Retirement 'rules' understate actual needs

business-times.asia1.com.sg :

The rough rule of thumb that you need to save for a retirement income that is about three-quarters or two-thirds of your last drawn pay is likely to understate your actual needs. NUS professor Mukul Asher said any calculation of a replacement rate must take into account both retirement and healthcare needs. 'In many countries, 25% of total health resource consumption is in the last six months of one's life ... healthcare resource consumption is likely to lead more people into poverty than anything else, if life expectancy rises.'

Mr Asher said the income that represents the replacement rate must be maintained throughout the individual's retirement with longevity and inflation risk. One of the shortcomings of inflation calculations for retirement savings lies in the use of headline consumer price index which also understates inflation in specific sectors. 'In an affluent society, services inflation is usually much higher than headline inflation. When I did my research, it was about two to three times the headline inflation.'

Part of the income gap can be made up for by some form of income-generating work in retirement. 'Retirement need not mean to retire from economic activity. (We) try to see human capital as a bond where you keep getting an income in perpetuity.' His research on the state of retirement savings in Singapore, based on CPF savings data, is not encouraging. While Singapore has a high savings rate, the high rate of withdrawal for housing works against the power of compounding, he said.

- Prof Asher has raised many good points. One of them I would like to comment on is the inflation rate.

Contrarian writers have long ranted on the true inflation rate to a small audience. But the mainstream press has mostly ignored it. I believe that the inflation rate is closer to 9-10% than the usual 2-3% CPI figures quoted in the media (which is why it is also known as "headline inflation").

M3 money supply growth is running at 10%. At this rate, a dollar will be worth only 35 cents in 10 years, 10 cents in 22 years, and 4 cents in 30 years. Put another way, prices will rise 3x in 10 years, 10x in 22 years and 23x in 30 years. In the past 30 years, the dollar (whatever dollar you are using - they are all inter-linked) would have lost over 95% of its value. If it continues like this, it will lose yet another 95% in the next 30 years.

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