For most Singaporeans, retirement is an important issue. You worry about when you can retire, and what will life be like after retirement. Will your retirement fund be able to support you, or will you have to reluctantly return to work if money runs dry?
Setting out retirement goals can be a daunting task. Retirement costs that are projected decades into the future can reach dizzying and seemingly unattainable sums. Include the needs of dependent children and elderly parents, and the notion of retirement drifts further into the horizon.
To enjoy the kind of post-retirement life you deserve after decades of hard work, it is important to have a plan. Your plan should be clear in specifying your retirement needs and the regular saving required to turn your retirement dream into reality.
In this article, we share some handy tips that will help you in your retirement planning.
1.Account for inflation
Inflation refers to the rate of increase in prices of goods and services. Over a short period of time, the effect of inflation may not be perceptible. Given enough time however, inflation can greatly reduce the value of your retirement fund.
In Singapore, the (compound) annual average rate of inflation over the last 30 years was about 1.7 per cent. A person who started saving 30 years ago would have seen the purchasing power of his retirement fund reduced by more than 68 per cent due to the effect of inflation.
Healthcare inflation, the increase in the cost of medical treatment and health insurance, is an especially important consideration. As a person ages, his or her likelihood of seeking medical help or long term care increases. In addition, history shows that healthcare inflation is greater than general inflation - over the last 10 years, healthcare inflation increased by 31 per cent, while general inflation increased by 22 per cent.
Account for inflation to make sure your retirement fund retains its purchasing power at the point of your retirement. For example, if you feel that you can comfortably retire 30 years in the future on a retirement fund worth S$1 million presently, increase that figure by 68 per cent (we choose the same value as earlier as an assumption). This means that your retirement fund may need to be 68 per cent larger at S$1.7 million to give you the purchasing power S$1 million is worth today.
2. Start early
Setting aside money in a retirement fund is like growing a tree - the earlier you start saving for retirement, the more time your retirement fund has to grow and the larger it will grow.
Consider the case where you save S$20,000 yearly for 30 years. Assume that your retirement fund grows by 5 per cent yearly. At the end of 30 years, your retirement basket will grow to a considerable sum of S$1.3 million.
If you start saving 5 years later, your retirement basket will only grow to S$950,000. If you start 10 years later, your retirement fund will only have 20 years to grow, and will yield a much smaller sum of S$661,000. This amount is about half of what you would have received if you had started saving 30 years ago.
Variations in retirement basket sizes can be explained by compound interest - interest generated by contributions to your retirement fund also generate interest.
Your earliest contributions to your retirement fund have up to 30 years to grow, and the interest they generate is compounded by up to 30 times. This is why it pays to start saving for your retirement fund, as soon as possible.
3. Choose suitable asset classes
The objective of your retirement fund is to provide a fund to draw from after you have stopped working, regardless of the state of the economy. This means that your retirement portfolio should be resilient to economic cycles.
Because of this, you want to choose the right mix of asset classes to invest your retirement funds in. Stocks are an asset class that offers potentially higher returns in exchange for higher risk. An asset class such as government treasury bonds is usually less risky, but offers less potential for growth.
Retirement portfolios are usually weighted more heavily toward safer assets. This is unsurprising as riskier portfolios are more likely to incur investment losses - which can result in a downgrade in post-retirement lifestyle, or set the retirement party back by a few years.
4. Plan, review and rebalance
As a first step to planning for your retirement, write down your retirement goals. Specify clearly when you would like to retire, how much you would like to set aside every year, and what kind of retirement lifestyle you would like to have. Also be sure to plan for the needs of dependent children and elderly parents.
Over time, your retirement needs may change. Dependent children may (hopefully) decide to forgo graduate degrees in favour of entering the workforce. Or elderly parents may encounter health issues and require financial assistance. Regularly review your retirement plan to make sure that you are able to fund your planned retirement lifestyle.
Inevitably, the performance of the different asset classes in your retirement portfolio will diverge, changing its overall riskiness. For example, a stock rally will increase the value of stocks, increasing the proportion of stock relative to other assets in your retirement portfolio. As stocks are a riskier component of your retirement fund, the stock rally will also increase the overall riskiness of your retirement fund.
To maintain the overall riskiness of your retirement fund, you may need to sell stocks, or increase investment in less risky assets. This is known as rebalancing. Regular rebalancing will ensure that your retirement portfolio maintains a comfortable risk to reward tradeoff.
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