COVID-19 has given many working folks an early glimpse of retirement life. Almost overnight, thousands have lost their regular means of generating income, some in part, others in entirety. Unlike retirement however, most people can rejoin the workforce and life will eventually return to state of normality, albeit gradually and to a varying degree.
But one thing is clear. The threats to our livelihoods the COVID-19 situation possess underscores our vulnerability. Come retirement, our inability to rely on an income can drastically alter our individual quality of life. Given that there are little to no lifetime employment options available and less attractive opportunities available to senior elderly individuals looking to rejoin the workforce, it is quite unrealistic to assume you will be able to reliably draw on a monthly salary like we do today. Whether you plan to stop working altogether, or to afford yourself a more relaxing life with a lighter workload in your later years, ask yourself this metaphorical question:
Will you have enough fuel to drive your car all the way to the finish line? In that same vein, do you have enough financial reserves to last a lifetime?
Additionally, it is important to keep in mind that the cost of living all over the world is rising, Singapore is no exception. This is largely due to inflation. Understanding how it continually erodes the value of money is critical to planning for retirement. Similar to how investing over a long period of time utilizes the power of compound interest in your favor, inflation has the inverse effect, not planning with inflation taken to account could severely limit the prospects of your retirement.
Another point to note is that in our society, it is quite common for children to financially support their parents in their sunset years. However, every generation confronts a different set of issues and the current generation is faced with some of the most challenging. Realistically, children providing financial support to their parents may not be as feasible as before. If yours are eventually able to do so, take it as a supplementary provision. Completely relying on them to financially support you during retirement however might impede or hinder the next generation’s ability to provide opportunities for future generations.
Consistency is Key
While there are several aspects about retirement planning to be aware of, a key concept often advocated is to create consistent streams of income, ideally you would be able to draw upon this reservoir in a way not unlike a private ATM for yourself.
To have sufficient retirement income is not a given. It requires active participation from you. The key to living the life that you dream of is to take command of your funds. It is an imposing challenge to forecast needs you cannot fully anticipate, however don’t be afraid to give yourself a larger buffer. As it stands, almost two thirds of Singaporean retirees’ savings will not last them through their retirement.
When it comes to saving up for retirement, a good rule of thumb is to set aside at least 20% of your current working income. Akin to how doctors recommend drinking eight glasses of water every day for optimal health, regular savings will support your optimal financial wellness in the years to come.
First, let’s work out how much you will need to save.
A lot depends on your ideal retirement situation. What kind of lifestyle do you want? Do you envision sustaining your current spending habits or will you likely pare down your budget for a simpler lifestyle?
Whatever your goals are, start by estimating how much you think you will need to retire comfortably. Then adjust for inflation and multiply that by the number of years you expect to be in retirement.
Scrutinize the numbers and this exercise will give you a good perspective of how much grounds you need to cover. The younger you start, the more time you will have.
|Your required monthly retirement income:||$2.5K|
|Adjusted for inflation (approximately):||$3.5K to $4.5K|
|Total income required in a year:||~$50K|
|Your expected minimum retirement period:||X 20 years|
|Target income required for your retirement:||$1million|
This is an estimate of how much you will need to have to retire comfortably.
Now that you have a rough roadmap, let’s look at the various streams of income you can utalise in order to realise this future.
Start with the Basics – your CPF Life Plan
In the Singapore context, the CPF Life plan gives us an opportunity to receive lifelong monthly pay-outs when we retire at age 65.
While such pay-outs serve as an important source of retirement income, the reality is that this is best viewed as a basic financial support or a foundation. Depending on your lifestyle, you may want to build on this. Also, it is important to consider the rising cost of inflation down the road and if you are a homeowner, whether you may have tapped into your CPF account for housing payments over the years. For most people, it soon becomes clear that this income stream alone will not be sufficient to retire comfortably.
To illustrate, say you reach 55 years of age and meet the full retirement sum requirement of $181K SGD (this minimum sum is reviewed upwards annually). In this case, on your 65th birthday, you will receive a payout of about $1.4K -$1.5K per month.
Should you decide to go for the enhanced retirement sum, the monthly payouts that you will be receiving will still be relatively modest, with a monthly payout of about $2 -2.2K per month. To qualify for the enhanced retirement scheme, you will need to have $271.5k in your retirement account.
Neither of these amounts are much to live on even by today’s standards, and that is not yet factoring in the toll of 10 years of inflation.
In short, it is crucial that you also explore and establish additional income streams to supplement your CPF pay-outs as part of your retirement plan.
