When it comes to planning for our retirement, we should take leaf out of the CPF LIFE playbook: planning for a lifelong income stream. While CPF LIFE already seeks to achieve this, we should not 1) Take for granted that it is the only retirement plan that we should have; and 2) Think that it will be sufficient for us.
Receiving The Median Income In Our Retirement
In the last Singapore household expenditure survey, it was recorded that the average monthly household expenditure of retiree households was $1,700. This was taken in 2012/2013, and was close to a 5.5% per annum increase from the previous survey done five years prior. If we assume that the next household survey will depict a similar 5.5% per annum increase in the average retiree household expenditure, we can expect it to hover at close to $2,250.
This forms a basis for how much we may need each month for our monthly expenses. If we also assume it will just be us and our spouse living in the household, we will each need $1,125 a month, on average, for our retirement years.
However, as our title promised, we are aiming higher – closer to the median income in Singapore. This isn’t just to provide for a more comfortable retirement, it’s also because investments can be riskier and we’re not always guaranteed such returns.
According to the Ministry of Manpower, the median income in Singapore in 2017 was $4,232. This isn’t our number; the number we’re aiming for is the take-home component of the median income. This amounts to $2,900 per person.
What About Our CPF LIFE Monthly Payouts?
There are two ways to go about tackling the fact that CPF LIFE exists – 1) we try to see how much we need to put into CPF LIFE to ensure we receive $2,900 in lifelong monthly payouts; or 2) we take into consideration the income stream from CPF LIFE.
In the first scenario, we estimate that we need to contribute close to $350,000 to our Retirement Account at 55 to receive up to $2,900 in lifelong monthly payouts on the Standard Plan when we turn 65. You can crunch the numbers for yourself on the CPF LIFE Payout Estimator.
In the second scenario, we will assume that everyone is able to contribute only the Basic Retirement Sum. If we achieve this, we would receive up to $800 in lifelong monthly payouts on the Standard Plan during our retirement.
This also means to achieve the take-home proportion of the median income in Singapore, we now need our investments to give us $2,100 (instead of $2,900) a month.
One benefit of using assets to supplement our retirement income is that we have hopes that asset prices and returns will increase to track inflation over time. In the end, we will also be able to leave a bequest to our loved ones, either to tide them through or to provide a better life for them.
As stated above, another consideration is that investments are typically considered risky assets, which means our capital and returns are never going to be guaranteed. This is why we should plan for our investment returns to supplement our CPF LIFE monthly payouts rather than treat it as a guaranteed cashflow.
With that in mind, we look at how much we need to invest in four common types of investments to receive the remaining $2,100 a month, or $25,200 a year, in lifelong monthly income.
# 1 Investment Property
This is the one big-ticket investment that all Singaporeans wish to make. Everyone dreams to invest in a freehold condominium that they can rent out to receive lifelong monthly payouts for ourselves, and be able to hand it down to the next generation.
We’re not going to make recommendations on which properties we should be investing in here. All we will do is assume a rental return of close to 3.0% per annum, based on what some online research points to.
On a recurring basis, we will be required to pay for the maintenance charges on private properties, fork out a commission when we rent out the property, pay taxes on the rental income we receive, pay for upgrades and repairs, and many more. This can easily shave over 10% of our rental income.
And the big one – we need to have this investment property paid off in full to enjoy the full rental yield. Otherwise, part of your rental income will be going to the bank in principal and interest repayments on a mortgage.
That’s not all. We haven’t taken into consideration any Stamp Duty or Additional Buyer’s Stamp Duty (ABSD) that we need to pay. Of course, we will also constrained by the Total Debt Servicing Ratio (TDSR).
Conservatively, we may end up only receiving close to 2.1% on our investment property. This being the case, we may need to invest over $1.2 million in order to receive the full $2,100 in monthly rental income.
Obviously, we may also enjoy price appreciation over time, but ultimately, this does not translate to higher rents. If we bank on this, we may not be able to receive the remaining $2,100 in full.
# 2 Corporate Bonds
When we invest in corporate bonds, we’re lending money to companies. In return, they have an obligation to pay us the promised interest return and repay our principal once the bond matures. The thing about a bond fund, as compared investing in corporate bonds on our own, is that it does not mature. The bond fund will simply reinvest the proceeds from maturing bonds into newer bonds.
This way, we don’t have to constantly update our bond investment ourselves. However, in return for this convenience, bond funds typically charge a management fee.
There is currently a single listed corporate bond fund in Singapore, which has a yield to maturity of 3.2%. With this yield, we need to invest $787,500 in order to receive a monthly payout of $2,100.
# 3 STI ETF
The Straits Times Index (STI) exchange traded fund (ETF) is a fund invested in the 30 largest and most liquid stocks listed in Singapore. Based on track record, the STI ETF delivers a yield of close to 3.7%. Again, you may gain from price appreciation, but this does not help you with any shortfall in your quest to build a lifelong monthly income for yourself.
Read Also: Complete Guide To Investing In The STI ETF
Based on a return of 3.7%, you will need to invest $681,000 in the STI ETF to get your $2,100 in monthly income.
# 4 REITs
REITs, or real estate investment trusts, are another asset class listed on the Singapore Exchange (SGX) that you can tap on. Typically seen as proxy investments to properties, REITs listed on the SGX are paying out nearly 7.1% in distributions.
This means we need to invest $355,000 in high-yielding REITs to attain the median income in Singapore.
|No.||Asset||Potential Yield||Amount Required To Invest To Receive $2,100 a month|
|1||Investment Properties||2.1%||$1.2 million|
There Are Risks Associated With All The Investments Above
One good way to assess how much risk you’re taking on is to just look at the returns an investment is giving. The higher the returns, the higher the risks you are taking on.
When it comes to your retirement security, it does not make sense to take on a lot of risk. This is because time is not on your side. You can’t ride out market volatility or readjust your investment portfolio to negate the effects of certain bad investments.
While you can start building your retirement nest egg with these investments, you may want to spread your money into the different asset classes, and gradually shift your portfolio to a less risky one the closer you get to your retirement.
Remember that just because you have less than required for your target monthly income in retirement, doesn’t mean you should take on more risk. You could also choose a lower standard of living, while achieving greater security in the form of taking on lower risk on your investments.