Your golden years, a time to take a step back and reflect on your accomplishments, your retirement shouldn’t be a taxing time, no pun intended. In fact, from your last day stepping out of the office, your only worry should be when your nephew’s birthday is or where your cruise is docking next.
Not just for the 1%, retirement planning is a necessary process to safeguard both your earnings and health after you stop working. The last thing you want to do when you get your first paycheck is commit any amount towards your retirement but the earlier you begin planning for retirement the better off you’ll be and the earlier you’ll be able to say goodbye to the 9:00 to 5:00.
Everyone has a different idea of how they want to spend their retirement. Some want to travel the world and experience some of the luxuries of life, others just want to relax and find a stress free routine. Wherever you imagine yourself, your spending needs to match.
All the decisions you make today will be a determining factor of how and when you retire. People naturally want things today rather than tomorrow but deciding to stick with your old kitchen appliances, as opposed to springing for new stainless steel appliances, can determine whether you retire at age 57 or 59. Start making decisions like this with a 10 or 20-year outlook in mind, ask yourself questions like “do I really need this new condo or am I happy at my HDB?” It will help put your goals in perspective and see that the true cost of upgrading your housing might actually be prolonging your retirement.
Where’s your money going?
Perhaps before settling your income sources you should determine realistic monthly expenses for yourself. It doesn’t need to be an exact amount, moreover, it’s to gain a better understanding of your own spending habits. Once this is determined you’ll have a much better idea of what you’ll need to sustain your lifestyle, or conversely, where you may need to compromise to meet goals.
Now to articulate your monthly expenses, include everything from rent to the doughnut you buy on Mondays, it’s better to aim high and allow yourself some breathing room than underestimate your spending. This will force you to analyze what kind of unnecessary expenses you make and what you’ll want to take on in your retirement. By the time you retire you may have paid off some expenses like student loans or home mortgage, if you are on track to close out these loans we can leave them out from your total monthly expense.
An important thing to keep in mind is that the working lifestyle you live now will change after retirement leaving your days wideopen, it’s easy to fill this void with expensive habits like traveling or dinning out to which is great, if you can afford it. Alternatively, you can fill your time with more accessible hobbies like cycling, swimming, or reading.
|Coffee or Tea||$||5.00|
Monthly Total: $1,075.00
Once you’ve determined your monthly expenses you can determine a nominal value for your retirement expenses. You can see how small monthly expenses like eating out more or taking taxis over public transport can add up to an intimidating retirement total.
These numbers assume that you retire at age 62 (official retirement age) and live for 23 years thereafter (average life expectancy in Singapore). Note that these total’s are meant to show a rough total of your discretionary expenses.
How Much Will You Need For Retirement?
|Monthly Expenses||Annual Expense||Term Expenses|
Try filling out this spreadsheet with your own expenses to find your total!
What’s the impact of a five year difference in retirement outlook?
Below is a chart plotting two, equally performing, retirement portfolios. The green line represents the trajectory of someone who began investing for retirement at age 25 and the blue line represents the same for someone who began at age 30. To illustrate the power of time value of money, both people dedicated the same incremental amounts to their portfolio and received the same compounding returns.
You can’t talk about income in retirement without talking about CPF.
There are mixed emotions about the efficacy of the CPF and whether or not it’s truly beneficial for your well-being but it’s here, and it’s not disappearing anytime soon, so let’s take maximum advantage of it. Afterall your Retirement Account (RA) does pay a reasonably attractive interest rate of 4%, and even more so if your balances total $60,000 where the rate jumps to 5%.
Furthermore, if your employer offers to match your contributions and you are not taking advantage of this, you are essentially turning down free money. Unless, of course, you think your money can be put to better use elsewhere, whether that be personal use or investment decisions.
After you turn 55 your Ordinary Account and Special Account are combined into your Retirement Account and eventually every Singaporean will eventually have to register for the CPF Life scheme. This offers a monthly payout option beginning at age 65 based on the amount of savings you have accrued up to the date of first withdrawal. The chart below created by the CPF Board shows how the payout changes based on savings.
When registering for CPF Life you’ll have a choice of two options, as shown in the graphic below. They only differ by the amount of payment and amount passed down to your family.
If, hypothetically, you would like to retire at age 55 you would need to have an established passive income stream for the first ten years since the CPF Life scheme doesn’t begin payouts until age 65. Thereafter you could potentially live solely off the income stream from CPF Life. Of course this depends on your total average expected monthly expenses as well as how much you’ve allocated and diverted out of your CPF saving over the years (mortgage expense, medical bills, ect.) Ultimately, your projected savings should be directly inline with your projected expenses. Be sure you’re only recording your savings allocated to retirement, not your child’s education fund or the money you’ve put away for your European Holiday. Check out our retirement calculator to find out if you can meet your goals today!
