The Big “R” in the minds of everyone.
How do you go about it?
After reading this guide, you’ll be well-equipped with much more knowledge on this tricky subject.
Some of the topics we’re touching on:
- the one thing that hinders Singaporeans from having an easy retirement
- everything crucial you need to know about retiring in Singapore
- how retirement plans/annuities play a part in the overall picture
… and more
So, read on!
The Retirement Landscape in Singapore
On 27 Aug 2018, a research study on retirement in Singapore was released.
It surveyed 400 Singaporean parents aged between 30 to 55 years old, and there were interesting findings on how the retirement climate in Singapore is like.
So how’s the retirement weather in Singapore?
Here are 3 major findings:
1) Saving only a fraction of what’s required for retirement
The Singaporeans surveyed perceived to need an average of $3,314 per month during their retirement years.
However, they’re only setting aside 35% of that amount which works out to be only $1,146 per month.
What can we infer from this?
Firstly, we know that we absolutely need that amount, but yet nothing is done to fully address the issue.
And this problem will only snowball as time goes by – more on that later on.
Secondly, if you’re currently allocating less than $1,146 monthly for retirement purposes, you may be doing lesser than the national average, which can be a cause of worry.
Would you be able to retire with ease? It can mean having a coffee at Starbucks or at the coffeeshop.
Perhaps you’re the type that doesn’t appreciate the “atas” coffee at Starbucks, but during your retirement years, it’s all about having options.
If you truly want to enjoy the golden years of your life, you would want to be able to enjoy that coffee at Starbucks or from the coffeeshop, whichever that pleases you.
2) Most have already started planning but a huge majority are not confident that they can meet their goals
80% of those surveyed have already started planning for their retirement but only 6% are confident that they can maintain their current lifestyle when they retire.
In addition, most of them started their retirement planning at 36 years old and expect to retire at 63 years old.
What do these mean to you?
If you haven’t start to plan for retirement yet, is there enough time left?
Even if you have already started, are you really confident that you’re able to meet your retirement goals?
It’s always best to start planning early.
You can always start with a smaller amount, and increase your savings with time. Planning early also allows you to choose an earlier retirement age.
3) High probability to outlive your retirement funds
The life expectancy in Singapore is 84 years and should be used as a reference when we’re planning for retirement.
Now, the research has found out that 67% (two-thirds) of Singaporeans expected to outlive their savings and not have enough money to last through their retirement years.
This is extremely worrying.
And if you’ve been to coffeeshops and hawker centres, you can see this happening: old folks still working.
You see, how can they afford to stop working?
With a lack of retirement funds and if they stop working, there won’t be any income coming in to pay for the monthly expenses.
But it’s even worse than that. When the inevitable comes – bad health or old age – the ability to work is eliminated.
What’s going to happen then?
That’s why early and proper planning will ensure none of this will happen.
The Golden Retirement Age in Singapore
To start planning for retirement, you’d need to have a goal to aim for.
That starts with the age you want to stop working… for good.
So, what is the retirement age in Singapore?
According to the Ministry of Manpower (MOM), the official statutory retirement age in Singapore is currently at 62 years old. That means that your company cannot ask you to leave before that age (for age-related reasons). There are of course certain conditions to be met.
There is also something called a re-employment age… which is meant to provide older workers with more opportunities to extend their work life.
Since July 1, 2017, that age has been raised from 65 to 67.
What’s the difference, you ask?
Employers must offer re-employment to eligible employees to age 67. If the company is unable to do so, employees can be transferred to another company (subject to conditions).
But what really matters most..
… is the drawdown age of the Central Provident Fund (CPF).
Because that’s when you would start receiving monthly payouts from CPF. And it’s important to factor that in.
The CPF drawdown age has increased over the years and is currently at 65.
Although the official retirement age will be increasing, PM Lee Hsien Loong has pointed out that the CPF withdrawal ages won’t.
With all that being said, it’s up to you to decide when you want to retire.
Be it now, retiring much earlier than the average, or never (because you love your work), it is all up to you.
The One Thing That Can Hinder You From Retiring
If you’re certain on the age you want to retire, it’s time to work towards it.
But there’s one thing that’s pulling you back.
HINT: utilising the liquidity of this “asset”.
