Get the right assumptions

Dear Mr Tan,

I am 37 years old. If I save $20,000 a year for next 18 years at 5% return, I would accummulate about $500,000 when I reach 55 years old.

With this amount being place in an annuity for next 25 years at 3%, I would only be getting about $2,000 a month from 55 to 80 years old.

With inflation, the real value of the annuity will be less than $2,000 and may not be sufficient for life beyond 55 years old.

How realistic is the return of 5%? Many funds have mentioned returns of higher than 5%, but there are possibilities that the funds may not generate such a return, as there are always up's and down's.

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MY REPLY:

I suggest that you re-calculate the figures on the following assumptions:

* the retirement age should be 65 (instead of 55)
* the investment return can be increased to 6% per annum

With the revised assumptions, you will be able to get a higher annuity payment on your retirement. Even after deducting for the effect of inflation (say at 2% per annum), your annuity income should be quite adequate.

You can read about the annuity in this FAQ