Housing choice linked to retirement comfort

Housing choice linked to retirement comfort
PHOTO: The Straits Times

A young couple who plans to spend S$4,000 per month - at current prices - during retirement would need to save S$2,800 a month during their working years, a study by the central bank on Tuesday showed.

And a large part of this can be in the form of Central Provident Fund (CPF) savings, but only if the couple, each aged 30, makes "prudent housing choices", said the Monetary Authority of Singapore (MAS) in a report as part of its financial stability review.

"Retirement planning is an increasingly pressing issue for Singapore households as our population ages," said MAS, noting that the citizen old-age support ratio should decline from 4.7 in 2016 to 2.3 in 2030. This refers to the number of people age 20-64 years for every person who is 65 years old and over.

There are two main issues linked to this - the choice of housing, and how soon a couple chooses to stare down death and plan for retirement.

The MAS calculated that the monthly mortgage repayment for a S$380,000 housing unit - as represented by a Housing and Development Board (HDB) five-room, build-to-order flat - stands at about S$1,400.

By comparison, the mortgage repayment for a S$1 million housing unit is almost three times as much at S$4,000.

The choice of a home relates to the income replacement rate (IRR), which suggests that a net IRR of 53-78 per cent would generally be enough for individuals to maintain a comfortable living standard during retirement.

A study commissioned by the Ministry of Manpower in 2012 found that median-income couples who bought HDB four-room BTO flats would have IRRs of about 70 per cent.

However, if they purchased larger flats, such as an HDB five-room BTO flat, their IRRs would fall to about 60 per cent.

And that naturally falls even further for those living in private homes.

MAS was clear that circumstances may vary across individuals depending on factors such as income growth, savings rate and investment strategy.

Retirement costs are also a function of government policies, with the Department of Statistics Singapore separately saying that the consumer price index for retiree households fell by the most among all types of households in 2015 on lower accommodation and healthcare services costs.

But MAS underscored the trade-off between housing "consumption" and retirement savings, and noted that households tend to underestimate their retirement expenditure.

They would also need to plan for unforeseen life events such as illness.

"To retire comfortably, households must consider their housing choice as part of their retirement planning," it said.

What compounds the issue is the seemingly daunting nature of retirement planning, which has led many people to put it off.

This article was first published on November 30, 2016.
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