A DBS Group (SGX: D05) study which analysed the data of two million customers has revealed that younger investors, comprising those in the Generation Z and Millennials (i.e. 25 to 44 years of age) could fall behind when it comes to saving for retirement.
The lender estimates that by 2030, a 65-year-old retiree would require at least S$550,000 to meet expenses for the next two decades.
This S$550,000 refers to basic living standards, though.
If the retiree wants to engage in other activities such as travel or personal hobbies, he or she will need to accumulate S$1.3 million.
The problem here is that younger investors are setting aside the smallest portion of their income for investments, thus implying that they will be far short of this S$550,000 target by the time they wish to retire.
Saving and investing early on
The study revealed that those in the 25 to 44 group invested just 15% to 17% of their monthly salaries, the lowest among pre-retirement groups.
In contrast, investors aged 45 to 54 invested 30% of their salaries while those in the 55-to-64 age bracket deployed nearly half of their salary into investments.
There was another problem highlighted, too.
Young investors tend to be too conservative in their investment choices, with around 37% to 44% of their investments going into Treasury Bills (T-Bills) and another 13% to 15% into Singapore Savings Bonds (SSBs).
While these options provide capital protection, they provide a yield that is lower than the long-term inflation rate of between 3% to 4%.
The latest Singapore six-month T-bill cut-off rate fell to 2.9% recently, down from the 3.04% offered in the previous six-month auction.
As for SSB, the latest bond offers an average return of 2.97% over 10 years.
With returns that are below 3%, investing in such instruments means that your money will be eroded by inflation in the long run.
Allocating higher amounts
Of course, you may argue that younger investors, having just started out in their careers, earn lower salaries and thus have less money to invest.
This could explain why the study found that such investors allocated less than a fifth of their salaries to investments.
Generation Z and millennials need to make a conscious effort to save more and allocate more of their gross salaries to investments.
One way to do this is to ensure you do not fall victim to “lifestyle inflation”.
Lifestyle inflation refers to an upgrade to one’s lifestyle when you enjoy an increment or sharp jump in salary.
Armed with a larger pool of money, many young adults may fall victim to branded goods, the latest fashion trends, or snazzy gadgets.
By consciously choosing to save the extra amount, you should then have more money that you can invest.
Another option is to funnel any bonuses you receive into investments, thereby bumping up the amount you allocate to investments annually.
Choosing a higher proportion of growth stocks
Now that you know how to allocate more money to your investments, the next step is to select investments that can help you beat inflation and grow your money faster.
One option is to go for growth stocks either in the US or Singapore.
For the US, there are trillion-dollar technology companies such as Apple (NASDAQ: AAPL), Meta Platforms (NASDAQ: META), and Microsoft (NASDAQ: MSFT) that you can park your money in.
Other growth stocks include consumer goods firms Lululemon (NASDAQ: LULU) and Starbucks (NASDAQ: SBUX) or software-as-a-service companies such as Salesforce (NYSE: CRM) and DocuSign (NASDAQ: DOCU).
You can check out some of our US growth stock write-ups to get more ideas on what to invest in to grow your money.
Over in Singapore, there are growth stocks such as iFAST Corporation Limited (SGX: AIY) and DBS itself, both of which have demonstrated healthy earnings growth in their latest earnings report.
Sprinkling in some dividend-paying stocks
Growth stocks are great for growing your portfolio over the long term.
However, you should not neglect dividend-paying stocks.
These stocks can generate a steady stream of passive income that will help to supplement your earned income.
With these dividends, you can enjoy more disposable total income and have the flexibility to either spend or invest this additional money.
As you get older, these dividends also help to buffer against any emergencies such job loss or an unexpected illness.
The REIT sector has blue-chip candidates CapitaLand Integrated Commercial Trust (SGX: C38U) and Mapletree Industrial Trust (SGX: ME8U) that pay consistent dividends.
Companies such as Haw Par Corporation (SGX: H02), Singtel (SGX: Z74), VICOM (SGX: WJP), and Riverstone (SGX: AP4) also dish out regular dividends to their investors.
Get Smart: Harness the power of compounding
Remember to start investing as early as you can.
The earlier you start, the more you can compound your wealth and build that retirement nest egg of at least S$550,000.
You should note that this amount is probably insufficient as years go by because of inflation, so it’s good to aim for a higher number to ensure you can enjoy a comfortable retirement.
Park more money into growth stocks, reinvest your dividends, and continue to save a substantial portion of your salary.
I guarantee that if you do the above consistently, you will end up with more than enough money to retire comfortably.
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Disclosure: Royston Yang owns shares of DBS Group, iFAST Corporation, VICOM, Mapletree Industrial Trust, Apple, Meta Platforms, Starbucks, and Lululemon.
