If you're young and starting out in your career, or at the peak of your career, the idea of retiring might not cross your mind. However, it's never too early to begin planning for retirement, even if you have many years until you reach retirement age.
In your 20s, taking advantage of compounding interest and time can help grow small amounts of savings into substantial sums. In your 30s, while your income may be increasing, you may also have expenses such as buying a car or a home. By the time you reach your 40s, you may be in your peak earning years but may also have responsibilities like supporting your own children and elderly parents.
Although it can be tempting to prioritize other financial needs, delaying retirement planning can make it harder to accumulate a sufficient nest egg. Starting early on your retirement plan can help you secure the funds you need for a comfortable life in retirement, and the process is simpler than you may believe.
What is Singapore's retirement age?
Knowing your retirement age is the first step towards planning for your retirement. In Singapore, the official retirement age is used as a reference point for retirement planning. However, you can always adjust your plan based on your preferred retirement age.
The lowest retirement age is 63 years old
Starting from 1 July 2022, Singapore's retirement age has been increased to 63 and will eventually be raised to 65 by 2030. This means that employers cannot force employees to retire early or terminate their employment due to age-related reasons before they turn 63. This age limit provides protection for workers and allows them more time to save money before they leave the workforce.
However, if someone wants to keep working, they do not have to retire at 63. Singapore also has a "re-employment age," which allows companies to offer continued employment to their workers for a set period of time. Currently, the re-employment age is 68, which allows individuals to continue working for five more years. Re-employment contracts are typically offered annually, contingent upon satisfactory job performance and good health. The re-employment age will be gradually increased to 70 by 2030, much like the retirement age.
CPF payouts will only begin at age 65
A Retirement Account (RA) is created for your monthly retirement payouts on your 55th birthday, funded by a portion of your monthly salary contributed to your CPF for healthcare and retirement.
You have the option to withdraw your CPF savings after setting aside the applicable retirement sum in your RA from the age of 55. This withdrawal can be made fully or partially, and as often as you wish.
Monthly payouts from your Retirement Account begin at age 65, which is a two-year gap from the official retirement age.
It is essential to have a retirement plan since unforeseen events such as illness or inability to find re-employment can result in an earlier retirement than intended. A retirement plan ensures that your daily expenses are taken care of after leaving the workforce.
How much money do you have to prepare for retirement?
Having determined your retirement age, the next step is to determine how much you should save in your retirement accounts by the time you reach age 63. To do so, it's important to consider the various factors that will impact the cost of your retirement in Singapore.
Your life expectancy
As you plan for retirement, it's essential to consider one crucial factor - how long you can expect to live.
In Singapore, we're blessed with a world-class healthcare system that helps us live longer, healthier lives. In fact, we have one of the highest life expectancies in the world! According to SingStat's latest data, the average life expectancy in Singapore is a remarkable 83.5 years. That's more than enough time to enjoy your golden years, explore new passions, and spend time with loved ones.
So, assuming you retire at 63, you can look forward to at least 18 to 22 years of retirement.
Summing up the price of retirement
How do you envision your retirement to look like?
Are you a person who values simplicity, or someone who dreams of living out their golden years in luxury? Answering this question can have a significant impact on how much you need to save for retirement. According to a 2019 study, a single individual aged 65 will require at least $1,379 a month to meet basic living standards, while a couple in the same age bracket will need $2,351. However, this amount does not cover the costs of extravagances such as air conditioning, a car, or medical and long-term care expenses. Therefore, determining how much you want to spend during your retirement can help you plan better and ensure that you have the financial stability to support your desired lifestyle.
Do you need to support anybody else?
Taking care of dependents can tighten your budget, and it's crucial to factor in their expenses when planning for retirement. This is especially true if you have a non-working spouse or a child with special needs who will require your financial support even during your retirement years. To get an accurate estimate of the amount you'll need, consider how much you're spending on their living expenses currently and add a little buffer to account for any unexpected expenses. By doing so, you can ensure that your retirement savings will be sufficient to cover not only your own expenses but also those of your loved ones who depend on you.
Do you have any confirmed expenses?
When it comes to retirement planning, it's crucial to take a look at your current financial situation and consider any outstanding debts, ongoing expenses, or commitments that will need to be factored into your retirement plan. Do you have any loans or mortgages that will still need to be paid off by the time you retire? Will you still require a domestic helper or caregiver, and how much will that cost? Are there investments or insurance policies that require ongoing premium payments? These are all important questions to ask yourself in order to create a realistic and comprehensive retirement plan.