If you don’t control or plan to do something about it, then it’s going to be an uphill battle further down the road.
And that’s the ability to purchase a property with your CPF Ordinary Account (OA) funds.
Let me explain:
When you contribute to your CPF accounts, bulk of that contribution goes into your CPF OA with the remainder going into the Special Account (SA) and Medisave Account (MA), especially when you’re young.
The table below shows the allocation rates for the private and public sector non-pensionable employees:
Image Credits: CPF
Throughout most of the years, you can see that OA contributions should form the bulk of your CPF savings.
But at the end of the day, it doesn’t turn out that way.
The liquidity of the OA allows you to buy one of the biggest assets you’ll own – property.
In your 30s, it’s easy to apply for a BTO. You’re able to wipe out everything from your OA for the downpayment. And you can use OA funds for your monthly loan repayments.
It’s all too easy to own a property and this can be an issue in the future.
With lesser OA funds, your retirement will take a huge hit (more details later).
Low CPF Savings Lead to Low Monthly Payouts
When you reach the age of 55, to fund a newly created Retirement Account, your SA savings will be transferred first, followed by your OA savings.
The total amount transferred will be up to the Full Retirement Sum (FRS).
The monies in your Retirement Account will sit in there earning interests until you hit the age of 65. That’s when it’s used to join CPF LIFE (an annuity) which gives you monthly payouts for life.
(For more details, check out how CPF for retirement works.)
By purchasing a property and paying it with CPF OA funds, your CPF savings (OA + SA) may not be substantial when you hit 55, and will translate to low monthly payouts from 65 onwards.
And according to CPF, setting aside the retirement sum is meant to ensure there’s regular income to support a basic standard of living.
Enlarging Your Nest Egg With Supplementary Retirement Scheme (SRS)
To further enhance your retirement needs, you can contribute to the Supplementary Retirement Scheme (SRS).
Contributing to SRS can be only be from cash.
There’s also a cap to how much you can contribute per year:
- For Singapore Citizens and PRs: $15,300
- For Foreigners: $35,700
There are several benefits to contributing into SRS:
- Contributions to SRS are eligible for tax relief
- Investment returns are tax-free before withdrawal
- Potentially higher returns by investing into SRS approved instruments
- Only 50% of withdrawals are taxable at the statutory retirement age of 62
If you were to contribute to your SRS account, the funds only grow at a 0.05% interest rate.
There are still downsides though…
- Depending on how much you’re withdrawing during your retirement years, you may still need to pay taxes
- If you withdraw SRS funds before age 62, you’ll need to pay a 5% penalty fee on the withdrawal amount and 100% of that withdrawal amount will still be subjected to taxes.
Is CPF and SRS Enough?
The national schemes offered by the government are meant to provide for a basic retirement and slightly more.
Here are the average CPF payouts:
These payouts are from the previous batches but more has already been done, and future batches will expect higher payouts.
Are these schemes enough for you?
If you think it’s not enough, then you’ll need to do something about it.
To start planning for a successful retirement, you’ll need to first know your numbers.
How Do Your Retirement Numbers Look Like
You must first need to know where you stand.
So head over to this retirement planning calculator, which allows you to estimate how much you need to retire in Singapore.
The calculator allows you to find out:
- How much you’ll need to be able to retire
- Whether there are any shortfalls
- If there are shortfalls, how much more do you need to save
Illustration of John’s Retirement Goals
Current Age: 40
Retirement Age: 65
Age To Stop Receiving Income: 85
He wishes to spend $5,000/mth (in today’s value) during his retirement years. Based on 3% Inflation Rate compounded over the years, that monthly amount would be $10,468 when he reaches 65. Therefore, his total lump sum needed at retirement age is $2,512,533.
John does not wish to take into account his CPF or whatever investments he’s doing right now into the calculation.
Therefore, his Retirement Shortfall Needed is the same at $2,512,533.
He now has 25 years to accumulate that amount.
If he were to save in the bank from now to his retirement age, he’ll need to save $8,375 per month.
3 Inferences You Can Make From John’s Numbers
1) Retirement Shortfall is Positive
That means that John still has to save for retirement – $2,512,533.
If he continues to do what he’s doing, he might not be able to achieve his retirement goals. So something has to be done.
