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In Singapore, retirement planning is an unavoidable part of our financial plans. As our country’s social policy is based on self-reliance and we do not provide universal benefits to retirees, we have the responsibility to plan for our retirement during our younger, working years.
In a Fullerton Fund Management report titled – Rethinking Retirement, it was revealed that on average, only about 69% of respondents have started retirement planning, with younger people less likely to have started. Singaporeans also estimated that they need $1.4 million to retire comfortably. Unfortunately, only about 38% are confident of achieving their desired retirement income.
So what are some of the common income sources that Singaporeans are looking at to fund their retirement lifestyle? According to Fullerton’s findings, the top five (in the following order) are: CPF, investment returns, savings, endowment/insurance plan and property rental.
Pros and Cons of Retirement Income Solutions
Planning for a healthy retirement is a bit like planning for a healthy meal. It doesn’t have to be complicated, but at the top level, you need a balanced diet of different foods (i.e. vegetables, protein, grains and fruits) to keep you healthy by providing the nutrients you need.
With retirement planning, each of the popular income solutions can play a role, but they also come with their own set of limitations.
#1 CPF LIFE
For a start, CPF LIFE can be an excellent building block in every retirement plan. CPF returns are pre-determined and stable, while CPF LIFE provides regular lifetime payouts that are guaranteed. For a guaranteed scheme, CPF’s regular interests of between 2.5%-4% p.a. are fairly attractive. It is however designed to provide a basic income level only.
As of 2021, if you can set aside the maximum of $279,000, which is the CPF Enhanced Retirement Sum, in your Retirement Account at age 55, it will provide about $2,080 – $2,230 a month from age 65. Those who prefer an increasing payout (by 2% p.a.) can opt for the CPF LIFE Escalating plan, where payouts will start at about $1,760 a month at 65. It’s not shabby, but for many, it probably still won’t be enough for their retirement lifestyle. The recent Minimum Income Standards 2021 report by the NUS LKYSPP and NTU found that an elderly person in Singapore currently needs $1,421 monthly for basic living expenses alone.
Also, monthly payouts only start at age 65 which means you can’t rely on the income for early retirement. Moreover, not everyone will have $279,000 in their CPF to set aside at age 55 (especially since many members use their CPF for housing).
#2 Financial Assets
Coming in a close second is Investing in Financial Assets such as stocks, bonds, ETFs and REITs. Some of these financial assets can offer good, dividend income while others may provide us with long-term capital appreciation.
Investing in financial assets can be richly rewarding, help you beat inflation and stretch your savings longer, but investors have to be ready to stomach price volatility and invest over a longer period. Moreover, if you wish to invest in these assets on your own, you will not only need the knowledge to make the right investment decisions but also the time and energy to actively manage your own portfolios. Alternatively, you could invest in a diversified investment fund such as a unit trust, which makes this step relatively simpler.
#3 Savings & Fixed Deposits
While many consider Saving and Fixed Deposits fairly safe in Singapore’s context, returns are miniscule (as low as 0.05% p.a.). The purchasing power on your life savings can get diluted very quickly by an inflation running at 1.5% p.a. over the past 20 years.
Since your savings won’t grow by much, this also means that the money, once withdrawn, won’t be able to grow back quickly. Deposits however serve its purpose as an emergency fund: During rainy days you can simply stroll to an ATM and make an immediate withdrawal. But in the overall scheme of things, relying on savings alone is probably the worst way to manage your retirement finances as withdrawals and inflation will quickly eat into your savings jar.
A typical Singaporean’s retirement planning framework
#4 Annuity & Endowment Plans
There is a myriad of commercial options with Annuity and Endowment Plans. Besides obtaining regular payouts (some portion of it guaranteed, some only for a limited number of years), many have insurance components built into the plans. Long-term returns are typically not mind-blowing (some dependent on the performance of an underlying investment plan), but many have a minimum value and provides a safety net should you fall sick or be retrenched.
