This article was written in partnership with OCBC. Views expressed in the article are the independent opinion of DollarsAndSense.sg
In Singapore, people think of the word “Retirement” as a stage where you are old and no longer working. Here at DollarsAndSense.sg, we like to think of retirement as simply having the financial freedom to do whatever we want in life, without having to worry about money and regardless of age.
An early retirement isn’t just for those born with a silver spoon. With careful financial planning in advance, and a disciplined approach to seeing through our plans, more Singaporeans can achieve an early retirement for ourselves.
If an early retirement to pursue other interests in life sounds like something that you wish to work towards, you need to start figuring out your answers to these five important questions today.
# 1 At What Age Would You Like To Retire?
In Singapore, the official retirement age is 62. CPF LIFE starts paying out at age 65. That means you need to find alternatives sources of regular income if you wish to stop working before 65.
You also must remember that for each additional year you spend in retirement, it gives you one less year that you are able to work and accumulate more savings and investments that could be used to fund your retirement.
In Singapore, the average life expectancy is 80.6 for males and 85.1 for females. This means that if you’re aiming for an early retirement, say at age 50, you can expect to have a retirement spanning 30 to 35 years. This would obviously require a sizeable sum of savings and cash flow from your investments.
You can leverage on the OCBC Life Goals Planner to help you get started on your retirement planning. In just a few minutes, it will give you an idea of the amount you need based on how much you expect to spend each month in your retirement, and the age you wish to retire.
# 2 How Much Would You Need?
It’s common to underestimate the amount of money that you need during retirement. People like to think that they can easily downgrade their lifestyles and live on less if they really wanted to. But living the retirement that you want does not usually mean having to scrimp and save every dollar that comes by.
One quick way to estimate how much you need each month is to base it on 70% of your current salary. That’s because 20% of your monthly salary is contributed to CPF, a contribution you no longer need to make if you are not working. A further 10%, and this is a rough estimate, can be said to be the “shoe leather” cost you incur going to work each day.
In other words, if your current monthly salary is $3,000, you should budget about $2,100 each month for your retirement.
Another way of estimating this is to base it on your current monthly expenditure, and to top it up by about 20% for additional expenses. For example, if your current monthly expenditure is about $2,000, then you should aim to have $2,400 of income for your retirement to cater for unexpected expenses.
Of course, you are free to use our suggestions, or an estimation you are more comfortable with. You can also use the OCBC Life Goals Planner to help you with your calculation. The key point here is that you should be calculating the amount of money that you need during your retirement, before you actually retire!
# 3 Where Will Your Income Come From?
CPF LIFE payouts will only start when you turn 65. If you wish to retire earlier, your retirement income will have to come from somewhere else. This can either be in the form of your savings, investments or financial products that you have.
Savings are easy to understand. You have a sum of money set aside, which you withdraw from each month. However, as you are no longer working, your savings will rapidly deplete over time. For example, if you need $2,000 each month, this would add up to $720,000 over a 30-year period. As you can see, savings alone will not sufficiently fund your retirement. Moreover, it does not retain its value against inflation over a long-time horizon.
A smarter way to fund your retirement will be through your investments. For example, if you have $720,000 worth of stocks that distributes a dividend yield of 3.33% per annum, you would receive $24,000 a year, or the same $2,000 per month that you need for your retirement, without your net asset declining each month.
However, investments are riskier and your returns may fluctuate. The stocks that you own may gain or see losses over time and its dividend payout may also change. This is a risk that you will have to bear if you only have investments in stocks.
The third way would be to use financial/retirement products. Many financial institutions offer products that can deliver both guaranteed and non-guaranteed returns. Think of these products as an in between for your savings, where your money is guaranteed, and investments, where your returns are non-guaranteed. This is a more efficient solution for retirement planning compared to just using your savings.
# 4 What’s Your Current Shortfall?
Regardless of which method(s) you intend to use to fund your retirement, you should calculate your current shortfall.
If you are relying on your savings, you can calculate how much you need, against how much you currently have.
If you are basing it on your investments, then you will need to know how much income your investments are able to give you today, against how much more you need.
If you are relying on financial products, then you need to know how many more years you need to pay for the premiums on the products that you buy, and when you can expect to receive the payouts you need.
To give you an idea on your current shortfall for retirement, you can use the OCBC Life Goals Planner. It will help you gauge how close (or far!) you are from your desired retirement goal and perhaps, give you the motivation to get started today.
# 5 What Actionable Plans Can You Put In Place Today?
Once you have calculated your shortfall, it’s time to make some actionable plans.
You can start off by doing some research on your own, or speak to a trusted advisor who can guide you on the things that you need to know. Areas you need to look into include the savings and loans that you currently have, your protection needs and of course, your investment plans.
You should avoid making financial decisions just because others around you are doing it. For example, you shouldn’t blindly invest in digital currencies just because everyone is talking about it today. Rather, consider if any plans or products proposed to you make sense for the life stage that you are currently in, and what your long-term objectives are, as well as the risk factors involved.
Review Your Goals Regularly
It’s easy to start off your retirement planning journey with a bang, only to see it slowly fizzling out as the hustle and bustle of everyday life takes over your plan or as you start to fall short of your initial goals.
To avoid this, we recommend that you do an annual review of your financial plans to see if they continue to be aligned with your financial objectives, be it an early retirement, or any other financial targets that you may have. This will ensure that you have sufficient time to adapt your plans accordingly, in order to remain on track to achieve the life goals that you have set for yourself.
If you want to get started today on planning for your life goals and would like to speak to a professional about them, you can make an appointment with OCBC Bank. A Personal Financial Consultant from the bank will be in touch with you to assist you.