Retirement may seem very far away and intimidating for millennials who typically have more active goals like annual vacations, getting married, and buying a home.
However, when you ask a retiree on how prepared they are for their golden years, most would likely reply that they wish they could tell their younger selves to plan simultaneously for their long-term goals alongside their short-term objectives.
There's no need to blame the coffee and avocado sandwiches anymore...
A lot has been said about cutting back on drinking coffee or buying avocado toast. While the idea is to cut back on unnecessary spending so as to build savings and investments, focusing on your $7 Frappuccino might instead divert needed attention away from more important decisions. Smaller transactions such as these would only improve your financial situation marginally, rather on completely secure your retirement if you were to just stop buying your coffee everyday.
While it is worth to note that small expenses do add up over time, success in financial planning usually comes from making big and suitable financial decisions, instead of the small ones. Bigger expenses impact your savings efforts more, and will have a much more significant cumulative effect.
Having a holistic financial plan will also give greater clarity on the inter-relatedness in your decision making, so you can understand and take advantage of big and small transactions to fulfil your objectives.
You can still have your avocado toast, and eat it!
Here are 5 retirement planning tips for millennials:
1. Pay yourself first
Your income is a very important component in this. The higher it is, the faster you can save to build emergency cash of at least 3 to 6 months, before investing to make your money work harder for you.
This approach of paying yourself first helps you to save a pre-determined amount once your monthly paycheck comes, BEFORE you start spending it. Another strategy is to set up a realistic budget with spending targets to prevent unnecessary spending so that you can grow your savings. Another form of forced savings is your Central Provident Fund (CPF) accounts, as a certain portion of your pay is contributed there. Understanding how to maximise CPF schemes and leverage the interest rates go a long way in retirement planning. For instance, by making the maximum contribution through top-ups.
2. Get adequate protection Having adequate insurance cover when you are younger ensures insurability, affordability of premiums and helps to cushion the cost of treatment without having to dig into your savings. While you do not need to have insurance for everything, it will be good advice to figure out the things that could set back your financial situation or derail your financial goals. To help you decide what insurance types you need, make a list of the risks or events that concern you. Assess the likelihood of them happening and the financial loss you may suffer from such scenarios if so. Consider how you would cover the financial loss. For instance, large hospital bills or a loss of income due to the inability to work while recuperating, could set back your retirement goals if you don't have savings or insurance to cover them.
3. Building passive income flows When you retire, the focus shifts from accumulating wealth to that of decumulation, in which your assets will then start to manage your expenses. Yet, most people do not know how to manage this optimally. Hence, it is crucial to consider having a suitable decumulation plan and start building passive income flows in order to fund your future retirement needs and wants, such as with investments, stock dividends, and insurance.
4. Retirement income insurance One decumulation solution is receiving payouts from a retirement income insurance plan. This plan typically offers a combination of fixed and variable payouts over a specified time or for life. The premium payment may be paid in one lumpsum or over a limited period.
With Singaporeans living longer, some insurers are offering policyholders increasing flexibility in their retirement income insurance policies, such as the flexibility to do premium top-ups, defer the retirement age, adjust the income payout period, and even customise their retirement payout allocation. This sort of flexibility means that millennials can start with smaller amounts and increase the premiums as their financial situation improves over time. With this, it helps to address the “fear” of committing to saving for the “stranger” of their future selves.
5. Commitment towards long-term investing
It is never too early to set up a retirement plan. The earlier you start, the more time your funds have to compound and grow. It helps to give you a long-term investing perspective and better understanding of your risk profile and needs, while you are working towards short-term goals of your own. At all times, make sure to never lose sight of your long-term financial needs.
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