What percentage of income should we set aside over time in building up a nest egg for retirement? It’s a simple enough question, but the answer is complicated because there are many variables and many cannot be foreseen. For instance, how much will you spend and how long will you live?
Saving 10-15% of income for retirement is just a rule of thumb. It's a good idea to establish a savings target based roughly on current spending and inflation expectations.
Past inflation can give some clues to prices in the future. Based on an average inflation rate over the past 30 years of 3.43% a year, a monthly salary of 120,000 baht about 30 years from now is equal to 50,000 baht at present. If we spend 60,000 baht a month now, all money accumulated in a provident fund will run out within 10 years of retirement.
Moreover, a tremendous increase in food prices is expected over the next 30 years. CIMB Principal Asset Management Thailand has calculated that MK's roast duck will be priced at 1,384 baht in 30 years' time from 570 now, while noodles will cost 97 baht per bowl from 40, and rice and curry will be 85 baht per dish from 35.
"Some people say inflation is such a key enemy of investment as goods prices increase, while our salary sometimes barely changes when stripping out inflation," said chief investment officer Jessada Sookdhis.
Assuming a standard retirement age of 60, a starting salary of 15,000 baht a month, an annual salary increase tied to an inflation rate of 3.43% a year, and an average provident fund contribution from both employer and employee at 8.27% plus a return of 5% a year, retirees who spend half of their last monthly salary every month will have spent all the money from their provident fund when they are 69, Mr Jessada estimated.
Imagine how life will be after you turn 70 when a large portion of your retirement savings is gone, while life expectancy becomes longer because of better health care. Life will be even more difficult for those who do not have such a safety net for retirement.
Thailand's long-term investment is minimal compared with its population. The country has 37 million workers, with 10 million being Social Security Fund members, and 2.7 million of them are also members of a provident fund. Another 2 million employees are covered by the Government Pension Fund but they are not required to be Social Security Fund members due to overlapping healthcare benefits.
According to the Association of Provident Funds, employees at the end of June contributed 4.02% of salary on average to a provident fund and employers' contribution averaged 4.25%, so each employee saved 8.27% in a fund.
According to the World Fact Book, life expectancy in Thailand averages 74.05 years, ranking it 115th in the world. Monaco leads the way at 89.63 years, followed by Macau at 84.4, Japan at 84.19, Singapore at 84.07 and San Marino's at 83.12.
"I expect Thailand's healthcare system and life expectancy in the next 20-30 years will improve and that many people will live to 80, so how they can live after 69 without enough money?" said Mr Jessada.
"I think two ways are possible. Their children could take care of them or they need to add more savings through provident funds or other long-term investment tools. If the second option is the case, they must do it now."
Savers could increase their monthly savings for retirement to 19% of salary from 8.27% and plough the additional portion into other products including long-term equity funds and retirement mutual funds, land, residences for rent, bonds and equities.
As this choice is exposed to high risks, savers should get investment advice from professionals about the appropriate financial instruments that help reach retirement goals with acceptable risks.
Mr Jessada said many Thai people do not understand the high-risk asset class. Most are familiar with banks' deposit accounts, which always yield low returns but carry low risk, while they shrug off high-yield products that always come with high risks.
However, deposits are not absolutely risk-free. The protected amount in cases of bankruptcy will gradually decline from 50 million to 25 million baht per account per bank from next August and to 1 million baht from August 2016. Most important, saving all money in bank deposits cannot achieve a retirement savings goal.
Visitors at a recent Mutual Fund fair give an encouraging picture of investment interest but many shun high-risk asset class.
The best way to ensure financial security and freedom is to explore the financial instruments that can increase savings and balance asset classes to fit well with savers' ages.
CIMB Principal Asset Management recently launched Target Date Retirement, an investment programme that focuses on asset classes suitable for ageing customers and reduces risky assets in accordance with age.
The investment plan comprises three steps. The first is for first-jobbers and seeks opportunities for increased returns. The second step is for middle-aged workers and will balance returns and risks. The last step is for those near retirement and focuses on principal protection and invests in highly liquid assets.
Of course, the longer you delay saving, the worse the shortfall is likely to get. It is better to do it now and enjoy financial freedom following retirement.