You may not want to hear this but
a) You will get older (no matter what your anti-age serum says).
b) There is no ‘magic number’ when it comes to retirement.
Now that it’s all cleared up (or not!), let’s dive into the specifics.
Why do you need a good retirement plan?
In your agile 20s and 30s, running the exhausting rat race, who cares for retirement? It’s the last thing on your mind.
But it shouldn’t be.
Life expectancy is increasing, which is a good thing, but it also means you have to rely on your retirement fund for more years. And guess who loves to keep increasing every year? Inflation and its close buddy, healthcare cost.
Did your parents ever advise you to put all your eggs into the fixed deposit basket and see off your retirement with the interest from that? With the kind of measly interest rates you now get, you might as well stash them under your mattress!
Unless you win the lottery or own a magic lamp, a robust financial retirement plan is not something that comes by chance.
When to start?
You may know of someone who needs just one glass of wine to start going on about how they wish they had started saving sooner for retirement. Unfortunately, that person is not alone.
A study by Manulife says that only two out of five Singaporeans are confident of meeting their retirement needs. One of the reasons for this is that most Singaporeans start planning for retirement only around age 38.
The average age of retirement in Singapore is 61. Say, you start putting in S $500 per month towards your retirement fund from the age of 25, you would have invested for 36 years.
Compare this to another person who starts at 40 and gets only 21 years to invest so he has to put in a higher amount, say S$1000 a month, to secure a comfortable fund. It looks doable on paper but we all know how it feels like to be broke every month, with barely any savings to put aside.
How much to save?
How much ever you can! Is it ever enough with expenses in Singapore going through the roof? Ok, if you insist, here’s a classic rule. You need around 70% of your current income in your retirement to maintain your lifestyle.
Too vanilla for you? How about the 4% rule? Under this rule, you can withdraw 4% from your retirement savings balance annually and increase the amount with inflation every year. For example, if you have S$100,000 in your retirement fund, you can withdraw S$4,000 in the first year of your retirement and increase that amount the next year depending on inflation. It is assumed that your portfolio (a mix of stocks and bonds) will also grow in the meantime.
Then, there is the simplest rule of them all, perfect if you have a phobia of numbers – The 300 Rule. Take your current monthly expense figure and multiply it by 300. The result is the figure you need in your kitty to keep up your lifestyle even after retirement. So if you spend about S$2500 a month then S$750,000 is your ballpark retirement number.
Notice the word ‘ballpark’ when we talk of retirement numbers? That’s because there is no one size fits all when it comes to retirement plans. What works for one person may not work for another.
Your idea of retirement could be downsizing into a smaller condo whereas your friend who has tightened his belt all his life may want to travel the world on a luxurious cruise. Also, do note that these ‘percentage’ rules are just guidelines that worked for the one who devised them. You don’t want to follow an ‘expert’ from another continent blindly and be saddled with low yield bonds that put even your basic 4% withdrawal rate in jeopardy.
What are the steps to figure out your needs?
- Assess your goals
- Estimate your monthly expenses
- Estimate your monthly savings and secondary income
- Calculate the gap
- Factor in inflation and life expectancy
1. Assess your goals
Your retirement fund is not a piggy bank. Sure, your funds are parked to meet your expenses post retirement but if that’s all you think there is to it, we smell trouble. What use is a map if you don’t know where you want to go? Retirement without a goal is something like that.
How should you go about assessing your goals?
Open up a spreadsheet and write down your financial goals for retirement. If you can’t write them, you don’t have specific goals yet. Keep thinking about it and it will eventually fall into place. Ideally, they should be clear, realistic and quantifiable. For example – ‘leaving some money for charity’ is vague and creates room for confusion. Instead jot it down as, ‘S$10,000 towards your favourite charity’.
Having a neat list gives you a better chance of watching your expenses, allocating funds effectively and achieving your goals.
2. Estimate your monthly expenses
The government’s Household Expenditure Survey of 2012-13 estimates that average expenditure per month for households headed by persons aged 60 years and over is $3586. This includes daily expenses like food, commute, utilities like phone and electricity bill and other essentials like holidays and medical expenses.
Even if you factor in inflation, this number cannot be taken on face value as each household has different spending patterns. Noting down your expenses meticulously will give you a better picture of your spending habits.
Do take into account that priorities play a big role in your expense break-up. In your 40s, the mortgage you are paying off could be your biggest expenditure while in your 60s, the bulk could be travel or health care.
Here’s a tip from us – don’t make the mistake of leaving out irregular but unavoidable expenses like home or car repairs or assisting children in financial need. These uninvited guests may play havoc with your numbers.
3. Estimate your savings and secondary income
How much will you have saved by the time you reach your retirement age of 62? For this, you have to take into account the amount you have been stashing aside since your 30s. Compound interest is the key to growing your money!
You may start getting monthly payouts from your Central Provident Fund (CPF) Life scheme. You might also start withdrawing from your Supplementary Retirement Scheme (SRS) too. Under this scheme, you get to pay less taxes and make bigger tax-exempt withdrawals after retirement.
You can use financial calculators like the government’s CPF Retirement Calculator to know how much this could be.
You can also continue to work a couple of more years, now that Singapore has increased its re-employment age to 67, giving you an extra financial cushion.
Even you have retired, there are many ways to make money on a part-time basis. Check out some ideas here.
4. Calculate the gap
Now that you have estimated your gross income, you can subtract it with your estimated expenses (home loan, daily expenses, travel, health etc.) and get an idea of the gap.
Let’s assume your monthly expense after retirement is S$5000 per month. That means your annual expense will be S$60000. If you have a guaranteed income of S$40000, then the gap of S$20000 will have to be met from your savings. This is called a negative gap and while it may not be a cause of worry, it helps to give your retirement plan a second look.
But say your annual expenditure post-retirement is only S$42,000 and your guaranteed income more or less covers it, you will be in surplus. Having the financial ability to weather unexpected situations that may arise, isn’t that the dream?
5. Factor in inflation and life expectancy
Inflation affects every financial plan but for a retiree, this has a significant impact. For one, inflation reduces your purchasing power. Using the Monetary Authority of Singapore’s Goods & Services Inflation calculator, you can see how the costs of essentials like food and commute keep going up every year.
A basket of food in the year 1996 worth S$500 was priced at S$729 in 2016, reflecting a percentage change of almost 46% and an average annual compounded inflation of 1.9%.
Healthcare inflation is another serious concern. According to findings from a recent study by AON, the gross medical inflation rate of Singapore stood at 10% in the year 2017 as compared to the global rate of 8.4%. Hospitalization costs, according to the report, contribute to the high rate of medical inflation. Diagnostic procedures, drugs, prosthetics and rooms are other essential health expenses that could make a hash of your retirement kitty if not accounted for with inflation.
In 2003, Singapore’s life expectancy at birth was 79.1. In 2017, the World Health Organization’s report pegged it at 83.1 years. So you get to live more than any other generation. That’s great news, right? It is. But only if you have the funds to give you a comfortable lifestyle throughout your lifetime.
Longer life expectancy means you need a bigger nest egg. Whether you want to work harder and take an early retirement at 55 to indulge in your hobbies or be super frugal and retire at 60 like your parents or you want to pull on till 67 and reduce your non-salaried years to the minimum, is your choice. But whichever route you go for, don’t forget to factor in the higher life expectancy thanks to medical advancements.
The difference between living and existing during your golden years may well depend on the steps you take today towards creating a prudent retirement plan.