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Most of us think of retirement as an idyllic state of relaxation. Ideally, we can stop working and hopefully remain in good health and wealth to start ticking off things on our bucket list that we have put off during our working lives. Yet, reality might be in stark contrast to our expectations, which may make us want to re-examine this mindset.
During a recent event organised as part of NTUC’s #EveryWorkerMatters Conversations, attendees cited retirement adequacy as a top concern. In fact, about 50% of older workers (aged 40 and above) who participated in such conversations are worried about their retirement adequacy.
Transitioning into a smooth retirement is no easy feat. There are many variables at play, and it takes years of prudent planning and discipline to follow through, rather than an impetuous decision to retire one day.
To get closer to building an adequate retirement nest egg, we have four important decisions to make – preferably as early as possible.
#1 How Much Can You Save Each Month?
Our savings habit is going to be important for our retirement. Self-sufficiency is a key goal for many of us, and we also do not want to burden rely on our children.
One way to think about it is that any money that we save today is taken away from ourselves and our loved ones right now, and given to our future selves later. While there’s no correct decision, we cannot afford to overspend as it will leave us in a stressful position during our senior years.
If anything, we rather spend well below our means today so that we can have more money (and options) during our retirement years. Some of us may be lulled into a false sense of security, thinking that our CPF monies will be enough for retirement. While we will receive a lifelong monthly income from CPF LIFE payouts, the reality is that 33% of people turning 55 this year have yet to even hit their Basic Retirement Sum (BRS).
In any case, achieving the BRS will only provide a payout of $830 each month. This is lower than the $1,154 that retirees are spending on average each month. What’s worrying is that is amount is based on the latest Report on Household Expenditure Survey 2017/18, without even taking inflation into consideration.
Deciding how much we can save also serves another purpose. We can choose the lifestyle that we want to lead today and set up the retirement lifestyle that we expect to live in the future. It may not be easy to cut back on a more luxurious during our retirement years. The “expensive” habits that we form over the decades will not be easy to stop suddenly.
At the same time, we are also creating greater flexibility down the road. Having more than enough means we can consider an earlier retirement or even have the option for one spouse to leave the workforce earlier to raise the children or care for a loved one.
#2 How Do You Invest Your Money?
Whether we understand the reasons behind the rising inflation or not, everyone can feel the pinch. In the latest inflation figures released by the Monetary Authority of Singapore (MAS), it shows that inflation has been steadily rising, and the CPI-All Items Inflation for August 2022 came in at 7.5%.
From a simplistic point of view, we need $107.50 today to buy something that was worth $100 last year (in July 2021).
Thus, our savings cannot be lying idle, and should ideally be growing at a faster rate than inflation. We need to invest our savings to achieve this.
When we invest our money, we will take on some risk. In general, we should only take on risks that allow us to have a good night’s sleep, especially in a volatile market (like today). Anything that keeps us awake at night is a sign of risks that we may not be able to stomach.
Given the current economic landscape, even the safest investment in government bonds provides a relatively decent return. The September tranche of the Singapore Savings Bonds (SSB) is paying an average annual return of 2.75% over 10 years, while the latest 6-month T-Bills on 15 September 2022 had a cut-off yield of 3.32%. We can use such investments for cash that we want to use in the near term.
Stocks are typically considered riskier investments. Due to this, they also provide higher returns in general. For example, Singapore’s benchmark Straits Times Index has gained 4.3% p.a. in the past 10 years and 6.6% p.a. in the past 20 years. Global markets are also easily available to us today. The best example is the S&P 500 Index, which has gained 13% p.a. over the past 10 years, and about 9.9% p.a. over the last 30 years.
That being said, the S&P 500 Index has lost 16% in the year-to-date, while the Straits Times Index has gained 6.8%. This just goes to show that when we invest in risky investments like stocks, we cannot be certain about returns in the near term.
Nevertheless, if we stay invested for the long term, they tend to give better returns. Ultimately, our investment returns will impact the size of our retirement funds.
#3 Where Do You Want To Live In Retirement?
For most of us in Singapore, our home will be the most valuable asset that we own. For this reason, monetising our home can be a natural retirement planning decision that we have to make.
There are basically three things we can do to monetise our home. First, we can rent out spare rooms in our home after our children have flown the coop. This can give us a monthly income, but we have to live with a stranger in our home. On the plus side, we get to continue living in our existing home.
We can also choose to rightsize. Again, when our kids have grown up and moved out, we may not need as much space. It’s harder to clean it anyway, right? By opting for a smaller home, we can unlock value for our retirement needs. When we do this, we may not want to execute the plan too early as we can leverage on HDB’s Silver Housing Bonus (SHB) scheme to enjoy a cash bonus topped up into our CPF Retirement Account.
We can also choose to live in the same home – while retaining the flexibility to rent out spare rooms – by using HDB’s Lease Buyback Scheme (LBS) to sell the tail-end of our 99-year HDB leases. Again, this is to supplement our monthly income by topping-up into our CPF Retirement Account.
#4 How Long Do You Plan To Work?
Another decision in our hands is how long we intend to work and in what capacity. We could be part of the FIRE movement, prefer to work till the retirement age or re-employment age – which will be 65 and 70, respectively, by 2030 – or we could even work beyond that.
We can also choose to take on less work or work that gives us more flexible hours in our senior years. As part of NTUC #EveryWorkerMatters Conversations, Deputy Secretary General (DSG) Heng Chee How spoke to many employees who shared that they “would like to continue to be active in the workforce (too), as they see it as helping their own finances and also contributing to the economy” during their senior years.
Source: DSG Heng Chee How’s Instagram page
If we too hold similar views and are physically able, looking for flexible working arrangements allows us to continue earning a regular income, even if it’s slightly lower than what we used to earn. At the same time, we can continue to have meaningful work and find fulfilment in what we do.
In order to work into their senior years or to have more flexible working hours, older workers may need training as well. This was also highlighted by workers over 40 during the NTUC #EveryWorkerMatters Conversations, indicating that “they expect a higher risk of job displacement and asked for more support during such disruptions”.
Working longer simply means having a regular income for a longer period of time. This delays our dipping into our retirement nest egg and CPF monies, allowing them to compound for slightly longer. In fact, working longer also means contributing more to our CPF monies rather than starting to draw down.
As part of NTUC’s #EveryWorkerMatters Conversations, employees from all walks of life are encouraged to participate in events and on the website to share their thoughts and aspirations for the future of work in Singapore.