Retirement Planning

Many young people feel that retirement is far away from them. But as life expectancy grows and societies age, longevity risk (being alive but out of money) may be more frightening than the risk of death.

Why Should You Plan as Early as Possible?

1. The effect of compounding: starting to save for retirement at 20 is far easier than starting at 40.
2. Social insurance is not enough: public pensions (social insurance) usually provide only a basic living guarantee (a replacement rate typically in the range of 40%-60%); a comfortable retirement has to be funded by your own savings.
3. Inflation: prices decades from now will be far higher than they are today.

The Three Pillars of Retirement Income

The retirement system of most countries is built on three pillars:

1. Pillar one: public pensions (led by the government)

   • Such as China’s basic pension insurance.
   • Characteristics: broad coverage, low guarantees, mandatory contributions.

2. Pillar two: occupational pensions (led by the employer)

   • Such as China’s enterprise annuity or the US 401(k).
   • Characteristics: contributions are shared by employer and employee, and there are usually tax advantages.

3. Pillar three: personal pensions (led by the individual)

   • Such as personal savings, commercial pension insurance, or individual retirement accounts (IRA).
   • Characteristics: entirely under your own control, flexible and varied.

How Much Do You Need to Retire?

The 4% Rule

This is a classic rule of thumb used to work out the total amount of money you need in retirement.

Formula:

Example:

If you need 100,000 yuan of living expenses per year after retiring, then you need to save:

$100,000 \times 25 = 2,500,000$ yuan.

The FIRE Movement

FIRE (Financial Independence, Retire Early) means “financial independence, retire early”.

• Core idea: a minimalist lifestyle, a high savings rate (50%-70%), and rapidly accumulating assets worth 25 times your annual spending through investing, so that you can retire in your thirties or forties.
• Lean FIRE: the minimalist version — lower your material desires and retire with less money.
• Fat FIRE: the affluent version — accumulate more wealth and enjoy a high-quality retirement.
• Barista FIRE: quit the high-pressure job and take a relaxed part-time job to cover part of your expenses, with the rest coming from investment returns.

Summary

The best time to plant a tree was ten years ago; the second best time is now. Retirement planning is no different. Start putting aside a sum for your future self every month from now on, and time will give you the best return.

Terms Used in This Article