Retirement Planning

Retirement planning
Have you given thought about your retirement? Where would you be after age 65? What would you like to do after you retire? Do you have the means to retire comfortably (i.e. without cares about meeting your needs at retirement)?

I hope these questions will start you thinking on your plans for retirement. To be realistic, we know that once we retire our income drops to $0. You may still be working but probably at a lower pay as compared to before retirement.

While you stop working, you continue to live on; this means that you need to meet your basic needs such as meals, transportation, medical needs, housing etc.

“But Issac, by then I would be able to cash out my CPF. It should not be a problem.” Yes, as Singaporeans we are blessed with a government with foresight to help us start saving once we start working. However, as the standard of living increases, you will realize that your CPF will not be enough for you to retire comfortably.

Are Singaporeans planning or saving for retirement?
You may be relieved to know that you are not alone. According to a HSBC survey (link to article) conducted in 2013, 4 in 10 Singaporeans were not saving for retirement. In another article (link to article) about one third of Singaporeans have not begun saving for retirement! Why are Singaporeans not planning for retirement?

According to the articles, some of the main reasons people are not saving for retirement are:
High cost of day to day living

Never think of it
Will plan after getting a property
Children education
Procrastination

Are these your reasons for not planning for retirement as well?

How to save for retirement when I have so many commitments and the high cost of living? I hear you but if you do not start saving today, you will suffer more in the future. I recommend you start small today!

5 steps of planning for retirement
After talking so much on planning for retirement, so what should you do to plan? There are 5 steps to help you plan for retirement.

1. Identify the age and amount of money you need to retire
Please visit CPF retirement estimator to calculate your retirement amount
https://www.cpf.gov.sg/cpf_trans/ssl/retirement/Ret_Est_Cal_opn2.asp?src=&prof=mem

At what age do you want to retire? 55? 60? 65? 70? From now till your intended retirement age, how many years do you have to plan and save? Let’s try to understand this through an example.

Assuming you intend to retire at aged 62, and would need about $3,500 (at today’s value) of monthly income at age 62 and will need this amount for the next 20 years. How much will you need to set aside monthly, assume return per annum is 5.5% and inflation is 3%?

 

Age

 

30

40

50

Future value of $3,500 at age 62

$108,153

$80,476

$59,882

Lump sum needed at age 62 to drawdown over 20 years

$1,738,883

$1,293,892

$962,777

Lump investment needed to reach your goals

$313,467

$398,423

$506,403

Monthly amount you need to invest to reach your goals

$1,662

$2,501

$4,642

From the table above, a 30 year old will need about $1,738,883 by the time he retires at age 62 in order to sustain a lifestyle that cost $3,500 currently (in about 32 years in the future with inflation of 3%, the equivalent amount is $108,153 for the next 20 years.)  This means that he would need to invest $1,662 monthly over 32 years at 5.5% return per annum or $313,467 in a lump sum investment to reach his goal.

From the table, the earlier one starts planning for retirement, the lesser he/she needs to invest per month to reach the same goal. (Please refer to the article on power of compounding)

2. Retirement planning projection
Do a projection of the value on your existing assets from now till your retirement age. In doing so, you will be able to estimate your current situation and how much is needed for you to reach your goals.

For example, if John needs $1,738,883 at age 62 and projected value of his existing asset is $1,000,000. This means that he will have a deficit of $738,883 from the planned amount. With this foresight, John is now able to plan his investment to top up $738,883 in future.

 

Rate of return

3%

5%

7%

Monthly savings to set aside

$1,139

$778

$522

In order to plan for investments, John will need to determine how risk-taking he is. From the table above, if John wants to be conservative, he will need to invest $1,139 monthly in an instrument (e.g. endowment) giving him 3% return per annum. However, if John is more risk taking since he is young with a small budget, he can invest in instruments that give a 7% return per annum. .

3. Start with budgeting
After identifying your required monthly income and projection on your retirement, you need to do a detailed budgeting. (Please see introduction to financial planning article) With your surplus savings, you would need to allocate your savings to the relevant financial instruments that will help you reach your retirement goals. (Do contact your financial adviser to know more about the options)

4. Implementation
After going through the 3 steps above, you should be ready for action. Start with baby steps; implement what you have done, even though you have a limited budget now.

5. Review and monitoring
After implementation, do review regularly (annual review would be sufficient) with your financial adviser if everything is according to your projection. If not, find out what you can do.

Plan for retirement your retirement today! It is never too early to start! Start with small little steps and you will reach your goals eventually.

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