Retirement (& Annuity) Plans in Singapore: Ultimate Guide for 2019
The Big "R" in everyones' minds.
How do you go about it?
After reading this guide, you'll be well-equipped with much more knowledge on the tricky subject.
Some of the topics we're touching on:
The one thing in Singapore that may be hindering an easy retirement from happening...
Everything crucial you need to know about retiring in Singapore...
How retirement plans/annuities play in the overall picture...
... and more
So, read on!
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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 significant findings on how the retirement climate in Singapore is like...
So how's the retirement weather in Singapore looking?
Here are 3 major findings:
1) Saving only a fraction of what's required for retirement
Singaporeans required 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.
At the end of the day, ask yourself: "Am I able to retire with ease?"
It's the difference between having a coffee at Starbucks and in 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 retirement but only 6% are confident that they can maintain their current lifestyle when they retire.
In addition, most started to plan at 36 years old and expected to retire at 63 years old.
What do those statistics mean to you?
If you haven't started 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 better to start planning earlier.
You can set aside a smaller amount, then the surplus can be used for other purposes like saving up for your kids' education, etc. If those don't really matter to you, you're able to push forward your retirement age by starting early.
3) High probability to outlive your retirement funds
The life expectancy in Singapore is 83 years old and should be used as a reference for planning.
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 the very reason why if you go to the coffeeshops and hawker centres, you can still see old aunties that are beyond their 70s still working (can be a painful sight).
But, how can they afford to stop working?
With a lack of retirement funds coupled without having a job, there will be no income to pay for even the bare monthly expenses, much less enjoy the "golden years".
Even so, bad health may creep in and cripple the ability to do any form of work.
There could be one factor that caused this issue and which may be something that you're already doing - touching on this soon.
The Golden Retirement Age in Singapore
To start planning for your retirement, you would firstly need 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 62 years. That means that your company cannot ask you to retire before that age. 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?
Employees who have reached 62 can officially retire. But, if they wish to continue working, employers must offer re-employment to eligible employees within their company. If the company is unable to do so, the employees can be transferred to a subsidiary or another company (subject to conditions).
But what really matters most...
... is the CPF (Central Provident Fund) retirement age (also known as the drawdown age).
Because that's when you would start receiving monthly payouts from CPF.
The CPF drawdown age has been increasing through the years as well, and is currently at 65 in 2018.
This sparked the term: "shifting goal post" to be coined. Will this drawdown age be increased in the future? Nothing is certain...
So one of the best ways to decide when to retire is to decide when YOU want to retire.
Be it now, 55, 60, 65 or never (because you love your work), it is all up to you.
Having said that, it's still important to factor in the CPF payouts.
And proper planning NEEDS to be done especially if you want to have an earlier retirement because special provisions and sacrifices need to be made earlier on.
The One Thing That’s Hindering You From Retiring
If you're certain on the age you want to retire, it's time to work towards it...
But there's this one thing that's pulling you back - which is something you're likely to be doing already
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.
** drumroll **
The ability to purchase a property with your CPF Ordinary Account (OA) funds.
Let me explain...
When you contribute monthly to your CPF account, bulk of that contribution goes into your CPF OA with the remainder going into the Special Account (SA) and Medisave Account (MA).
The table below shows the allocation rates for private sector and public sector non-pensionable employees:
Throughout most of the years you can see that OA contributions forms the bulk of the total CPF contributions.
There are limitations to the SA and MA accounts.
For SA, you can use the funds to invest but you can only really "see" the money when you're beyond 55 years old.
For MA, you can use the funds to pay for hospital bills, premiums for ElderShield and MediShield, etc but that's pretty much it.
The biggest funds that you should be seeing in your CPF should be your OA funds.
But sometimes ... you don't.
There's liquidity in using the funds.
And the biggest one is that you can buy a property (happens to be a big asset).
Think about it...
When you're in your 30s, it's easy to apply for a BTO. When you purchase that property, you're able wipe out everything from your OA for the downpayment and sometimes, not needing to pay any cash at all. For the monthly loan repayments, you can use the monthly OA contributions to pay for the remaining loan.
It's all too easy to own a property because of that, but have you thought about how it'll affect your future?