A formula to find out how much you need to retire
Now that you have an idea of how much you need per month, it's time to calculate your ideal retirement amount. You can start with your current monthly income and expenses and adjust it for the lifestyle you want as a retiree. Don't forget to include expenses to support any dependents and a budget for healthcare, as health becomes more important as you age.
To arrive at your ideal retirement amount, use this calculation:
Monthly Retirement Needs x 12 months x Estimated Years of Retirement*
*However, do note that this amount does not include inflation or your CPF Retirement Account.
For example, if you need $1,379 per month for a simple retirement and plan to retire for 20 years, you'll need to save $331,920 in total. However, this amount does not include inflation or your CPF Retirement Account.
It's important to keep in mind that the study's conclusion only covers basic living expenses without accounting for inflation. Therefore, it's crucial to invest your savings in a retirement plan that beats inflation. Don't forget to consider your CPF Retirement Account as well. By planning ahead and understanding your retirement needs, you can ensure a comfortable and stress-free retirement.
It's true that the longer you stay in the workforce, the less retirement savings you'll need. However, it's not wise to rely solely on this assumption because life is unpredictable, and circumstances can change in an instant. You may face unexpected health issues, workplace layoffs, or other financial emergencies that could force you to retire earlier than planned. Therefore, it's important to be cautious and plan for retirement with the goal of achieving peace of mind by age 63. This way, you'll be better prepared for any unforeseen events and can enjoy your retirement without financial stress.
When should you start planning for your retirement?
It can be challenging to manage various financial obligations and find a suitable time to begin saving for retirement. However, the reality is that the ideal time to start planning for retirement is now. Starting early provides the advantage of compounding interest, making it simpler to achieve the necessary savings amount.
Why 20-year-olds should start planning for retirement
When you're in your 20s, you may believe that you have a significant amount of time to plan for retirement. This may be accurate, but it's also the perfect time to begin constructing a substantial retirement fund.
Lesser financial responsibilities
Although it may be alluring to spend your entire income as you please, your 20s are likely the phase in your adult life when you have the least financial obligations. Since you aren't burdened with expenses like mortgage payments, utilities, or raising a family, it's typically more manageable to allocate funds for retirement.
More time to save up
Regardless of whether you have more financial obligations than the typical Singaporean in their 20s, initiating your retirement plan now is still advisable. Time is on your side, which enables you to leverage compound interest to the fullest. This implies that even if you invest only a few hundred dollars, you could end up saving more for retirement than someone who began planning for retirement later.
Why your 30s is still not too late
As you enter your 30s, you may already have various financial responsibilities such as owning your first HDB, getting married, or expecting your first child. If you haven't prioritized retirement planning, it's not too late to start. Even if you begin at 35, you still have nearly 30 years to accumulate a sufficient retirement fund.
To prepare for retirement, it's crucial to allocate as much of your monthly income as possible towards retirement-building instruments. You don't have to live an extremely frugal lifestyle, but you may need to make some lifestyle changes. For instance, look for areas where you can reduce leisure and entertainment expenses. Instead of spending your annual bonus, consider directing it towards your retirement savings.
Scrutinize your monthly expenditures and determine which expenses can be minimized. These additional savings can bring you closer to achieving the ideal 20% savings goal. If reducing expenses is not feasible, conducting a cash flow analysis can still be useful in highlighting any savings gaps and providing insights into your household's monthly expenditures.
Why you still have a chance to save up in your 40s
When you are in your 40s, you are likely to be earning more and have more responsibilities as a member of the sandwich generation. However, with two decades to go until retirement, retirement planning should remain a top priority.
In addition to assessing your expenses and finding ways to increase savings, you can consider the CPF Investment Scheme (CPFIS) to grow your CPF retirement savings. This scheme allows you to invest a portion of your OA and SA to potentially earn higher interest rates. Since 20% of your salary goes into CPF, exploring CPFIS can be a worthwhile option.
To participate in CPFIS, you need a minimum balance of $20,000 in your OA and $40,000 in your SA. You can utilize a range of investment products, including Singapore Government Bonds. However, note that like any investment, there are risks involved. It is essential to practice safe and intelligent investing.
Another option is to do a voluntary top-up of your SA through the Retirement Sum Topping-up Scheme, available to those below 55 years old, with less than the current Full Retirement Sum in their SA, which includes the net savings withdrawn under CPFIS.
