This article was written in collaboration with MoneyOwl. Any views expressed are the independent opinion of DollarsAndSense.sg
When it comes to retirement planning, preparing yourself in your earlier years will go a long way in seeing you enjoy the fruits of your planning during the years when you are no longer working.
Retirement planning may appear daunting to some but it doesn’t have to be. Here are three important things all Singaporeans need to do today to prepare for their future retirement.
#1 Figure Out What Retirement Looks Like To You
What does your retirement look like to you?
The first step to planning well for retirement is to understand the lifestyle that you hope to have during retirement. Are you intending to have the same lifestyle during retirement as you have today, or will you be intending to cut back or increase your spending during retirement?
While we may expect to spend roughly the same amount of money on the basic necessities that we need each month (e.g. food, transport, utility bills, telecommunication subscription, entertainment), there may also be big-ticket expenses that we no longer need to pay for during our retirement. For example, many young couples will have housing loan instalments that they need to pay for today. By the time they retire, their flat may be fully paid up.
According to the latest Household Expenditure Survey (HES) 2017/18, in the 4th quintile (or upper middle segment) of retiree households, the spending is about $1,130 per month. This is relatively low when compared to the average of $4,906 that Singapore households spend a month on goods and services. However, this reduced spending during retirement years might not apply equally to all households and all individuals.
There are also areas that we might be spending more on when we retire, such as medical expenses. While Medisave helps to alleviate some of our medical costs, as our health risk increases when we get older, we may also be required to fork out additional cash for medication and regular screenings.
There are also different passions in life we might want to pursue when we retire. Some of these could be friendly on the wallet such as frequent trips to the library and enjoying coffees with our retired friends at local coffee shops. There are also more expensive retirement goals such as travelling around the world and enjoying recreational sports such as golf. These different passions will also provide an indication of the funds you will require for your retirement.
By understanding your retirement lifestyle and taking into consideration the expenses that you might incur, you can then determine for yourself how much you think you will need each month during retirement.
It’s also prudent to give yourself some buffer, so that you have more than enough retirement funds (rather than have insufficient funds) to get by.
#2 Understand How Much You Can Get From CPF LIFE
All Singaporean Citizens and Permanent Residents (PRs) can have CPF LIFE. CPF LIFE is a lifelong annuity that pays out a monthly income for as long as you live.
With CPF LIFE, be it on the Standard Plan, Escalating Plan or Basic Plan, Singaporeans and PRs have a safe retirement income floor. CPF LIFE hedges against the risk of running out of money in your retirement years since it provides you with a monthly payout for as long as you live. This forms a good income base for retirement, that can be used to cover our basic expenses such as food, transport, telco bills and more.
However, there are also limitations to CPF LIFE. Firstly, you can only contribute up to the prevailing Enhanced Retirement Sum (ERS), currently $264,000 as of 2019. For those who want to receive higher payouts and have already set aside the ERS, your basic monthly payout from age 65 is estimated to be $1,960 to $2,110. This means that if you require more money each month for your retirement, for example $3,000 a month, CPF LIFE will not be sufficient.
What we should look to do is to optimise our CPF LIFE with our ideal retirement in mind. This means planning to have more through our dividend income, rental income, savings and getting the annuity plans that can support the additional funds we need each month.
For example, as part of MoneyOwl’s RetireWise Bundle, MoneyOwl has a CPF analyser that helps to provide advice on optimising your CPF LIFE so it can be fully integrated into your retirement plan.
#3 Enhance Your Retirement Payouts With Retirement Plans
While CPF LIFE provides a good base for your retirement income, there are other ways you can grow your nest egg. For example, you can invest into stocks that pay dividends or invest into bonds that give you coupon payments. Some Singaporeans may also purchase an investment property for rental income.
Besides investing through stocks, bonds and property, you can also purchase retirement plans to supplement your retirement income beyond the CPF LIFE payouts.
MoneyOwl has a RetireWise Bundle, which is a retirement package that integrates CPF Schemes, insurance plans and low-cost investment solutions. For their RetireWise Bundle, you set aside monthly savings that go towards this retirement plan. During the course of this plan, you will 1) receive monthly payouts during your retirement years as 2) well as two retirement angpows. You will also 3) receive additional monthly income should an unfortunate accident or illness happen and you suffer sever disability, which is a health risk in golden years.
Here’s an example illustrated by MoneyOwl:
If you are a 45 year old male that takes up the RetireWise Bundle today and who choose to set aside $600 per month for the next 10 years, you would have set aside $72,000 for your retirement by age 55.
At age 60, you receive a retirement angpow of $8,000 as well as $500^ per month (^$400 is guaranteed and the rest is not guaranteed) till the age of 65. At age 65, you can choose to commence your CPF LIFE payouts. At this point, you will now enjoy your monthly CPF LIFE payouts in addition to the $500^ per month that you were already getting from the RetireWise Bundle since age 60.You will enjoy the additional $500^ per month for another 15 years till age 80.
At age 80, you continue to receive CPF LIFE payouts for life and the projected portfolio value of $86,000* as your second retirement angpow. If you suffer severe disability, you will also receive additional monthly income for life. You will also receive commission rebates ($1,000 estimated) from the retirement income insurance component of the bundle, as MoneyOwl rebates up to 50% of the agent’s commissions received from the insurer back to you, helping to lower costs.
^ The $500/month and $8,000 lump sum are estimated payouts from a retirement income insurance policy. Of these payouts, $400/month over 20 years is guaranteed and the rest is non-guaranteed. These values are based on illustrated insurance fund returns of 4.75% p.a.
* This is based on investing $100/month over 10 years in a portfolio with a projected net return of 6.7% p.a. and remaining invested for a further 25 years.
Initial Input: $600 x 12 months x 10 years = $72,000
Total Guaranteed income received through monthly payouts = $400 x 12 months x 20 years = $96,000
Total Additional monthly income and cash bonus received = ($100 x 12 months x 20 years) + $8,000 = $32,000
Projected Investment Portfolio Value (Based on investing $100 per month for 10 years in a portfolio with a projected net return of 6.7% and staying invested for a further 25 years) = $86,000
Total Potential Retirement income benefits = $96,000 + $32,000 + $86,000 = $214,000
Additional Commission Rebate= $1,000
Additional Disability Income Payout = $400 per month from age 60 to 80
Find out more about MoneyOwl’s RetireWise Bundle here.