In addition, you can also use the OA funds to pay for your kid's education in the future...
So what does that leave you?
At the end of the day, you're left with lesser OA funds.
And in my opinion, most of the CPF funds are for retirement purposes (more in the next section)
So, if a bulk of your CPF funds are taken out, your retirement funds are going to take a huge hit.
That's the reason why most Singaporeans look for alternative assets to supplement their retirement.
The Purpose of the CPF Retirement Account
What is the CPF retirement account?
When you reach the age of 55, your OA and SA balances will be transferred into the Retirement Account, which would form the Retirement Sum. This retirement sum allows you to join CPF Life which then gives you monthly payouts for life, starting from the current drawdown age, 65.
According to CPF, setting aside the retirement sum is meant to ensure there's regular income to support a BASIC standard of living.
So if you desire to "country-hop" when retirement comes and do whatever you like, something else has to be done on top of just contributing to your CPF.
By purchasing a property and paying it with CPF OA funds, the total retirement amount (OA + SA) may not be substantial when you hit 55.
This "retirement sum" would then be translated into low monthly payouts from 65 onwards, and it may not be the "dream" retirement you've always dreamed about.
This brings us to the next point...
How much can you expect to receive from the CPF monthly payouts...
Do You Want a Retirement that is “Basic" or "Full"?
Reiterating again, the CPF monthly payouts will be determined by how much you have in your CPF (only OA + SA) at 55, when it's transferred into the Retirement Account.
There are 3 "tiers" that you must know...
These are the CPF Retirement Sums if your 55th birthday falls on or after 1 Jan 2018 (and these numbers should increase from year to year - another "shifting goal post")
- Basic Retirement Sum: $85,500
- Full Retirement Sum: $171,000
- Enhanced Retirement Sum: $256,500
Basically, if you're able to set aside the full retirement sum or the basic retirement sum (with pledging of property), you're able to withdraw the remaining balance in your OA and SA. But the maximum you can set aside in the Retirement Account is the Enhanced Retirement Sum.
Knowing these numbers would help you get an estimate of what your monthly payouts would be like (example just below).
The amount in your Retirement Account is used to join CPF life which is an annuity that provides the monthly payouts for life, starting from 65. You can also defer the payouts till 70 (and receive up to 7% higher payouts per year).
You may be thinking: "what happens if I were to pass away?"
If that were to happen, you'll leave behind a "bequest" for your family - something like a legacy.
In short, the monthly payouts + bequest = you'll get back at least the amount you put into CPF Life.
To give more details, under the CPF Life scheme, there are 3 different types of plans - Standard, Basic and Escalating.
The selection of a plan should be based on your needs.
The 3 Types of CPF Life plans:
You have the option to choose the type of CPF Life plan between age 65 and 70. But if nothing is chosen, then you'll be automatically placed under the Standard plan.
Below shows the estimated payouts you can receive under the Standard plan:
For a more accurate estimation, you can visit the CPF life monthly payout calculator.
There are 3 points to take note:
- If you feel that you might not hit your desired retirement income with your CPF funds, then something else must be done.
- Don't forget about the inflation rate. The numbers usually increase with age because the cost of living is increasing year by year.
- Unfortunately, if you just want to withdraw everything, it's not possible to do so.
Adding On to Your Nest Egg: Supplementary Retirement Scheme (SRS)
If you wish to further "enhance" your retirement, there's still the SRS account available to complement CPF.
You can use cash to contribute to your SRS account but there's still a cap on how much you can contribute per year (numbers have increased since 1 Jan 2016):
For Singapore Citizens and PRs: $15,300
For Foreigners: $35,700
SRS contributions made on or after 1 Jan 2017 are still subjected to a cap on the overall personal income tax relief of $80,000 per Year of Assessment from Year of Assessment 2018.
There are several several benefits in contributing to your 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.
But you're able to invest in SRS-approved financial instruments like annuities, unit trusts, endowment policies, etc, which can give potentially higher interest.
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% fee on the withdrawal amount
Therefore, some Singaporeans may not find SRS to be the end-all retirement solution... but only as a supplement.
The Real Retirement Planning Question in Singapore: "Is CPF + SRS Enough?"
