Retirement planning in Singapore can be quite daunting to think about. Being one of the world’s most expensive countries to live in, it’s important for Singaporeans to start planning for their retirement early.
The official retirement age in Singapore is 62. However, CPF LIFE payout only commences from age 65 onwards. This means if you wish to retire earlier, say at age 55, you will need to find other sources of income to cover your living expenses.
But how much exactly would you need to save and invest?
Monthly Expenses Needed
Before you can determine whether you have enough to retire early, you first need to have a comprehensive understanding of what’s your average monthly expenses. Logic dictates that the lesser you spend each month, the easier it will be for you to retire.
When it comes to how much money you need, some people simply base it on what’s the median income in Singapore. However, this may not be the most accurate way to estimate how much you need.
The best way is of course to calculate how much you typically spend each month. For this article, what will do is to rely on data from Singstats to guide us on how much we need.
According to Singstats, a household which is led by someone who is between the age of 50 to 59, spend an average of $4,837 per month. These households tend to have an average of 2.1 working person.
If we divide the average expenditure of $4,837 by two, it means an individual need to have an income of about $2,419 per month, in order to retire at age 55.
For both couples to retire, they will need on average $4,837 per month. However, for the purpose of this article, we will only take into consideration the amount needed for one person to retire.
Funding Your Retirement
For a start, let’s consider CPF.
If you set aside the Enhanced Retirement Sum (ERS) of $256,500 by age 55, you will start receiving payout of about $1,985 at age 65. Utilising CPF is probably the most cost-effective way for retirement planning in Singapore.
However, this leads to two further questions.
Using Savings Only
Firstly, $1,985 is still about $434 short of our target of $2,419. Secondly, CPF LIFE payout only starts from age 65, which means we cannot retire at age 55.
To solve the first question, what it means is that we need an extra $434 per month, or about $5,208 per year. Assuming life expectancy till age 85, we will need about $104,160 in savings to cover for the shortfall in the amount we need till age 65.
To solve the second question, for an individual to retire at age 55, the person will need an average of $2,419 per month, or about $29,028 per annum, over a period of about 10 years.
An easy way to calculate this is to assume that an individual funds his/her early retirement solely through savings. In this case, the person would need about $290,280 in total to fund an early retirement from age 55 to 65, before CPF LIFE payout commences.
Here’s a simple table to illustrate the amount needed, in order to receive a payout of $2,419 from age 55 to 85.
|Age 55 to 65||Savings Needed||$290,280|
|Age 65 to 85||Additional Savings Required
CPF LIFE For Enhanced Retirement Sum
|Total Amount Needed At Age 55||$650,940|
In total, the individual will need about $650,940 at age 55 in order to retire and to receive $2,419 per month.
Earning Interest On Our Savings
However, we should not simply leave the amount we have saved into an account that pays us zero interest. Since we only need to draw down this amount monthly, we should leave the unused amount into an account that pays us interest.
One obvious account that we can leave our savings untouched will be our CPF Ordinary Account (CPF-OA), which pays an annual interest of 2.5%. Of course, this is not the only account that you can use and you can also consider other high interest savings accounts.
With an annual interest of 2.5% per annum, we will need about $256,600, and not $290,280, in order to get a payout of $2,419 from age 55 to 65. This is because our savings is also earning an interest each year even as we slowly draw down on it.
In order to make up for the shortfall of $434 from age 65 to 85, we will need about $81,901 at age 55, at an interest rate of 2.5% per annum. This assumes that the money grows from age 55 to 65, with a monthly withdrawal of $434 from age 65 onwards.
Lastly, we will also need $256,500 in our Retirement Account at age 55.
|Age 55 to 65||Savings Needed (2.5% interest)||$256,600|
|Age 65 To 85||Additional Savings Required
CPF LIFE For Enhanced Retirement Sum
|Total Amount Needed At Age 55||$595,001|
Funding Our Retirement Through Investments
Another way to fund our retirement will be through investments.
In order to enjoy a passive income of $2,419 per month, or $29,028 per annum, we will need a portfolio size of about $580,560, based on a dividend/interest income of about 5% per annum.
The good thing about this method of calculation is that we can receive lifelong dividend/interest income, without having to draw down on our principal investment.
If we were to draw down on our principal investment each year, and still continue to earn 5% per annum, we will need a portfolio size of $450,615. This will provide us with passive income of $2,419 a month till age 85. Under this method, we will need a smaller portfolio since we will be drawing down on our principal each year, but this also means that we will be left with nothing at age 85.
There are two big assumptions that we are making here which we need to point out.
Firstly, we are assuming our portfolio size remains constant throughout the duration. Secondly, we are also assuming that dividend/interest income of 5% remains constant throughout the duration.
While these assumptions are necessary for ease of calculation in this article, they hardly ever apply in the real world, where markets constantly move up and down, and where dividend/interest changes all the time.
How You Fund Your Retirement Matters
To sum it up, how we intend to fund our retirement is just as important as how much we need, and when we hope to retire. If you are relying purely on savings alone, without earning ongoing interests on your savings, then you would need a much larger sum of money in order to retire.
Through the Enhanced Retirement Sum, CPF LIFE is able to give us about $1,985 per month. In practise, this is probably the most cost-effective way for Singaporeans to get started on retirement planning. However, payout only starts from age 65 onwards.
In order to retire earlier, Singaporeans ought to have a mixture of both CPF and investments. This will give them the best of both world as they can earn higher return from their investments, while concurrently getting the good risk-free interest provided by CPF.
Retirement Planning In Singapore: 3 Lesser-Known Facts About CPF LIFE