#5 Property Rental
Another popular retirement income strategy is to buy into an Investment Property for Rental. Typically, this means retirees own two properties, one to live in and the other that is rented out for passive income. However, owning a rental property usually requires some form of involvement and a large upfront financial commitment from property owners. As a landlord, you can’t afford to have a hands-off approach. This may not be ideal for retirees, in particular if they want a stress-free retirement that does not require them to constantly worry about finding tenants and upkeeping their properties.
Supplementing Your Retirement Nest Egg Via Investments
Rather than trying to figure out which asset classes can give us a higher yield for our retirement, one way to invest is to do so through a diversified, professionally managed investment fund to achieve a sustainable total return at a moderate level of risk. Rather than focusing only on the dividend yield or coupon payments of asset classes, we should be more interested in a portfolio’s total return, including dividend returns and capital appreciation, not just one without the other. Doing so will allow us to ensure that we can get sustainable distribution income from the total return of the portfolio.
For more information, go to: www.fullertonfund.com/trmi
One such income-oriented fund for retail investors in Singapore to consider is the Fullerton Total Return Multi-Asset Income. The fund aims to generate regular income and long-term capital growth in SGD by investing in a portfolio of global growth stocks, Asian bonds, cash and other permissible instruments such as gold and commodities. By investing in a combination of asset classes, the fund can realise returns from both income and capital growth, as opposed to just one without the other. The total return generated by the fund can then be used to provide distribution income* for investors, with a distribution option that offers fixed monthly payouts of 6.88% p.a.
Another interesting feature is that during periods of market opportunities or stress, the portfolio manager has broad latitude to adjust the fund’s risk exposure through hedging or adjusting the cash and asset levels to increase upside potential or limit downside risks. This ability to retreat to and from safe assets provides more leeway to safeguard a portfolio’s asset value and enhance returns.
Different Share Classes for Investors with Varied Requirements
One point that is worth noting is that even within the same investment fund, investors may sometimes have different objectives on what they hope to achieve from the fund.
For example, younger investors who are just starting out in their retirement planning journey may not require dividend payouts and may prefer to reinvest their dividends to enjoy compound return and capital growth for the long-term. Those with families may want their investments to give them additional passive income. For retirees who rely on dividend income to sustain their lifestyle, a fixed and higher level of regular income will be vital.
In this aspect, the Fullerton Total Return Multi-Asset Income also provides three options, also known as share classes, for investors to choose from.
Class A: An accumulating share class in which all dividends are reinvested for higher potential capital growth; suitable for young working adults seeking asset growth over a longer time horizon;
Class B: A distributing share class that seeks to build accretive returns and provides investors with a moderate dividend monthly payout so that investors with family commitments may have an extra income stream; or
Class C: A distributing share class that distributes portfolio gains and capital growth in the form of dividends at a fixed monthly payout of 6.88% per annum. This allows investors to receive a higher regular income that supplements their existing government or private retirement schemes in their retirement years.
One thing we like about such investment funds is that they provide greater flexibility in terms of deciding when we want our payouts to start and choose their preferred payout level, as opposed to CPF LIFE that follows government policies strictly when it comes to commencing payouts.
Another distinct difference between CPF and investment funds, such as the Fullerton Total Return Multi-Asset Income, is that such investment funds can earn us a higher return. The fund invests in equities that are growth-focused, as opposed to safe-haven assets like government bonds. This is, particularly crucial, during a low-interest-rate environment where yields are at record-low levels. The tradeoff here is that returns from investment funds are not guaranteed. That is why it’s also important for us, as investors, to buy into a diversified fund that invests in different asset classes, and think long-term as investing over a longer-term horizon will allow us to ride out the market volatility.
If you are thinking of starting your investment journey now, our advice is to stop procrastinating and get started today. Whether it’s through investment funds, starting your self-directed portfolio, or just topping up your CPF savings, it always pays to start early.
* The fund declares distribution out of income as much as possible but retains the discretion to distribute out of capital as deemed appropriate.