With the CPF and SRS, the initiatives provided by the government are fixed.
They are meant to provide for a basic retirement and maybe slightly more...
Are they enough for you?
Most of the time, it may not be. And if you want more than what they can provide, then it's all up to you.
So, how to plan for retirement in Singapore?
The only way to find out whether you would have enough and be able to hit your retirement goals is to first know your numbers...
That's why you'll need do a calculation...
Retirement Calculator: “How Much To Retire in Singapore?"
As the needs of everyone are different and there's no one size fits all, this simple retirement planning calculator would allow you to estimate how much you need to retire in Singapore.
Basically, we want to find out that total lump sum needed at retirement age.
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 these numbers:
1) Retirement Shortfall is Positive or Negative
If your Retirement Shortfall is Negative
Congratulations! If you continue to do what you're doing, then you should likely hit your goal. However, it's always good to create a buffer to cushion against the unexpected.
If your Retirement Shortfall is Positive
It's time to do something about it.
Continuing at this pace, you might not be able to achieve what you want in the future. Steady gains are what matters now. You can just start small to get into the habit of saving for retirement.
2) The Monthly Amount To Save From Now is Too High
The assumption is that you're just purely saving that monthly amount in the bank, generating at a 0.05% interest per year. This amount may be too high that it seems almost impossible, and you'll just give up.
One way to work around this is through alternate assets that can generate potentially high returns therefore bringing this monthly amount down substantially.
Some examples could be through retirement plans, annuities, investments, etc.
3) The Time Period to Save is Fixed.
No matter what, the time period stays fixed.
If you start saving later, the shortfall won't change, but the monthly amount needed to save will only get bigger until it gets out of hand.
If you've started 5 years earlier, that monthly amount is a lot lesser and you'll have lesser stress when it comes to wealth accumulation.
So these are the 3 reasons why most people create alternative assets so as to not rely solely on CPF.
Creating Alternate Assets: The Top 3 Retirement Solutions To Create Your Golden Goose
The top 3 ways people save for retirement in Singapore are saving in the savings account/fixed deposits, investments, retirement/annuity plans.
I'll go through each one then you can evaluate your options.
1) Savings/Fixed Deposits
In a typical savings account, the interest rate is usually 0.05% per year. And it's close to nothing...
Even with fixed deposits, the interest rate could hover around 1%.
There are times when banks offer promotional and attractive rates. But take note, this may not last for the long haul as the banks may be trying to get new monies in for the short term. So, the returns may not be so enticing and/or long-lasting.
The good thing is that having money inside these accounts give 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 leave 6 months - 1 year of income set aside for emergency funds (if retrenchment happens, these funds will come in handy as you use them to pay for expenses in the time being and most likely within 3-6 months, you can find another job)
The remaining amount of your money could go into other assets.
At the other end of the spectrum are investments.
Investments come in various forms and can be properties, stocks/shares, ETFs, unit trusts, etc.
There is a common denominator though...
The value can fluctuate drastically, and at any time.
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), but the amount you should allocate to investments depends on your risk appetite and what age you're at.
Think of it as running a race...
If you're in the 20s, you can pretty much take on any form of investment as the time horizon is much longer, and you have a higher probability to overcome losses (and gains) with time.
When you hit the 30s, the time to save becomes shorter. Sure, you may have already starting saving a little for retirement. You can still take some form of risk in investments but it may be time to look at less riskier options.
When the big 40 comes, you're in the last lap.
The money you've accumulated thus far are from the many years of hard work. Most in this age group wouldn't risk everything and put them all into investments. They would instead safeguard and fortify their assets by transferring from riskier assets to less riskier ones ...
3) Retirement/Annuity Plans
In the middle of the spectrum, comes retirement and 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). This ensures that your money is safe and not fluctuate haphazardly like investments.
Secondly, 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.
Savings Account / Fixed Deposits
Retirement / Annuity Plans
- Highest potential returns
- Provides safety and upside returns
- Don't need to require constant monitoring
- Low interest rates
- Can be very volatile
- Have to stick to the conditions set
What Exactly Is A Retirement Savings Plan or Annuity?
