Are You Saving Enough for Retirement?

These days, retirement has become a sort of holy grail for the majority of the working population, regardless of age. The critical challenge is saving enough for retirement living, or for some, financial independence.

And here comes the core question: how much precisely is “enough”?

The 25x Rule or 4% Rule

This originated from the “Trinity Study” in 1998, and was popularized by financial planners and media in recent years. The premise is simple enough – start by estimating the annual expenses you need post-retirement, and then multiply it by 25.  Alternatively, divide the same number by 4%. For example, if you need to spend HK$30,000 per month after you retire, multiple $30,000 by 12 then 25, you get HK$9 million. This is the amount you require for retirement.

The concept is popular because it’s catchy, easy to understand, and simple to calculate. It is, however, also misleading in that it’s not really a “rule”.  It is based on a statistical study with actual portfolio and withdrawal data over a period of 70 years. The authors were merely noting what worked for this group of retirees. It is descriptive not predictive.

Nevertheless, it’s worth noting that the portfolios in this study were invested in a mixture of stocks and bonds. On average, the retirees drew money from the fund for 30 years before they passed away. Which is to say that 25x might not be enough if your portfolio is too conservative, or if withdrawals are to be made over a more extended period, i.e. if you retire early, or live a longer life.

The Bottom-Up Approach

There is undoubtedly a more personalized and accurate way to calculate how much you need for retirement.

Step 1: Estimate your post-retirement monthly/yearly expenses

If you have been tracking your living expenses, this should be an easy task. Basically, you need to estimate how much you will spend each month on housing, food, transportation, entertainment, etc. Some assumptions might be necessary, such as whether your mortgage has been paid up, or whether you need to continue to support your children. In retirement, you might spend less on clothing, but more on traveling.

HSBC publishes quarterly a “Retirement Monitor” which is a fairly comprehensive and detailed budget for a retired living. There are four sets of estimates – for “basic lifestyle”, “modest lifestyle”, “comfortable lifestyle”, and “affluent lifestyle”. You might disagree on the amounts, these are nevertheless useful references that help you itemize the necessary expenses.

Step 2: Calculate the required retirement “nest egg”

Now you’ve got an idea how much you need to spend each year in your retirement. The next step is to calculate the lump sum required.

Here, we need to make a few additional assumptions:

  • How many more years you will live post-retirement
  • Annual inflation rate
  • The Rate of return of your asset portfolio

For those into numbers crunching, this would be a simple exercise of calculating the PV (Present Value) of the series of annual expenses of your living years, discounted by the interest (or rate of return) net of inflation. Alternatively, there are plenty of retirement calculators available online – try the one from the government-backed Investor and Financial Education Council. It is nicely animated, easy to use, and a fun way to estimate what you need for retirement.

And that’s not the end of it

Having a clear goal is the essential first step to retirement planning. But that’s not the end of it – you need to revisit the assumptions periodically to see if adjustment is necessary. And take this as an opportunity to motivate yourself to stay on the plan!


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