2) The Monthly Amount He Needs to Save Is Too High
He needs to save $8,375 per month from now till his retirement age.
That’s a lot. But the assumption is that he’s just purely saving that money in the bank, generating low interests.
Another solution is to save/invest in alternate assets that can generate potentially higher returns, which will then bring this figure down substantially.
3) Time to Retirement Is Fixed
How much he has till retirement is fixed.
If he starts saving later, the retirement shortfall won’t change, but the amount he needs to save every month increases substantially, making it even more difficult to achieve.
So not only should he save and invest his savings, he should do it as soon as possible.
Why You Should Invest for Retirement
When you’ve made investments into your career and/or businesses, you’ll reap rewards in the form of bonuses, higher salary, and promotions.
With more money, it should be put to better use, away from the bank account.
Apart from inflation (costs of goods get more expensive with time), there’s also the opportunity cost of not doing anything.
With a compound interest calculator, you can see the effects of how getting higher potential returns can affect the amount of retirement funds in the future:
Here are some solutions that cater to retirement:
- Savings Accounts
- Fixed Deposits
- Retirement Plans (Annuities)
- Individual Stocks and Shares
- Index Funds, ETFs, and Unit Trusts
- Real Estate Properties and REITs
With so many solutions, how do you choose one?
While every one is different – risk appetite and expected returns – here’s one way to look at it.
These assets can be categorised as such:
- Emergency funds
- Non-volatile assets
- Volatile assets
And here’s a common strategy to investing for retirement:
When you’re young, you can afford to take more risks as your time horizon to retirement is longer than someone who’s older. A longer time horizon enables you to recover from market downturns. At the same time, you can also start to build a foundation with non-volatile assets.
When you’re older, as your time horizon is shorter, you might want to reduce the amount of volatile holdings you have and divert them into non-volatile assets, to lock in profits.
But again, every one is unique, and everything depends on your situation and preferences.
Why Is a Retirement Annuity Plan a Great Alternate Asset
In a typical savings account, the interest is usually 0.05% per year. And it’s close to nothing.
Even with fixed deposits, they can hover around 1-2%.
The good thing is that having money inside these accounts gives liquidity and is very safe.
The downside is that there is opportunity cost as your money could be put into better use.
Generally, it’s good to set aside 6-12 months of income/expenses as emergency funds. This will be on top of whatever short term financial commitments you have.
The rest should be placed in other alternatives.
At the end of the spectrum are investments.
They come in various forms such as properties, REITs, ETFs, unit trusts and stocks.
There is a common denominator though…
The value can fluctuate, and at any time.
Timing is crucial. For example, if it drops 50% when it’s time for you to retire, would you sell off at a loss? What if it’s down for a prolonged time? How are you going to find the money to retire on?
I’m not saying that you shouldn’t do any investments (you should consider them), but the amount you should allocate to investments depends on your risk appetite and what age you’re at.
In the middle of the spectrum, comes retirement annuity plans.
They offer the best of both worlds…
Firstly, the money you’ve set aside can be capital guaranteed (look carefully at the policy illustration; subject to conditions being fulfilled).
Secondly, apart from guaranteed income, the plans offer “bonuses” in the form of non-guarantees which help to grow your money. Sure, the returns might not reach as high as what investments can achieve, but at least your money is still growing rather than collecting dust in the bank.
What Exactly Is A Retirement Savings Plan or Annuity?
A retirement plan and an annuity is similar so I would use the terms interchangeably.
There are many variations that can constitute to a retirement plan but here’s what they’re commonly known for:
You allocate either a lump sum or a monthly/yearly fixed amount for a period of time, usually till your chosen retirement age. At the retirement age, you can receive a regular income stream monthly or yearly, for a specified period of time – 10, 20, 30 years, etc. The income paid out usually comes with guarantees and non-guarantees.
How Do Annuities Work?
Here’s a simple overview:
The premiums that you contribute are pooled together with other policy holders’ monies. The insurance company takes this pool of money and reinvest it to achieve higher returns. The funds can be invested in various instruments but majority of the holdings usually go into bonds.
In return, most plans are usually capital guaranteed upon maturity and offer guaranteed income as well as additional bonuses.
Thus, you’re essentially transferring the risk of volatility to the insurance company and can still enjoy the upsides.