A retirement plan and an annuity is closely similar so I would the terms interchangeably.
There are many variations that can constitute to a retirement plan/annuity which are created by insurance companies (I'll go through the various options in awhile), 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. The income paid out usually comes with some form of guarantee. The payouts can last 10, 20 years, or for life, depending on the plan you chose.
How Do Annuities Work?
I'll be overly simplified.
The premiums that you contribute are pooled together with other policy holders' monies. The insurance company takes this pool of money and reinvest it in the hopes of gaining better returns. The funds can be invested in various instruments but majority of the holdings usually falls into bonds - which can be a safer class of investment product.
In return, most plans offer capital guarantees as well as additional bonuses.
Thus, you're essentially transferring the risk of volatility to the insurance company AND still able to enjoy upsides.
The Different Types of Annuities
Here are some commonly known 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.
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 still have time from their retirement age would usually go for this as they're able to grow their money more with a deferred annuity.
A lifetime annuity pays out income for the till the end of life.
Even so, there can be variations to this. One could get an lifetime annuity on his own life but he can also put it on the life of his child (or even grandchild). So basically, it's to extend the period of payouts, making it "more worth it".
And what if premature death happens? Usually there would still be a death benefit payout (most of the time, regular payouts + death benefit = at least the total amount you've put in).
A fixed period annuity pays an income for a pre-defined amount of time. It's usually 10 and 20 years. Think about it... the average lifespan is around 83. From your retirement age, there's a good 20 years there. So to most, it is sufficient.
On top of that, there can also be maturity payouts upon reaching a specified age.
It's the most common form of annuity in Singapore.
Pretty straightforward. The policy is funded by a single payout 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 a lot of different types of annuities but usually they are part of a combination.
The most common one in Singapore is an annuity that has a combination of Deferred, Fixed Period of Payouts, and having a Flexible premium.
But of course, it all depends on your needs and how you would want to design payouts for yourself and your beneficiaries.
3 Reasons Why A Retirement Plan Can Be The Last Piece to Your Puzzle
Imagine doing a 1000-pieces jigsaw puzzle...
You're only left with a few pieces and it's much easier to complete it now compared to when you first started.
Retirement planning might have more considerations to take note of but retirement plans form a foundation whether you're just starting out, close to retirement, investment-savvy person or know nothing.
That's why they're a good "next step" solution and can complete your puzzle.
Here are the 3 reasons why they are so pivotal:
With so many variations of retirement plans available, there is definitely one that will meet you demands and specific needs.
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 will not be any drastic impacts.
Or if you're still young, you don't need a huge sum to get started. You can just allocate a small amount monthly towards retirement, so it won't be so daunting if you were to start years later.
2) Potentially Higher Interest
Who would want to park their money away from their bank accounts while not being compensated by it?
But sometimes, Singaporeans are used to just leaving the money in their accounts, usually by habit. And at the end of the day, they thought they saved a lot but the hard truth is reflected in the unfavourable numbers.
Because there's an invisible money-eating monster.
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 for inflation to eat your money up.
Sure, the returns you get from such retirement plans may not be sky-high, but it can go in line with the inflation rate...
At least after decades, your money won't lose that much 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 your time and resources.
I'm not saying you should not put your money in bank accounts or investments, but striking a balance is crucial.
That's why these retirement plans give the best of both worlds (one world being guarantees; the other world having upsides).
The best scenario is when you put most of your time and effort into generating the correct income (your job) and then allocating it to such plans passively, so you'd 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.
It usually depends on the plan you've taken up.
But the downside is this: if you stop contributing or surrender/withdraw early, there will be penalties.
The penalty is that the money you take back could be lower than what you've contributed.
And thus, it's vital that you must AND be able to sustain the premiums throughout the contribution period.
If you're able to do so, then you'd be duly rewarded with a solution to retire according to your desired lifestyle.
Finding The Best Retirement Plan
So are retirement plans worth it? Should we buy annuities in Singapore?
That's for you to decide.
Somehow, plan features and returns do matter.
What you can take up depends on your age and features of the various plans offered by insurance companies (there may be limitations).
The only way to find out?
Compare the best retirement plans available in Singapore.