What young Singaporeans need to know to start planning for retirement

What young Singaporeans need to know to start planning for retirement

What is it about us Singaporeans and retirement? We just can't seem to get away from talking about it.

Many Singaporeans are naturally concerned about being able to retire as soon as possible while still maintaining their standard of living. But it's one thing to talk about retirement, it's another to talk about how much retirement income is enough.

So how much do Singaporeans need a month for retirement?

On the surface, deciding how much money Singaporeans need for retirement seems like an impossible task.

Firstly, it depends on what kind of lifestyle you want to have during retirement. Are you planning to travel the world? Write a book? Just have a lot of money and swim in it like Scrooge McDuck?

If you're going to be doing any of these things, you'll probably need quite a bit of money.

If not, then according to some finance experts, you can expect to spend $1,200 a month for your most basic post-retirement expenses.

Wah, only $1,200 a month? Is that even realistic?

This $1,200 figure is made up of $300 on bills, $400 for food, $200 for public transport and $300 for general entertainment.

However, given that many Singaporeans might want some sort of leeway when it comes to their own lifestyle, especially when you're retired and want to enjoy the fruits of your labour, planning for a bit more buffer is probably a wise choice.

With that in mind, we've come up with three scenarios, taking into account differing levels of lifestyle expenditure in Singapore.

The numbers shown here on a monthly and yearly basis are for each individual, and not a combined total:

1. Ms Teo Ah Choo, wants a simple retirement life

There are definitely Singaporeans who just want to live simply in their twilight years.

As an illustration, let's look at Ms Teo Ah Choo, who is blessed with relatively good health and doesn't need more than the most basic of lifestyle needs. She lives in the apartment she owns, and takes daily walks around her HDB estate, meeting and chatting with her neighbours and friends.

This scenario is essentially a benchmark which excludes variable expenses like medical bills.

With that said, here's what we're guessing Ms Teo's financial needs are:

Assuming a spend of $14,400 a year, that's about $1,200 a month.

It's still a pretty low estimate, all things considered - a single medical emergency could set you back another $2,000 to $2,500, the average total bill in a Class B2 ward, but thankfully when you're retired, MediShield Life takes care of a large part of the costs of medical care.

Assuming a life expectancy of 85 years - that's about 20 years in retirement.

At this level, you would be spending about $288,000.

2. Ms Hazirah and Mr Rahim, want to spend retirement spoiling their grandkids

After many years of hard work and raising good Singapore citizens, Hazirah and Rahim have retired. Now that their children have children of their own, Hazirah and Rahim are happy to chip in and look after their grandchildren. This means bringing them out to parks and shopping malls during the week. Just like regular Singaporeans.

Singaporeans apparently earned a median income of $3,900 a month last year.

Assuming that your lifestyle doesn't change too much in retirement, an ideal scenario would be if you still have the ability to spend about 70 per cent to 80 per cent of your income each month after the age of 65.

It's very unrealistic to think that someone who has been dining out regularly at restaurants or has gotten used to an air-conditioned home, for example, would suddenly be able to adjust to a lifestyle without all these luxuries.

Let's assume in this scenario, Hazirah and Rahim earned $3,800 each before retirement. That puts their monthly post-retirement income at about $3,000 each month.

Assuming 20 years in retirement, this comes up to spending about $720,000 for each person.

3. Ms Chitra and Mr Nathanael, plan to travel the world

In this scenario, we'll look at the retirement plans of Chitra and Nathanael, who have big plans about visiting almost every continent in their retirement years.

Let's look at what their annual expenditure would look like:

Assuming they each spend $72,000 a year, that's about $6,000 a month per person.

Again assuming a life expectancy of 85 years - that's about 20 years in retirement. At this level, adventurous retirees like Chitra would be spending a total of $1,440,000 in their retirement years.

Wah…. that's almost $1.5 million dollars. How is anyone supposed to have that kind of money on hand when you retire at 65?

This question assumes that upon retirement, you'll need to have a lump sum of cash waiting for you.

While working towards a lump sum is not wrong in itself, there is a human tendency to spend what you have.

It requires a lot of self-discipline to avoid splurging that lump sum you receive at retirement age on unnecessary expenditures without planning for the next 20 years of your life.

And what if you live beyond those 20 years? You'll risk having nothing to your name when you die.

So if we shouldn't be looking at getting a lump sum pay out, then what are you recommending?

Based on our general calculations above, you'll notice that it mostly depends on ensuring you have a regular monthly income in your retirement.