The Different Types of Annuities
Here are some common types of annuities in Singapore:
When an immediate annuity is purchased (usually as a one-time lump sum upfront), it is designed to pay out an income immediately, whether it’s monthly or yearly. It’s meant for people who are already very close to their retirement age. Such plans are rare.
Deferred annuities are the opposite of their Immediate counterpart. There is a deferred period or accumulation phase before payouts start. The accumulation period can be 10, 20, 30 years, etc. People who are still far from their retirement usually go for this as the regular amount to save is manageable.
A lifetime annuity pays out income till the end of life.
An example will be CPF LIFE. But that’s a national scheme.
Insurance companies can offer such an option too.
There are variations to this as well. For example, you can get a 3-generation lifetime income plan on your child’s name. That’ll extend the period of payouts.
Fixed Payout Period
A fixed period annuity pays an income for a pre-defined amount of years (e.g 10, 20 years).
The average life expectancy is 84 years. So the likelihood of needing a long payout period is lower (comparing to lifetime payouts).
It’s the most common form of annuity in Singapore.
Pretty straightforward. The policy is funded by a single lump sum upfront.
It’s funded by a series of payments, usually on a monthly or yearly basis from the time of purchase to the intended retirement age.
It seems that there are many types of annuities but usually they are part of a combination.
The most common one in Singapore is an annuity that offers deferred payouts for a fixed period of time, and is funded by regular premiums.
But of course, it all depends on your needs and how you would want to design payouts for yourself.
3 Reasons Why a Retirement Plan Can Be the Last Piece to Your Puzzle
Image doing a 1000-pieces jigsaw puzzle..
At the beginning, it’ll be difficult to figure out the whole puzzle but as you’re piecing everything together, it becomes easier.
Likewise with retirement planning, it’s more complicated at the beginning.
But as you’re learning more about it, there could be a time when you’d realise annuity plans can be a good complement to your financial portfolio whether you’re an investment-savvy person or know nothing.
That’s why they can complete your puzzle. Here are 3 reasons why:
With so many variations of retirement plans available, there is definitely one that will meet you demands and specific needs.
If you’re still young, you don’t need a huge sum to get started. You can just allocate a smaller amount first and relook into it in the future.
Even if you’ve started to receive your regular income during retirement years, most plans offer the option of surrendering, so you can just cash out the lump sum. This is important because things may change in the future and such flexibility ensures that there’s a way out. But beware of the implications of surrendering too.
2) Potentially Higher Interest
We’re used to leaving money in our bank accounts, usually because of habit.
And at the end of the day, we may think that we have a lot but the hard truth is that it’s eaten by inflation.
The cost of goods is increasing every year, and sometimes you don’t see or feel it, but it’s happening all around us.
5 years ago, coffee may be $0.50, but now it’s $1 (or more…).
Leaving the money in the bank over time is a sure way to “lose money”.
Sure, the returns you get from such retirement plans may not be sky-high, but it can offset inflation.
At least your money won’t lose value.
Bank accounts give safety and liquidity, but that’s about it.
Investments give potentially higher interest but can fluctuate greatly. And if you’re doing your own investments, it also takes up time and resources.
I’m not saying you shouldn’t put your money in bank accounts or investments, but striking a balance is crucial.
These retirement plans give the best of both worlds – guarantees and participating in upsides.
The best scenario is when you put most of your time and effort into generating the highest income (your career) and then allocating extra cash into such plans passively, so as to make your money work much more harder.
The Biggest Downside Of Retirement Plans
As much as retirement plans seem like the holy grail of all retirement solutions.
This is not entirely the case…
While insurance companies can provide structured payouts and by absorbing investment risks on their end, there are conditions that you must meet.
For example, if you stop contributing or surrender/withdraw early, there will be penalties.
The penalty is that the money you can take back may be lower than what you’ve put in.
And thus, it’s vital that you must be able to commit paying the premiums. If you’re able to do so, only then the annuity will work for you.
Finding the Best Retirement Plan in Singapore
So are retirement plans worth it? Should we buy annuities in Singapore?
That’s for you to decide.
Somehow, plan features and potential returns do matter.
It depends on your age as well.
The only way to find out?
Take the first step by comparing the best retirement plans in Singapore.