Many people choose their career or studies based on interest. They also choose it based on the potential salary that the job can command. I would like to give an alternative view on what is the minimum salary required when considering a career or academic qualification.
Assume a person who is aged 25 with a monthly expense of $1,000 (today’s value). We assume an inflation rate of 5% per annum and retirement age of 62. We also assume a life expectancy of 90 and that this person keeps her money in an (almost) risk-free instrument generating 2% per annum (technically it means that the discount rate is 2%) after retirement. This is quite reasonable because fixed deposit earns between 1% to 2% pa and many retirees like to keep their money in fixed deposits. The retirement fund required at age 62 will be $3.1 million. Before anyone thinks this is an impossible amount, this is merely equivalent to $511,000 in today’s value. Certainly this is a very small amount of retirement funding we are looking at. But how does one achieve this $3.1 million? Assuming an investment return of 5% pa (reasonable for a balanced portfolio), she needs to save $2,400 every month.
A few points to note:
- Many people think that paying a mortgage for the residential flat is equivalent to saving for retirement. This is not correct because one cannot sell the residential flat upon retirement since everybody needs a roof over the head. Moreover, a place to stay is a daily necessity. There is no compromise when come to daily necessity.
- Many people think that rental from residential flat is able to generate some income during retirement. This is correct but it has already been taken into the account in the discount rate assumption used during retirement. If the residential flat’s capital is part of retirement fund, then it is not considered risk-free and a volatility factor has to be included. The greater the volatility, the faster the capital will be drawn down.
- In the above calculation, if we assume a 50% saving rate, than a person should earn an income of $4,800 per month. (For those with greater saving rate does not need to earn so much.) Based on my experience, most people earn less than this.
Therefore, the benchmark salary that I propose should be $4,800 using the above assumptions and parameters. It is quite common for new entrants to the job market to earn much less than this. Having $2000 to $3000 of starting pay is quite common. This is all right as long as there is a future prospect of an increased pay that can more than compensate for the previously lower pay. However, if the job is known to cap the salary at say $5,000 then this is the wrong job to be in. A cap of $5,000 means that the person would have to work for very long before achieving this cap. Thus the previously lower pay will not be sufficiently compensated.
Other considerations are married couples. It is quite common for one of the couple to look after the family full time. For the sole-breadwinner means that the salary required has to be doubled. Using the above examples and assuming both husband and wife have identical expenditure, age, life expectancy, than $4,800 of monthly saving is required. Again, assuming a saving rate of 50% than the salary required will be $9,600 per month. This is a scary figure and that is why many married couple decides either to delay their family planning or to maintain dual income.
Some people thinks that by increasing the investment return it can solve the problem. This is a feasible way but there is a catch. A higher potential investment return means greater the risk. There is no free lunch. If the risk is so high, what happens if the retirement fund ends up too little due to massive losses?
I would to suggest increasing one’s salary being a safer way to fix this problem. Here are some of my suggestions:
- While it is all right to have low pay when just started work, ask your seniors and HR manager what is the future prospect of your job in your company. Is there a career path? More importantly, is there a career path in the industry as a whole?
- What is the average pay of those who are in higher position? You can ask HR managers, friends and HR consultancy.
- Will there be greater demand for your experience in the future? This will be closely related to where the country’s economics is heading. You have to look at the global trend and the government policies. For example, the global trend is and has always been to outsource electronics and plastic manufacturing to contract manufacturers. Due to cost sensitive nature of this industry, Singapore can never compete with price. Hence, electronics manufacturing should never be part of your career plan.
- Will there be supply constraints or will there be an oversupply of those with similar experience as you? Again you have to look at global supply and domestic job supply. If there is going to be a large influx of foreigners with similar experience as you or it seems that the local tertiary institutions are churning huge amount of graduates with the same qualification as you then this job or qualification should not be the one for you.
- Imagine you are the job interviewer and there are two candidates out of which one is yourself. Ask yourself – why would the interviewer select you and not the other? Why would the interviewer pay you more than your current job is paying? What is it you have that others do not? Once you are differentiated from the rest, you’ll find yourself at a different demand curve from others. In economics language, the demand curve for your labor has “shifted” to the right.
- Do not obtain a degree that is not recognized. Do some research first before embarking on the course. It is demoralizing to have spent so much time and money on a degree only to find it worthless. In fact, you could look worst than someone else without a degree because the former has demonstrated the lack of initiative in assessing the worthiness of the degree.
- For those with a entrepreneur sprit can consider business as their career but do note that high risk nature of this occupation. Some financial planning is required before embarking in business to ring-fence one’s assets against business liabilities.
Finally, retirement planning does not start when you have a family or when you earn your first income. Retirement planning starts the day you select your university course and your first job. Choose the wrong one and your retirement is in jeopardy.
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Hello Wilfred,
How I wish I’ve read this article back in 2008! Yet another straight-talk. Could you elaborate more on how you get the 3.1m at age 62? Don’t quite understand how the interaction of 2% annual return and 5% inflation rate reach to 3.1m.
N = 12*(90-62) = 336
R = [ (1+2%)/(1+5%)-1]/12 = -2.86%/12
PMT (first payment) =1000*(1+5%)^(62-25) = 6081.41
Using an excel, PV at 62 = $3,135,690.47 (ending mode).
You can also use the formula:
Thank you Wilfred!
Hi Wilfred,
May I suggest that you repost this excellent piece of information every year or so with updated figures – this will greatly benefit many of your younger and new readers who just join the workforce.
Definitely a good start for them.
Heheh, most people never go into the industry for which they are supposedly trained for. Famous example in Singapore will be the hordes of BEng grads going into banks & finance sector in general (*wink*).
For the past few years, many good scoring grads (2nd Upper & above in local Unis) are going into civil service (including stat boards & MOE teaching service). Although not quite the iron rice bowl of previous generations, but it’s still very stable and hard to go wrong even if you just do the bare minimum. Plus the salary scales are very good, with starting pay for fresh grad being $3.6+K, and certain stat boards paying minimum $4+K starting pay for even general Biz Ad degrees (of course must be at least good local Uni degrees; good Ivy League degrees better). And quite common to hit $7+K salaries after just five or six years of service. This route is the recommended one for those with general degrees or Humanities.
Suspect PSD over-estimating private sector salaries & keep on benchmarking against middle- and senior-level in MNCs and major banks. But of course civil servants happy lah!