Why You Need to Bust These 3 Beliefs to Get Ready for Retirement
Did you know the average life expectancy in Singapore is 80.4 years for men and 84.9 years for females? People are living longer, and with this, it also means you must save for a longer retirement.
While we generally know the merits of saving early for our golden years, we still tend to put it off in order to meet the needs and wants of “now”. Other than procrastination, another costly mistake is believing you have a retirement resource to provide sufficiently for your golden years that is in fact not secure, and conversely not tapping on resources that are available and guaranteed.
Here are 3 things that you need to straighten your thinking on to hatch an adequate golden nest egg plan.
1. My Kids Will Provide for Me
When we become parents, we put our children’s needs and welfare before our own. A recent survey found that more than half of Singapore parents are willing to go into debt to fund their child’s education, often at the expense of other financial commitments like saving for retirement. While some believe that their children will eventually return their monies, many do not.
While Asian values preach filial piety, and I’m not saying that has completely been eroded, there is really no guarantee. Times have changed, the way we bring up children have changed. Gone are the times when the reason to have kids is so that they can be your future income generator (that was when your kids are your farmhands). Such expectations seem hard to enforce when kids don’t grow up with them ingrained, or see it as a societal non-negotiable.
The same survey found that while 25% of parents expect their kids to contribute to or pay back some of what is spent on their university education, only 5% actually do. Ouch.
So if you say, my kids will support me in my old age. Well yes, but completely or partially? They face their own financial commitments as they grow up and start a family. With cost of living and especially, medical costs, expected to only go up, not down, to be responsible for generating your own income for your retirement is not so much a back-up as a necessity.
2. I have $XXXXXX worth of assets. I should be set for retirement
One common pitfall is thinking that you have invested in a high value asset (read: property) and that will provide you with passive income for retirement. Note that when you go out to have a meal, you cannot pay with a card that deduct x% from your property value.
It is not a large (and illiquid) asset that will provide for your retirement but a guaranteed continuous income flow. Property investment is a darling in Singapore, but if you own a huge house that cannot be sold or rented, it doesn’t yield you any income at all. You need to have the financial stamina to wait it out, or unlock the value in advance.
The same goes for a stock-heavy portfolio. When you first started your portfolio in your working age, they may be more geared towards long-term growth but as you near retirement age, you need to refine the mix toward lower-risk, income-generating tools. Consult your financial adviser to adjust it to a level of risk that is suitable and comfortable for you as you enter retirement. A market downturn can leave you stuck with a portfolio that you cannot draw cash from.
3. MY CPF is used for my housing, healthcare and child’s education
The CPF was started as a retirement fund but people forget about that because they draw down on their CPF savings for housing, healthcare and children’s education costs. If you tap on the various CPF schemes as a retirement tool early, you can accumulate sizeable savings that covers a good part of your retirement budget.
Attractive CPF interest rates
Consider keeping your money in the CPF to let it grow. Savings in your Ordinary Account (OA) earn up to 3.5% per year* while savings in all other accounts earn up to 5% per year*, compounded annually. In a prevailing environment of ultra-low interest rates, this is a great deal.
Since 1998, members have been able to transfer savings from their OA to the Special Account (SA) to enjoy the higher returns from their SA, as long as the total amount in their SA after the transfer does not exceed the prevailing Full Retirement Sum.
Although transferring OA savings to SA means there is less in your CPF savings to invest in property, remember what I said earlier about large illiquid assets versus guaranteed income.
* Your CPF savings in the Ordinary Account earn guaranteed interest rates of 2.5% per year, while savings in the Special and Medisave Accounts earn guaranteed interest rates of 4% per year. The first $60,000 of your combined CPF balances, of which up to $20,000 comes from your Ordinary Account, will earn an extra 1% interest per year. Combined balances refer to the total balances in your Ordinary, Special, Medisave and Retirement Accounts, including the annuity premiums for CPF LIFE less any payouts made.
Retirement Sum Topping-Up Scheme
To fully tap on the compounding interests of the CPF accounts, you can also top up your personal or loved ones' CPF account under the Retirement Sum Topping-Up (RSTU) scheme.
Under this scheme, you get to enjoy tax relief of up to $7,000 if you top up in cash.
CPF LIFE Scheme
When you reach 55, a Retirement Account will be created for you. The savings from your Special Account and/or Ordinary Account will be transferred to your Retirement Account to form your retirement sum.
If you meet the minimum Retirement Account balance, it will be used to join CPF LIFE, which was introduced in 2009 to provide you with a monthly income from your payout eligibility age, currently at age 65, to meet your retirement needs. It is essentially an annuity plan. This is another reason why you should set aside the minimum sums into your CPF savings.
You can choose from three levels of retirement sum to set aside in your Retirement Account – Basic, Full or Enhanced Retirement Sum.
| Your monthly payout from age 65 | Retirement Account savings required at age 55 | |
|---|---|---|
| If you own a property and choose to pledge your property. | $660 - $720 | Basic Retirement Sum (BRS) ($80,500 in 2016) |
| If you do not own a property or choose not to pledge your property. | $1,220 - $1,320 | Full Retirement Sum (FRS)
($161,000 in 2016)
The FRS is 2 x BRS. |
| If you wish to put more savings in CPF LIFE. | $1,770 - $1,920 | Enhanced Retirement Sum (ERS) ^
($241,500 in 2016)
The ERS is 3 x BRS. |
After setting aside either the Full Retirement Sum or Basic Retirement Sum with sufficient property charge/pledge, you can choose to withdraw the remaining cash balances in your Ordinary and Special Accounts, or continue to keep your savings in CPF to earn attractive interest.
Learn more about the CPF LIFE Scheme.
Supplementary Retirement Scheme
The Supplementary Retirement Scheme (SRS) is a voluntary scheme to encourage individuals to save for retirement, over and above their CPF savings. Contributions to SRS are eligible for tax relief. In addition, you are taxed only on 50% of the amount withdrawn at retirement.
To begin making contributions, you need to first open an account with one of the three SRS operators: DBS, OCBC or UOB.
Learn more about the Supplementary Retirement Scheme.
Myths Busted, Now to Get Started
Start by getting a fix on the expenses you’ll face in retirement. While we cannot be exact to the dollar, it is not difficult to come up with a reasonable estimate, using the CPF Retirement Estimator.
Based on your various retirement sources, work out what is the guaranteed amount per month you can get, e.g. from an annuity plan, withdrawals from savings account, insurance policies or investments, and see if you can meet your monthly retirement budget. The CPF Retirement Calculator can provide a more detailed review of whether you are on track to meeting your retirement goals.
If there is a gap, consider how you can start growing your savings or investing now to close the gap. If you start early, you will have a longer time horizon and that means more time to hatch this golden nest egg.
