Most people will agree that planning for our retirement is important. However, when it comes to actually working towards it, many people succumb to instant gratification or subscribing to the #YOLO movement.
It’s hard to argue against the fact that “tomorrow could be our last day”, or put a price on our present-day happiness or the smiles on the face of our loved ones when we shower them with gifts. However, on the flip side of the same coin is the question “what if we don’t have enough in our retirement?”.
When Do We Retire In Singapore?
To understand why it’s so important to plan for our retirement, we first look at the retirement age in Singapore. Today, the official retirement age in Singapore is at 62 years. We also have a re-employment age, which was increased from 65 years to 67 years in 2017.
Another way to think about this is that we will only start receiving our CPF LIFE monthly payouts when we turn 65. It’s quite logical to treat these monthly payouts as a replacement of our income from work when we retire.
While it’s easy to think that we can simply work longer if we can’t fund our retirement at 62, 65, 67 or some other arbitrary number, it isn’t always up to us. We may succumb to ill-health or get retrenched as our skills become outdated or automated.
In fact, it’s only in the best-case scenario that we get to retire, on our terms, in our 60s. The reality is that it may be cut short for many reasons.
The next step of the retirement planning equation is to understand how long we can expect to spend in retirement. The longer we spend in retirement, the more we need to sustain ourselves.
How Long Do We Spend In Retirement?
The simplest way to derive this figure is to use the average life expectancy of Singaporeans – which stands at 83.1 years today. This figure is only going to go up as the latest report from the World Health Organisation (WHO) revealed that people here can expect to live up to 85.4 years by 2040.
What this tells us is that if we retire at the moment we are able to receive our CPF LIFE payouts – at 65 – and live to the average life expectancy in Singapore – to 83.1 – we will have close to 18 years of retirement.
Many of us only start working when we are close to 22 years old. For males, it’s close to 25 after completing National Service. Simple math tells us that most of us will spend 43 years in the workforce.
So, we have 43 years to save up for 18 years of retirement, without even considering our daily expenses, paying for our home, raising our children, caring for our parents, and also going for holidays, buying the latest gadgets purchasing a car, and everything else in between.
AND this only checks out if we live to today’s average life expectancy.
What If You Live Beyond The Average Life Expectancy Of A Singaporean?
Here’s an overly simplistic explanation to drive this point across. If there are only three people in Singapore, and one of them dies at 50, the other two have to live to close to 100 years old to get the average to 83.1 years. This is why simply planning for a retirement until the average life expectancy is risky, as we may live longer than that.
According to a research commissioned by Prudential, 1 in 2 people in Singapore were not ready to live to 100, mainly due to uncertainties over their finances and/or health. Since 1990, the number of centenarians here has jumped from just 50 to over 1,100. This will also rise in tandem with the average life expectancy increasing.
So, rather than harp on the notion of “what if tomorrow is our last day?”, we should also consider the question “what if we live to 100?”.
How To Start Planning For Your Retirement?
By and large, there are three main ways to get by in our retirement:
# 1 Relying On Our CPF LIFE Monthly Payouts
As mentioned, CPF LIFE monthly payouts commence when we turn 65. We can also choose to delay this payouts at any point until we turn 70.
If we plan it well, we could accumulate sufficient savings in our CPF Retirement Account (RA) such that our CPF LIFE monthly payouts are able to cover a substantial portion of our monthly expenses.
# 2 Relying On Our Assets
There are two main ways to rely on our assets during our retirement.
Firstly, we will start a process of de-accumulation. This is when we start selling or liquidating our assets to live off in our retirement. We could cash in our stock holdings or even investment properties, which are riskier assets, to put into fixed deposits and start drawing down every month.
We could also time an endowment or savings policy to mature when we hit our 60s. We can then start living off this money. Of course, this could also just mean starting to drawdown our cash savings rather than to add to it.
The second way is simply to live off the returns of our assets. This could mean renting out spare bedrooms (once our children have moved out), living on dividend income from our stocks or even rentals from our investment properties. This way, we just live on the returns, and keep the assets as a means to beat inflation, provide greater security in our long-term cashflow and leave to our beneficiaries once we pass on.
# 3 Relying On Our Spouse/Children
This is a method none of us really want to rely on in our retirement. While we all aim to be able to live independently and avoid being a burden to our spouse or children, life happens. This could sometimes be beyond our ability to predict.
Of course, we could also live in retirement using a combination of the three methods, especially since CPF LIFE payouts will likely be available to majority of people.
Why You Need To Start As Early As Possible
Starting earlier gives you more time to build your retirement nest egg. However, the main benefit comes from being able to compound your returns over a longer period of time.
For example, if you are able to contribute an additional $7,000 in your CPF Special Account every year (or under $600 every month), for 30 years, you will have an additional $400,000, on top of whatever you have contributed through your job, in your CPF Special Account. Better yet, we’re also able to receive tax deductions for making such CPF top-ups.
However, if we start later, and only have 10 years. Making the same $7,000 contribution will have a significantly diminished effect on our retirement nest egg. In this instance, we will only have an additional $87,400 in our CPF Special Account. As you can tell, this is some ways off the one-third mark from the example above, even though we are spending a third of the time to accumulate our retirement nest egg.
The key is because starting earlier allows our returns to compound over a longer period of time.
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