ปรับแนวคิดการออมเพื่อวัยเกษียน

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Thai society is ageing. Currently, around one out of five persons is older than 60 years. However, by 2040, if you look at a group of 3 people, 1 person will be an elder. With rapidly increasing proportion of old population, several concerns emerge, including smaller labor force, lower economic growth, lower saving rate, and higher medical expense.

Among all, one of the primary worries is how could elders afford their living expenses after retirement. Apparently, the government could lend its hand. However, with slower economic growth weighing down on government revenue, fiscal capacity to support may be limited. One couldn’t expect to rely solely on the government. Private saving, hence, is a wise option if one wants to live a comfortable life after retirement. The question is how a saver should save for it.

Standard Approach for Retirement Saving – Save a Fixed Amount

If you search on internet, you could find several helpful websites. You will be asked some questions. For example, how old are you? How much you plan to spend per month after the retirement? What is the expected return from investment? Then, a program will calculate how much you should save per month.

Let see an example. Suppose Mr. Save is currently 30 years old. He wants to retire when he is 55, and expect to live until 80 years old. He wants to spend 30,000 baht in current value per month after his retirement. In other words, assuming 2.5% inflation rate per year, Mr. Save must spend roughly 56,000 baht when he is 55 to maintain 30,000-baht-purchasing-power when he is 30 years old. He could also generate 5% return on investment. According to these assumptions, he must save around 20,000 baht per month for every month until he retires.

Saving the fixed amount of money every month is the standard approach for retirement saving – 20,000 baht in our example.

Unfortunately, we think this approach is counterintuitive. The reason is that it doesn’t take into account the salary growth. Since salary generally increases every year, it means the saving rate will keep declining. For example, suppose Mr. Save’s salary is 50,000 baht when he is 30 years old, his saving rate is as high as 40%. Now, if his salary grows 5% every year, his salary when he is 40 would be around 81,000 baht. If he still saves 20,000 baht per month, the saving ratio will drop to 25% only, and 15% when he is 50 years old.

So, if Mr. Save follows the standard approach, overtime, he will save less-and-less relative to his income. It’s a bit inefficient, isn’t it?

Our Alternative Approach for Retirement Saving – Percentage of Salary

From the drawback mentioned above, we would like to propose our alternative approach. Instead of saving a fixed amount, we argue that one could save a certain percentage of his/her salary. By this method, as salary increases overtime, a saver will save more-and-more in nominal term. However, by construction, the saving ratio remains the same.

Let’s get back to Mr. Save example. If we assume that his salary increased 5% every year, according to our calculation, his saving ratio should be 23%. So, when he is 30 and his salary is 50,000 baht per month, he should save 11,300 baht per month. When he is 40, his salary would be 81,000 baht, and he must save 18,400 baht. When he is 50, he will need to save 30,000 baht from his 130,000-baht salary. Eventually, when he retires, he would have the same amount of money as in the case where he saved 20,000 baht every month.

Obviously, our method requires extra assumption from standard approach – the salary growth. It might be argued that there is a risk in salary growth. If it turns out that salary is increased less than expected, the saver may not achieve his retirement goal.

Yes, that’s true. However standard assumptions, e.g. rate of return or inflation rate, are also uncertain. Thus, in our opinion, introducing assumption on salary growth is acceptable if the number is sufficiently conservative.

Despite the drawback, we believe that our approach possess a giant advantage which easily dominates additional uncertainty – greater affordability.

To see the point, let’s look at Mr. Save again. Recall that he currently earned 50,000 baht per month. According to standard approach, he has to save 20,000 baht per month, or almost 40% of his income. How many people do you think could maintain such a high level of saving rate for, say, a year? He may feel that it’s too much, and stop investing at all.

In contrast, if our method is employed, Mr. Save needs to save only 11,300 baht out of 50,000 baht every month in the first year. This is much more affordable. In his last year of work, admittedly, he would have to save around 38,000 baht, well above 20,000 from standard method. However, his salary would have been as high as 170,000 baht already.

Some Scenarios

Let’s vary assumptions on current salary and how much one wants to use per month in current value, while maintaining other assumptions as in Mr. Save example. The table summarizes the target saving rates to satisfy the goals.

For example, if you are 30 years old with 75,000-baht salary, you would need to save 25% of your salary if you want to spend 50,000 baht per month in current value after retirement, or 50% if you want to use 100,000 baht per month. Unfortunately, it is impossible if you want to use 200,000 baht per month as you have to save up all of you salary. 

Please note that our target saving rates are based on several assumptions which may not all be appropriate to you. So, you could not directly use these numbers. For example, it is assumed that you are 30 years old. In addition, you may want to retire later than 55 years old or you could earn return on investment more than 5%. In these cases, your saving rates will be lower.

All in all, we think that our approach is much more practical. It balances the burden over time, rather than concentrates the burden in beginning years as in standard approach. So, when you plan saving for retirement, try our approach. You may find your goal is much more achievable.

(Published in Bangkok Post on April 1, 2016)

TMB Analytics is the economic analysis unit of TMB Bank. Behind the Numbers is co-authored by Peerawat Samranchit and Naris Sathapholdeja. They can be reached at tmbanalytics@tmbbank.com

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