The advantage of this scheme is that your savings in SA can earn an interest rate of 4% per annum, compared to your OA savings, which earn an interest rate of 2.5% per annum. To see the difference in savings between this scheme and the normal OA interest rate, you can use CPF's calculator.
Your 3-step retirement plan
When considering retirement savings, it's important to keep your money in a financial instrument that can generate enough interest to outpace inflation over time. Simply keeping cash at home or in a low-yielding savings account won't suffice. Additionally, it's crucial to have financial protection in place to safeguard your retirement savings in case of unexpected events such as illness or job loss.
To secure a comfortable retirement, you need a 3-step plan that includes investment vehicles such as stocks, bonds, and mutual funds to generate returns, insurance policies to protect your assets, and a solid emergency fund to cover unexpected expenses. By combining these elements, you can build a robust retirement plan that will help you achieve your long-term financial goals.
Step 1: Investments
nvesting presents a more proactive approach to achieve your retirement goals by accelerating your money's growth over time. At its core, investing offers interest that can be compounded. Compound interest may seem simple, but it can facilitate the growth of your money faster than you might expect.
One effective way to take advantage of compound interest is to invest in a product that allows you to reinvest your gains, which can speed up the growth of your money. Some investment-linked insurance products can accomplish this by automatically reinvesting any earned payouts that you don't withdraw, along with your original sum, ultimately accelerating the growth of your money.
You can also use the Supplementary Retirement Scheme (SRS) to enhance your retirement savings. The government provides this voluntary savings scheme to aid in retirement savings and investment. You can contribute up to $15,300 per year to your SRS account and invest the funds in SRS-approved products such as exchange-traded funds (ETFs) and shares.
Nevertheless, it's essential to keep in mind that investing involves risks, so ensure that you conduct adequate research and proceed with caution before investing in anything.
Additionally, you can use your $500 SkillsFuture credits to learn more about investing and how it can contribute to retirement planning.
Step 2: Insurance
Though often overlooked, insurance is a crucial aspect of any financial strategy. You wouldn't want all your hard-earned savings to be wiped out by an unexpected illness or accident. Insurance helps to safeguard your finances by ensuring that your ability to earn an income is protected, your expenses are covered, and your retirement savings continue to grow in the event of critical illness or disability that renders you unable to work.
Your insurance requirements may evolve with each stage of life, but the following types of coverage should be especially beneficial as you work toward your retirement goals.
Life insurance
Life insurance is an important component of a financial plan that is purchased to safeguard the financial well-being of your loved ones. If you are the primary breadwinner or your spouse relies on you for saving for the future, it is crucial to consider life insurance. In the event of your death, diagnosis of a critical illness, or permanent disability, life insurance provides a lump sum payment to help your family meet ongoing expenses, protect your spouse's savings, and potentially contribute to their retirement savings.
Term life and whole life insurance are the two types of life insurance available, and the choice between the two depends on your financial capacity and individual needs.
Whole life insurance
Whole life plans offer a cash value if no claims are made during the policy term. Depending on the plan's performance, the premiums' value can even increase over time. Because of this feature, whole life insurance can be a beneficial addition to one's retirement planning portfolio.
Term life insurance
Term insurance is a suitable option if you are looking for a temporary financial safeguard, such as until your retirement age. However, it's important to note that term insurance is a basic protection plan that does not offer any cash value. This means that if you remain healthy and do not make any claims during the policy term, you will not be able to recover the premiums paid.
Health insurance
Health insurance is an essential component of any financial plan, especially in a country like Singapore where healthcare costs are high and continue to rise. On average, households in Singapore spend about 5% of their monthly expenditure on healthcare costs. Health insurance can help you cover the costs of hospitalisation and eligible outpatient treatments if you fall ill. By having health insurance, you can protect yourself and your family from potentially crippling medical expenses.
Step 3: Regular savings plans
A regular savings plan is a simple way to save and grow your money. You can choose to pay a single premium or make payments on a monthly, quarterly, half-yearly, or yearly basis, which is then invested to grow over your policy term. You can opt to receive your cash benefit as monthly payouts or as a lump sum, depending on the plan's features.
Some regular savings plans may also offer a small insurance component, which provides protection in the event of unexpected circumstances like death or total and permanent disability (TPD before age 70).
It's never too late to start planning for retirement
Retirement planning can be overwhelming due to the amount of information available. It's important to educate yourself on your options, but it's okay if you don't understand everything at once. Taking the time to learn is the first step towards effective retirement planning.
While self-study is essential, you don't have to navigate this journey alone. Feel free to reach out to me at 9790 1583 should you have any questions or concerns.
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