Building a Retirement Plan (Part 2)

The personal finance problem: retirement planning (Part 2)

In part 2 of our series on retirement planning, Green Chart explores how to build a retirement plan that gives you complete financial freedom by allocating your savings and investments sensibly.

Retirement Assumptions

In the previous article, we left many questions open about how to build a sensible retirement plan. Our calculations left out quite a few factors to arrive at concrete figures, and of course our estimates are still fairly simple. Now, using what we have learned in earlier lessons, we will work out how to build the more than VND 29 billion needed for 20 years of retirement.

Before retiring, we will work and earn a steady income. However, as many Green Chart readers know, savings from a monthly salary alone are sometimes not enough to put aside VND 33.6 billion. So we need to turn to investments to harness the power of compound interest. Let’s assume a person holds investments in the following assets:

• 50% of net worth invested in real estate
• 10% of net worth in savings deposits
• 10% of net worth in gold
• 15% of net worth in stocks
• 15% of net worth in cash

Each of these assets grows at its own rate, and clearly the rates differ from one asset to another. The question is: what is the overall growth rate of this whole portfolio?

To answer that, we need to estimate the expected growth rate of each asset. You can read about each investment channel and its actual historical returns here.

The expected long-term (10-year) growth (CAGR) of these assets is as follows:

• Real estate: 8–10%
• Savings deposits: 6–7%
• Gold: 8–9%
• Stocks: 10–11%
• Cash: 0% (in reality, cash loses value once inflation is taken into account)

You can of course estimate the expected growth of these assets according to your own views. Taking a conservative view, I will use the rates above.

So the portfolio’s expected overall growth will be:

= (50% x 10%) + (10% x 7%) + (10% x 9%) + (15% x 11%) + (15% x 0)

= 8.25%

So, as you can see, a combined (diversified) portfolio of several assets produces an overall return of 8.25%. Naturally, changing the asset allocation weights will change the portfolio’s growth.

How to Set Up Your Retirement Plan

A quick reminder of the plan I suggested in the previous article: we need VND 29 billion to enjoy a comfortable retirement, with VND 20 million a month to spend.

The next step is to build a 25-year plan to make that dream a reality. Note that we will calculate on a monthly basis, so 25 years equals 300 months.

I will assume that we invest in an investment fund to reach the amount needed for retirement. Our other assumptions are:

• We have a stable job and receive a monthly salary.
• We will not lose our job or be unemployed during the 25 years.
• Our main savings vehicle is investing in that fund.
• We receive an annual pay rise of about 10% on average.
• Each year, we increase our investment in the fund by 10%.
• The increase happens every January.
• The fund delivers an average return of 11% a year.

Many people will question these assumptions, especially those about pay rises and employment. But they are the most basic assumptions and make it easy for you to work out your savings plan.

So how do these assumptions turn into action? Look at the table below:

It is now month one, and we make our first investment of VND 5,000,000 in the fund. We will not touch it until we retire, 25 years or 300 months from now

Month 2 is the same: we invest VND 5,000,000 at the start of the month and leave it untouched for the next 299 months, and so on.

In assumption 6, we assumed that we raise our savings by 10% every January. This means that if we start with VND 5,000,000 in year 1, we increase it by 10% in year 2, so in year 2 we invest VND 5,500,000 a month.

The table will then look like this:

The months in this table work the same way: the VND 5,500,000 invested in January of year 2 has 288 months left to compound.

So what happens after we make these investments? By assumption, each monthly investment grows at a CAGR (compound annual growth rate) of 11% over its remaining months.

For example, our first investment of VND 5,000,000 grows at 11% a year for 300 months. So what is it worth at the end of the 300 months?

Now we apply the concept of the future value of money to get the answer. The future value formula is:

Future value = P * (1 + R) ^ (n)

Where,

Principal (P) = 5,000,000

Growth rate (R) = 11% a year

Time (n) = 300 months. However, the formula works in years, so we need to convert the months into years, i.e.

= 5000 * (1 + 11%) ^ (300/12)

= 67,927,319 (VND)

The same goes for the second month:

= 5000 * (1 + 11%) ^ (299/12)

= 67,339,139 (VND)

Continuing, we get the following table:

All that remains is to add up all the future values and see whether they cover our VND 29 billion retirement fund. And guess what: with VND 5 million and 11% annual growth, can we enjoy a retirement spending VND 20 million a month? The answer is No; we only reach about VND 17.5 billion.

So what should we do? How do we make sure we save enough to enjoy retirement? We can change 3 things:

• Save for longer, for example 30 or 35 years. This may not be feasible, though, since it is hard to keep a steady income for that many years.
• Raise the rate of return, perhaps from 11% to 15–20%, but this also means taking more risk. You will need to learn more to invest for yourself at those returns. See our investing and trading courses here.
• Save more, which means trading a frugal life today for a comfortable, financially independent life tomorrow. This seems the most feasible option.

So instead of saving VND 5,000,000 a month, let’s raise it to VND 10,000,000 a month. Here is the result

Instead of saving VND 5,000,000 a month, let’s raise it to VND 10,000,000 a month. Then we will be financially free!

As we can see, starting at VND 10,000,000 a month gives us about VND 35 billion, more than enough to spend VND 20 million a month in retirement, with some left over for our children.

Getting Serious About Saving for Retirement

Saving 10,000,000 a month may sound crazy at first to many people, especially those just starting their careers. After all, isn’t it a bit much to set aside most of your money for retirement just as you start out and begin earning a decent, steady income, instead of enjoying your youth?

Let’s make an assumption here: if you are starting your career now, you are probably 24 or 25. That means you have a long road ahead before retirement. Even if you retire at 60, you still have 35 years of work ahead of you

So clearly you have 10 years to gain experience and skills and to achieve your goals in life step by step. Ten years into your career, if you work hard enough, you will surely earn enough to save at the level above.

This is just one simple way to plan for retirement, and clearly saving like this takes far more effort and discipline than building an Excel sheet. It takes determination and a clear roadmap, and we are always here to help you do it, with a stock market full of potential and opportunity.

Happy Trading !

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