Planning, Planning, and more Planning
Ideally, by the time you retire you should be debt free having done everything to minimize any loans, credit card debt, or a mortgage while you still had a line of credit. In the event that you do have outstanding debt to be paid off you should develop a sure fire path to do so, your later years should be lived debt and stress free. Estate planning is necessary where you have the ability to create a plan for your belongings you’ve paid off before you are physically unable to. You’ll need to consider things such as identifying your assets and creating an asset management plan, selecting your trustees and beneficiaries, lasting power of attorney, CPF nomination, and deciding whether or not a trust should be created. All things that a third party member (ie. financial planner) should be responsible for in order to avoid any conflict of interest and ensure your wishes will be carried out accordingly.
Insurance, The Backbone of Retirement Planning
What’s the point in all this saving and planning if you can’t keep your health? Our health risks increase with age and your insurance policies should be adjusted to represent that. Standards for medical care in Singapore are some of the highest in the world and prices are beginning to represent that where the yearly average cost of health care is expected to “rise tenfold by 2030 to S$51,000.” Finding quality service won’t be the problem, instead, it’ll be whether or not you can pay for the service. You should be beyond positive that you, and your loved ones, will be covered in the event of serious illness or even death. When choosing a provider or product be sure to cover some key points;
- Is there any age limit on your insurance plan?
- Does the insurer have a reputation?
- Will treatment of your pre-existing conditions be priced differently?
- Are you limited to certain clinics for treatment?
- If you plan to be traveling, will there be any additional international treatment fee?
How Should Your Portfolio Change As You Age?
Individual investments you hold (outside of CPF influence) into retirement should be geared towards income oriented, conservative investments. At this point in your life you cannot, nor should you need to, accept they same amount of apparent risk as may have enjoyed earlier in life. General practices of wealth management maintain that as your age tends to dictate your lifestyle decisions, it should dictate your investment choices. The focus of your portfolio should be to create a steady stream of income, for example, this could be done by mixing bonds of staggering maturities with some proven mutual funds and shares in well-established blue chips.
Investment Ideas To Wet Your Pallet *
The portfolio you hold into retirement typically has a certain type of asset allocation to supplement the lifestyle you are expected to be living. Below are a few ideas just to get the gears turning, this is intended as a liftoff point to continue learning more about each respective asset class and how they are able to supplement your portfolio.
Real Estate Investment Trust’s (REIT)
Where investing in income generating real estate is strongly advised, it’s not so easy on the island of Singapore. The good news is you can achieve a similar effect by investing in REIT’s (Real Estate Investment Trusts), a type of investment that makes owning and operating properties accessible to the average person by pooling money from multiple parties. Just as there are different types of properties, like hospitals or industrial parks, there are corresponding REITs. Your favorite shopping mall might be listed under a retail REIT, it’s performance will depend on store vacancy and profits from rent which is ultimately decided by visitor rates, including yourself. Singapore happens to have some of the best performing market for REIT’s in the world. The beauty of REITs is that you don’t have to deal with the headache of managing a physical property, there is a team that handles the tenants and maintenance, you just sit back and watch your holdings increase (hopefully). Learn More
Bonds aren’t for everyone, often times people are apprehensive to buy bonds because of the term commitment. They can be even harder to swallow considering the bull market we’ve been enjoying for the past decade and the tempting alternatives that offers. But this doesn’t change the fact that they come highly recommended to supplement a matured portfolio. Government bonds like Singapore Savings Bonds or US Treasury Bonds are typically considered risk free because it is so unlikely that either the Singapore or US government will default, the are more likely to just borrow funds. Corporate bonds typically offer a higher rate of return due to their higher risk of default.
Some investors favor convertible securities as they allow you to convert from one type of security to another, from a fixed-income security to a predetermined amount of common stock. There are typically two types; convertible bonds and convertible preferred stock. Once you make the conversion you are unable to return to the contract you held previously and depending on the type of convertible security the issuing company may be able to enact a forced conversion.
At this stage in your life you may have the added luxury of considering preferred stock instead of common stock. Prefered stock offers some added protection in that it behaves more like a bond where it offers lower levels of risk. Looking at different common stocks, you should also be prioritizing blue chip companies, those that have an established reputation of earning power and dividend payouts, have solid financials and have a large market cap.
Often favored for their steady returns and professionally managed nature, mutual funds are structured similarly to that of REIT’s where money is pooled together from multiple investors and a fund manager will invest the money on behalf of the participants. The goals of each mutual fund will depend on the type of fund, differing by industry focus or asset type. Buying a share of a mutual fund is also an easy way to diversify your investments because that one share is actually a percentage of the compilation of the entire mutual fund.