Retirement planning in Singapore can be quite daunting to think about. Legitimate concerns like how much money we need to retire, where we will get our income from and whether inflation will erode our purchasing power in the future worry even the most financially savvy among us.
CPF LIFE – Singapore’s Retirement Scheme
CPF Lifelong Income For The Elderly (LIFE) is the first thing most Singaporeans think about when it comes to retirement. CPF LIFE is Singapore’s retirement scheme that provides lifelong payouts to Singaporeans and Permanent Residents from the age of 65. Monthly payout is based on how much individuals have contributed in their Retirement Account (RA).
There are a few features about CPF LIFE that makes it a good retirement plan on its own.
Firstly, payout is lifelong. This means that CPF members do not have to worry about outliving the amount they have in their RA. Payout will continue for as long as members are living, even if the RA amount has been completely drawn down.
Secondly, money in our RA continues to earn risk-free interest of 4% to 6% per annum, even while withdrawals are being made each month.
If you wish to receive a higher monthly payout, you can consider topping up to the Enhanced Retirement Sum (EHS), which currently stands at S$249,000. This gives you a monthly payout of between S$1,860 to S$2,000.
Next you have to determine what kind of retirement lifestyle you hope to lead. From there, it is easier to determine how much is needed to support that lifestyle.
So, what can Singaporeans do if they need other sources of retirement income beyond CPF Life? Here are some ideas:
#1 Rental income from properties
Singaporeans love investing in properties. The strategy here is simple: buy a second (or even third) property that you can get rental income. This is a common method for many older Singaporeans who have been fortunate enough to buy properties during times when prices were lower.
When you rely on investment properties to provide you with rental income, there are a few risks that you are exposed to.
Firstly, you need to ensure your investment property is always being rented out. If left empty, you earn zero income. This becomes even worse if you have an existing mortgage, as it would mean a cash outlay each month, which is a terrible proposition when you are already retired.
Owning investment properties also means having to upkeep the places you own. You have to ensure properties are taken care of and that your tenants are satisfied with the conditions of the units. Retired or not, these are still your responsibilities as a landlord.
Here’s a quick breakdown of both the pros and cons.
Investment Properties For Rental Income
|Passive Income||Earn passive income through the rental of the property, less agent commission, property tax, and maintenance fee||During times when the economy is performing poorly, rental income will be lower, or even zero, if property is not rented out|
|Capital Gain Potential||Potential capital gain if prices increase and the property is sold||If there is a property loan taken and property prices drop, total debt incurred may even exceed equity|
|Time & Effort Required||When property is being rented out, little upkeep is required||Effort is needed to ensure property is well maintained when moving from one tenant to another|
# 2 Dividend income from stocks
Another option that retirees can rely on for passive income is dividend payouts made by companies whose stocks they have invested in. Such companies include blue-chip companies, real estate investment trusts (REITs) or other high yield companies. Dividends may be paid annually, semi-annually or even quarterly.
However, stock prices are volatile and that means retirees have to tolerate higher risk especially during economic downturns when prices may decline. Dividend income is also distributed at the discretion of the company and can never be taken for granted.
Retirees have to constantly review their portfolio to ensure that the companies they invested in are still performing well. They must be prepared to re-allocate their investment when required, and cannot afford to adopt a buy-and-hold strategy.
Here’s a quick breakdown of both the pros and cons of stocks.
|Passive Income||Dividends from stocks can potentially be quite high.||Dividends are never guaranteed. It may reduce or even be zero if company does not do well.|
|Capital Gain Potential||Potential capital gain if stock price increases.||Capital losses can be significant during economy downturn.|
|Time & Effort Required||No direct management of business required by stock investors.||Investors have to review their portfolio periodically, usually once or twice a year, to ensure that their stock investments are doing well.|
#3 Retirement Products For Passive Income
There are also products offered by financial institutions that have been specifically designed to provide retirees with additional income during their retirement years.
Unlike the personal investments made in properties or stocks, such products do not require individuals to manage their own investments. They simply buy the products, pay the premiums required and enjoy both the guaranteed and non-guaranteed returns provided by the product.
An example of such a product would be the MaxRetire Income distributed by OCBC. MaxRetire Income is a regular premium endowment insurance plan and it is not a fixed or savings deposit. MaxRetire Income provides you with a steady stream of monthly retirement income from 65 (age next birthday) to either age 85 or 100 (age next birthday). If you wish to receive a higher monthly retirement income, you have the flexibility to change payout age to 67 or 70 (age next birthday).
Also, MaxRetire Income provides Death coverage and its compulsory Premium Waiver TPD (Own Life) Rider covers Total and Permanent Disability (TPD). The rider will waive off future premiums for the basic plan and any attaching riders in the event that the insured person suffers from TPD during the premium term.
Here’s how it works based on what’s described on the OCBC website:
Source: MaxRetire Income, OCBC
Unlike properties or stocks where you can cash out your investment anytime, retirement products like MaxRetire Income is a long-term commitment.
An early termination of the policy usually involves high costs, and the surrender value payable, if any, may be less than the total premiums paid.
Here’s a quick breakdown of both the pros and cons of this Retirement Product.
|Steady stream of Income||The monthly payout is paid until age 85 or 100 (age next birthday.) It gives you the flexibility to increase your retirement payout age from 65 (age next birthday) to 67 or 70 (age next birthday).||Monthly income consists of both guaranteed and non-guaranteed portion. The non-guaranteed portion depends on how the participating fund performs in the future.|
|Capital Gain Potential||Capital guaranteed by retirement payout age.||None. It’s a retirement product.|
|Time & Effort Required||No management required for investment or payout.||Premiums have to be committed to and paid. Cancellation of policy may result in losses.|
Understand The Options And Choose The Product(s) That Best Suit You
There are of course other products that we have not covered in this article. That said, the broad categories of properties, stocks and retirement products are the typical products you can consider if you have additional capital that you wish to have a higher monthly income during retirement.
At the end of the day, the best move is to start retirement planning early. You should not wait until you are 65 before you start thinking about investing in properties and stocks to fund your retirement lifestyle. By the same token, the purchase of retirement products also require you to start from as early as 40, so that you have the time to accumulate and compound your returns in preparation for retirement.
Read Also: Why Financial Planning Is A Young Man’s Game
This article was written in collaboration with OCBC. Views expressed in the article are the independent opinion of DollarsAndSense.sg