If you have been reading DollarsAndSense.sg for some time, we are sure you would have given some thoughts to your retirement. Whether it’s downgrading to a smaller home, spending more time on a hobby or to go on holidays together with your spouse, most people would have some retirement aspirations in mind.
While these are the “nice and easy” things to think about, they do not offer us much of a plan on how to get to that stage. Of course, plans that involve fantasizing about investing in the next Google or Apple or even winning a $1 million lottery don’t cut it either.
Even with proper plans in place, there are so many variables that could throw a spanner in the works. We look at 9 retirement derailing errors that many people, even those with good plans, tend to make.
# 1 Lack Of Communication With Your Spouse
Partners are in a life journey together and need to communicate their retirement plans and aspirations with one another.
A study in the USA found that approximately 30% of people who already had some form of retirement savings did not even communicate with their partners about how much money they will eventually need. And of those who thought their partners were handling the retirement fund, approximately 20% do not know how much is being saved. This could very well be the case here with a local survey indicating that one in three people don’t even have a retirement plan.
It is easy to delay retirement plans by making valid excuses such as having to save for a home first, the high cost of living in Singapore and even living the #YOLO lifestyle because you never know what will happen tomorrow. Some people may even conveniently think their spouse is saving so they can afford to splurge. Without communication, you never really know what is happening until you have to cross the bridge. By then, it could be too late.
# 2 Death Or Illness
Married couples may have a retirement plan where both partners contribute to a nest egg that they will enjoy in the future. However, one spouse may be contributing more or have a better sense of where it should be invested.
Although no one ever want a spouse to pass on or a family member to become critically ill, people should plan for such a scenario. Buying insurance to protect their spouse for crucial expenses is necessary. Medical expenses for a spouse or other family members is also often overlooked, and have disastrous effects on couple’s retirement nest eggs. Appropriate insurance to cover for this is necessary.
# 3 Overestimating How Long You Can Continue Working
The government has recently raised the re-employment age to 67. This does not however mean that everyone will be able to continue working until the ripe old age of 67.
Some people may get hit by a medical emergency that takes away a few years of employment or even be retrenched before reaching the retirement age.
In fact, you should underestimate your retirement age and work toward an amount that’s appropriate for early retirement. This gives you the flexibility to choose to continue working if you want to, rather than to be be forced to do so.
# 4 Using Your Retirement Savings Like A Bank Account
After building up a good pile of cash, people should not think of their retirement savings as a bank account that they can withdraw from. It may be tempting to use the money to pay for the downpayment of a car or to book a relaxing holiday, and “promise” to pay back the money in the account in the future.
This rarely happens for one good reason. As you continue borrowing from yourself and “promising” to put in a larger amount from your future paychecks, you will find that you will be unable to fulfil this as the amount gets too large after just a handful of these “promises” because you have already got other stuff to pay for with your current paycheck.
# 5 Thinking Your CPF Is Your Retirement Plan
Your CPF Special Account (SA) is meant to be part of your retirement plan. However, we should not just sweep the topic under the carpet and rely on it solely for our retirement requirements.
Contributions are only made when you are in employment. This does not take into consideration any time spent away from work looking after children or finding new employment. Inflation will also diminish part of the 4% annual returns you receive on the account.
# 6 Investments And Not Concentrating It In One Area
People need to be investing their retirement savings as soon as they start earning a salary. This is because savings stagnate at bank deposit interest rates of 0.1% to 0.25% while investments grow. The Straits Times Index (STI) has delivered an annualized return of 3.27% over the last 10 years. Over time, it is key for people to grow their retirement funds and to earn compound interest.
Once you get on the investment bandwagon, the next point is basically investment 101 – diversification is important.
New investors can easily buy index funds. The great thing about index funds such as the SPDR STI Exchange Traded Fund (ETF), which constitutes the 30 best stocks in Singapore, or Nikko AM’s Singapore Bond Index Fund, is that they allow people to diversify their investments in a cheap and convenient way. They are able to generate good yields that will grow your portfolio. These types of index funds allow investors to gain exposure to a wide range of highly rated companies and countries.
# 7 Supporting Your Children, Even Though They’re Adults
It costs nearly $360,000 on average to raise a child in Singapore. At higher end, it could add up to close to $1 million. This is really costly, especially when you should be building your nest egg.
Besides making a dent on your retirement plans, supporting your children even after they’re grown up may foster irresponsibility and reward them for laziness. This could easily turn into a vicious cycle where they can only ever afford to pay for their recreational and entertainment but never have the responsibility to pay for bills like their own rent, utilities and transport.
# 8 Relying On Your Children
While children may feel obligated and even responsible to support their aging parents, people should not pin their hopes on such a scenario as their children may have their own problems, financial or otherwise, at that stage.
Doing this will open doors to possible disappointment and worse, making your children think of you as financial burdens they have to bear. In an extreme scenario, children may stop contributing to their parents’ financial needs completely, especially when they don’t agree with their parents on how money is being spent.
# 9 Retiring With Substantial Financial Commitments
The premise of retirement is that people stop earning money at this point. For people who have financial commitments even after hitting their retirement age, it makes retiring nearly impossible as would be drawing down on their savings very quickly.
In an ideal scenario, people should either have paid off their mortgages by then or downgraded to a smaller flat without a mortgage.
What are some other ways that you think your retirement can fail? Discuss your thoughts with us on Facebook. Even better, consider posing it as a question to financial planners in the Insurance Discussion SG Facebook Group.