and $800 savings as averages throughout your life. If you income is low, and your expenses are high, you can save less, but at some point in the future, you need to save more, to average it out.

The point is you need to work out your target, work out the means and the intermediate targets, and set goals for yourself (like saving 40% of your income, or $X per month.

If you just save what you can, then you will never hit the target because you never set targets and you don't know what are your targets.

As a friend of mine likes to say - failing to plan is like planning to fail.

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