You'll want this income to continue regardless of what you do, so it needs to be steady and sustainable.

One of the things that will contribute to this recurring "income" is CPF LIFE, which promises monthly payouts based on the amount you commit in your Retirement Account.

What's better, the payout is lifelong, which means you'll never need to worry about your savings drying up.

Ideally, planning with the Full Retirement Sum (FRS), which as of 2016 is at least $161,000, in mind is the first starting step. The FRS will already give you a monthly payout ranging from *$1220 to $1320 (*payouts are estimated based on CPF LIFE Standard Plan parameters in 2016), and this doesn't even include your own money that you've saved up.

Should your CPF monies still be tied up elsewhere (e.g paying your monthly mortgage) when you retire, the Basic Retirement Sum is an option for those who own their property, because they don't need to worry about the cost of rent.

However, if you want to go beyond a basic retirement plan, here are some suggestions based on the lifestyle you want to have.

1. Scenario 1: Ms Teo Ah Choo, wants a simple retirement life

As we discovered above, Ms Teo is looking at monthly expenditure of $1,200.

Since she owns the property she lives in, she has the option of the Basic Retirement Sum, CPF LIFE will provide her a monthly payout ranging from *$660 - $720.

This is assuming she has at least $80,500 as of 2016 and is an estimate.

The additional money needed can come from an investment product that pays monthly dividends, such as unit trusts. She can also consider an annuity with a lump sum premium payment to supplement CPF LIFE.

The other side to this is, of course, if she has at least the Full Retirement Sum in her CPF, she will get monthly payouts that meet this amount for the rest of her life.

2. Scenario 2: Ms Hazirah and Mr Rahim, want to spend retirement spoiling their grandkids

Let's assume Hazirah and Rahim's post-retirement monthly income is about $3,000 each.

If they go with the Full Retirement Sum (currently at least $161,000), then CPF LIFE will pay out *$1,220 to $1,320 each month to each of them for the rest of their lives.

To achieve their preferred lifestyle, they will still need to earn about $1,800 each more every month.

Alternatively, if they had saved or put in more money into their CPF and have hit the Enhanced Retirement Sum (ERS) of $241,500, they'll get a payout of about $1,770 - $1,920 a month.

Here's a quick summary for your reference:

If you are like Hazirah and Rahim, other than the investment and insurance route, you can of course consider earning through rental incomes of your property, such as leasing out a spare room, or even moving to a smaller house and renting out your current property altogether.

3. Scenario 3: Ms Chitra and Mr Nathanael, plan to travel the world

As we mentioned above, Chitra and Nathanael want to have a post-retirement income each of $6,000 a month for their jetsetting lifestyle. This is also the kind of retirement lifestyle I'm sure a good number of Singaporeans hope to have.

Presumably if you intend to live this kind of lifestyle, you'd hopefully have been saving from an early age. Why? Because even if you leave as much money in your CPF as possible, and go with the Enhanced Retirement Sum (currently at $241,500), that results in CPF LIFE giving you *$1,770 to $1,920 a month (an estimate based on 2016's numbers).

If you hope to spend $6,000 a month, that means you'll need to find other means to earn $4,200 a month.

This is where starting saving and planning for retirement early is important.

When you're young, you can afford to take more risks and go for investment products with higher returns. But even if your risk appetite is low, starting early means you can take advantage of compound interest to maximise your returns.

What does all this mean for me?

Basically, if you haven't started planning for your retirement, there's no better time than now.

Your CPF LIFE monthly payouts will go a long way in ensuring that you have a steady income stream during retirement, but should you want to go beyond just the money you will get from CPF LIFE, you might like to consider active financial planning.

There are other considerations when it comes to CPF LIFE as well, and one of the big factors for most Singaporeans is being prudent about their home purchases.

Understanding more about how you can manage your CPF funds is key to making sure that you are not only able to buy a home, but more importantly, to retire comfortably.

Consider voluntary contributions to your CPF account, the CPF Retirement Sum Topping-Up Scheme or even getting your spouse to transfer excess funds from his/her CPF account to yours in order to enjoy the higher interest rates.

You may also consider options like looking into various investment and insurance products and more importantly, start saving now to ensure that you have a suitable monthly income for the lifestyle you want to have.

Have you started planning your retirement? What are your concerns?

This article was brought to you in collaboration with CPF Board.

The article first appeared on MoneySmart


MoneySmart.sg is Singapore’s leading personal finance portal, and aims to help people maximise their money with powerful tools and engaging content.

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