Retirement Funding

With immediate needs and financial commitments such as purchasing a home and getting married taking precedence, Singaporeans often defer planning for retirement. According to a survey conducted in 2006, only 1 in 10 Singaporeans actively saved for retirement.

CPF is insufficient for your retirement needs

Many people have the misconception that their CPF savings can see them through their retirement years. The reality is that the Central Provident Fund (CPF) may not be able to provide Singaporeans with the much-needed financial security in their senior years, as much of it would have been withdrawn for other purposes over the years. In fact, less than 1 in 3 Singaporeans are even aware of how much CPF funds they will have by the time they reach 55 years of age.

For most people, the ‘age of retirement’ is about 65. As retirees need to live on assets they have accumulated during a lifetime of work, many realize they will need to continue working longer than planned.

If you want to retire with sufficient savings, you will need to start planning and saving sooner rather than later.

Life insurance can play a significant role in long-term retirement planning by providing you with a regular source of income during your retirement years. Below are some guidelines to assist you in planning for your retirement:

Gauging your retirement needs
 
Retirement is a highly personalized lifestyle change that requires careful attention and good decision-making skills.
 
As a general rule of thumb, most would require 50 to 70 per cent of their last drawn annual income to maintain their current standard of living during retirement.		 Life insurance is necessary for a comfortable retirement life.
However, bear in mind that you have to take into account the impact of inflation, and if you aspire to have an active retirement lifestyle that involves traveling and hobbies, you will require more savings!
 
To ascertain how much retirement income is needed, it is important to first ask yourself four basic questions:

  • What are my investment goals?

    • Consider your current lifestyle and your dreams.

  • How long do I have to invest?

    • Estimate how long it will be before you retire - your time horizon. The longer your time horizon, the more risk you may be able to accept in exchange for potentially higher returns. If your time horizon is relatively short, you may not want to accept as much risk.

  • How long do I expect to live in retirement?

    • If you can estimate this, you will be able to design an investment plan that covers the entirety of your retirement.

  • How much risk am I willing to take?

    • It requires you to stick with an investment strategy that exposes you to the possibility of loss, which can be a bit unnerving at times. However, there will always be risk in financial markets, so meeting your retirement goals will force you to take an honest view of your own willingness to tolerate risk, to have reasonable expectations regarding market performance and to invest consistently for the long term.

Designing your retirement
 
A complete retirement strategy recognizes three financial categories – essentials, lifestyle and estate. Each can and should have its own unique investment portfolio.		 Start saving sooner rather than later.
Essentials are the fixed expenses of life, such as groceries, housing, insurance, healthcare and taxes.
 
Lifestyle is made up of the various aspects that make retirement more enjoyable, such as dining out, club memberships, vacations, golf lessons and so on.
 
Estate refers to creating a future legacy, such as an inheritance for children and/or grandchildren or a gift to a cause that matters to you.

How to start building your nest egg

After you have established your retirement expenses, you can start building what you are going to need to live out your golden years in comfort.

You should start saving early so that you can benefit from the compounding interest, which in turn will help you build a larger nest egg. You will also have a longer period for accumulation, saving and investment.

There are a variety of ways you can start saving:

Bank Deposits To get things going, save a portion of your income with a fixed bank deposit.
 
They generally pay a very low interest, but it is a safe and low risk option which ensures a smooth saving plan over the years. It is also one with the highest liquidity as you can still access your funds anytime should the need arise.
 
The risk here is that you could keep dipping into your savings and find that they are depleted, or inadequate, by the time you reach your golden years, so if discipline is not your thing, perhaps other plans are needed as well.
Investing in stocks and unit trusts Don’t forget that there’s a risk. 
 
Talk to a financial advisor and assess your risk appetite, how long you are looking to investing for, and the kind of returns you can hope to achieve from your investment. 
 
If your risk appetite is low, this option is not for you.
Endowment policy You can build your retirement fund by investing in a policy that both protects you and allows you to save. Essentially, you pay a premium over a set number of years, at the end of which you will receive a payout. This payout may also potentially offer higher returns than bank deposit interest rates and therefore allows you to build a larger retirement fund in a shorter period.
Investment-Linked Insurance Plan (ILP) An ILP allows you to invest and at the same time protect yourself and your family against financial loss in the event of an unfortunate disability or injury.
 
You can decide how your premiums are invested, in which funds, and also have the flexibility to switch between different funds during the life of the policy.
Life Annuity You pay a lump sum to the insurance company, in return, the insurer gives you monthly payouts for as long as you are alive.
 
There are annuities that are specially designed for members of the Central Provident Fund (CPF), under the CPF Minimum Sum Scheme or Minimum Sum Plus Scheme.
 
For this annuity, you can invest your CPF Minimum Sum with an approved life-insurance company to provide a monthly income for the rest of your life.