Explore Retirement Income and Endowment Plans
One common method to establish supplementary income streams is to acquire retirement income or endowment savings plans from financial advisors. Retirement income plans are plans that typically disburse fixed payments at regular intervals, these plans are either payout in perpetual or disperse cash over a fixed period of time regardless of market conditions. Typically, endowments on the other hand, help you save over a period and provide you with a lump sum amount at a future date. Some plans with annual cash benefits which will allow you to withdraw a portion for rainy days. Also note that the cash value for these plans typically contain two parts, a guaranteed portion and non-guaranteed bonuses.
So, how do you determine what is best for you – retirement savings plans or endowment? As well as the specific terms and conditions, several key factors will need to be taken into consideration. These include your current age, existing financial situation and the timeframe when you expect to receive pay-outs. Generally, proper planning can offer some level of peace of mind when you have a retirement income plan in place. It is advisable to discuss these and other factors with a trusted professional financial adviser who will be able to guide you on the best options to take.
Diversify your Wealth Beyond the Expected
Another method to build additional income streams is to invest your funds across diversified financial instruments, in order to generate potentially higher returns over time. This is especially useful if you are looking to receive potentially higher returns albeit subjected to market performance. For some, this might be preferable to leaving funds untouched in your CPF Ordinary account and Special account (interest rates are currently fixed at 2.5% and 4% per annum respectively.)
There are quite a few other options available, including unit trust and 101 investment-linked (ILP) products. These options are suited to individuals with a higher risk profile. While these products can potentially yield higher returns, they are subjected to market forces and are non-guaranteed.
Although all investments come with their own level of financial risks, one specific strategy you can adopt is dollar-cost averaging (DCA) for Unit Trust and 101 ILP products, in which a fixed amount is invested consistently in the same instrument over a period of time. By doing so, you can avoid unfavourable market timing and remove the emotional component in your decision-making. Such a strategy is particularly suitable for younger to middle-aged individuals as they have more time on their side for their funds to compound until they retire.
Similar to retirement income and endowment plans, deciding the specific types of financial instruments to invest in will depend on factors such as your specific financial objectives, investment time horizon and risk appetite. So, again, it is advisable that you speak with a professional financial adviser.
In Good Health and Wealth
Not exactly another income stream but an often overlook threat to a fulfilling retirement. Unforeseen medical emergencies or long-term health conditions are scenarios that can significantly diminish or even wipe out your income streams very quickly, leaving you high and dry. This is especially true as we age, we have increased health risks and require more specialized medical attention depending on our lifestyles.
It is important that you are adequately protected with a comprehensive healthcare plan as part of your retirement plan. Include key areas such as hospitalisation, critical illnesses, disability income, personal accident and long-term care plans.
In Singapore, Medisave, Medishield Life and Eldershield /CareshieldLife are part of our baseline systems, which provides a certain level of care and allows us to manage healthcare costs. However, to ensure that you receive optimal coverage without the need to tap into your income streams, it is advisable to review your existing healthcare plans and consider applying for additional medical coverage if and when necessary.
Retirement should be a joyous chapter in our lives where we celebrate all that we have worked hard for, it is a time to enjoy the fruits of labour. As you plan ahead for the life you want, keep in mind you are also planning to reduce exposure and protect yourself from what you don’t want.
TEAM EAGLE ADVISORY GROUP
Raymond started off working as a Certified Public Accountant/Chartered Accountant at one of the Big 4 accounting firms and, over time, had joined the banking and finance industry whereby his previous designation was Vice-President. Along the way, he did some career self-reflection and realised that his true passion was in helping people to achieve financial independence. As such he has decided to follow his passion for helping others and entered the financial advisory industry, joining IPPFA as an wealth planner.
Over the course of an illustrious career spanning 12 years, Raymond has achieved several prestigious awards such as the Chairman’s Round Table (CRT) qualifier, producer club on numerous occasions and the Million Dollar Round Table (MDRT), hence being the Top 5% in the industry. He has also been featured on several TV programs. Today, Raymond is an Associate Director of IPPFA’s Team Eagle Advisory Group and specializes in helping his clients build their retirement nest egg, grow, preserve and protect their income and wealth. Raymond is also a certified professional estate planning practitioner.
Raymond is passionate about helping affluent top professionals, senior management, top executives and business owners (PMEB) with wealth planning to ensure that they are prepared for various scenarios as well as helping them achieve financial independence and great success.
He currently has a client base of over 800 people, and many whom have complimented him for his in-depth financial knowledge, professionalism and sincerity in caring for their financial well-being. Raymond likens his role as an adviser to that of a GPS navigator:
“Like how the GPS navigator provides people with the optimal routes to their destination, I help my clients navigate the best paths to financial well-being and achieve lifetime financial success.”