5 retirement problems Singaporeans never see coming

If you haven't started saving for your retirement, you really might want to soon.

A disturbing number of Singaporeans think they can live like cave-dwelling hermits. When we ask around, we still get responses like "Oh, I can live on just $1,000 a month when I retire." That's like scuba diving without oxygen and saying it's fine because you took a deep breath.

Retirement is not as simple or cheap as most Singaporeans imagine, and CPF savings won't be enough. In addition to living expenses, your retirement savings must also cover unforeseen situations like the following:

1. Being doomed to homelessness after giving up your flat

This is one of the most common problems faced by retirees. Some Singaporeans sell their flats (sometimes giving their children the money), and then move in with their children or grand-children.

But if you've had to share a hotel room with friends for a week, let alone move in with someone, you know things don't always work out. Quarrels happen. And when the retired parents get kicked out of the house, they are often penniless, and unable to get a place of their own. Cue social welfare and a rented studio apartment.

To prevent this happening, you either (a) hold on to your flat, or (b) ensure you have a big enough retirement fund that, even if it happens, you will not end up homeless. Option (a) is the easier solution; but if you must sell and give the money to your children, speak to a financial advisor about a safety net.

5 unanticipated retirement problems

  • A disturbing number of Singaporeans think they can live like cave-dwelling hermits, with many saying: "Oh, I can live on just $1,000 a month when I retire."
  • Retirement is not as simple or cheap as most Singaporeans imagine, and CPF savings won't be enough.
  • In addition to living expenses, your retirement savings must also cover unforeseen situations.
  • Some Singaporeans sell their flats and move in with their children. But quarrels happen, and when the retired parents get kicked out of the house, they are often penniless, and unable to get a place of their own.
  • To prevent this happening, you either hold on to your flat, or ensure you have a big enough retirement fund that, even if it happens, you will not end up homeless.
  • The cost of goods in Singapore rises every year, so income after retirement has to be sufficiently large to cope with the new cost of living.
  • Most people underestimate their spending. In the years immediately preceding retirement, every day is an off day. And like at present, we tend to spend more on weekends and off days than we do at work.
  • This can result in a sharp spike in spending, for reasons of sheer boredom - retirees who are adjusting to a non-working lifestyle often take overseas trips to visit friends, go to the movies more often or eat out more.
  • Many Singaporeans count on their flat as being a source of retirement funds. For the most part, this works - it is only under rare circumstances that flats fail to appreciate. However, you do have to be braced for it.
  • Government policy can also be a significant factor here: consider how, since 2014, property prices of resale flats have fallen because of government imposed cooling measures. You can't be certain that, when you need to sell, market conditions will be good.
  • Divorces can do significant financial damage, and if they happen at a late stage in life, a large chunk of your retirement funds can vanish.
  • You may also be forced to sell the flat at an inopportune time, if your spouse is also a co-owner. The cost of legal fees can also be exorbitant.

2. Inflation risk rate

Inflation rate risk refers to the way the rising cost of goods reduces the value of your money. The cost of goods in Singapore rises every year, so S$10,000 today will not buy you S$10,000 worth of goods in 10 or 15 years; this is why your grandparents could buy satay sticks for one cent in their time. So no, you cannot "just live on S$1,000" a month.

Your income after retirement has to be sufficiently large to cope with the new cost of living. To do that, you should have an investment that beats the inflation rate by two per cent per annum (at present, this means you need returns of at least five per cent per annum). It is not possible to get this from most bank accounts.

Unless you are a multi-millionaire with access to an exclusive private bank, you will be lucky to get one per cent on a fixed deposit. You either need to build a portfolio to generate sufficient returns, or pay a financial advisor or wealth manager to do it for you (e.g. let them choose insurance and mutual funds for you).

3. Rising retirement expenses during the first few years

Most people underestimate their spending. Ask a financial advisor or wealth manager, and they can often show you significant evidence that expenses post-retirement can actually rise, not fall.

In the years immediately preceding retirement, every day is an off day. And like at present, we tend to spend more on weekends and off days than we do at work.

This can result in a sharp spike in spending, for reasons of sheer boredom - retirees who are adjusting to a non-working lifestyle often take overseas trips to visit friends, go to the movies more often, eat out more, etc. (Some of you are shaking your head and insisting it won't happen. But we already said, most people underestimate their spending. Do you really spend less on weekends and holidays? That's only true for a tiny minority).

The best way to fix this is to plan for what you want. Look at your weekend, and think of the things critical to your lifestyle (e.g. golfing, travelling, photography). Make sure your wealth manager factors this into your retirement plan. In addition, remember that medical costs rise as you get older. Ensure that your integrated shield plan covers this.

5 dangerous retirement myths that Singaporeans believe

  • The cost of healthcare and insurance will increase. Don't assume that, just because the mortgage is paid up, the extra cash will cover the difference.
  • You also have to factor the cost of replacing stuff every three to five years: you'll need cash for home maintenance, replacing your guitar / computer / TV etc. Tabulate the cost of all that, and you'll realise even $1,500 a month is a dangerously tight sum to retire on.
  • The good news is Singapore's property values tend to head up over time. And at present, the government has a $15,000 silver housing bonus.
  • If you want to ensure a luxurious retirement, invest in other asset classes besides your house. You might also want to follow us on Facebook for the next 30+ years, as we track the state of home prices in Singapore.
  • The CPI is an annual gauge of how much the prices of goods have risen. So a CPI of 4 per cent means that, over the year, the prices of everything went up by 4 per cent. That's why a cup of kopi cost your grandma about a cent, and costs you around $1.20.
  • In effect, the money you have is worth 4 per cent less. And every year, Singapore's CPI reaches around 3 per cent to 4 per cent. Over the course of 20 to 30 years, you can expect inflation (the CPI) to utterly destroy your wealth if all you do is save.
  • In general, safer assets tend to have lower returns. Take, for example, a safe investment option like your CPF: the returns are guaranteed, but they only yield 2.5 per cent for the ordinary account, and 4 per cent for the special account. Likewise, bank fixed deposits tend to hover around 1 per cent, even though they're safe as fortresses.
  • In effect, your investment guarantees may just be guarantees of poor returns. A more reasonable approach would be to diversify your portfolio: mix low and medium risk investments. The riskier investments provide higher returns, while the safer ones offset any losses.
  • Some people retire at 62, some people retire at 70, and I know a lucky few who retire in their 30's. If you start to manage your finances as early as possible, you don't have to base everything on your CPF draw-down age.
  • When you insist on thinking of 62 as the magic age, you tend to put off your financial education. You don't bother learning about stocks and bonds, you don't build your emergency fund, you don't invest, etc.

4. Your flat depreciates in value

Many Singaporeans count on their flat as being a source of retirement funds. For the most part, this works - it is only under rare circumstances that flats fail to appreciate. However, you do have to be braced for it. You may find that your flat does not rise significantly in value, thus not meeting your needs for the entirety of your retirement (usually planned to age 90.)

Government policy can also be a significant factor here: consider how, since 2014, property prices of resale flats have fallen because of government imposed cooling measures. You can't be certain that, when you need to sell, market conditions will be good. You also need to consider psychological and health concerns - illness, lack of mobility, lack of personal comfort, etc. can make the mere thought of selling the flat impossible. In which case, you will need another source of retirement funds beyond your four walls.

If your income permits it, we advise that you plan for retirement as if you are not going to be able to sell your flat. This will prepare you for the worst, and can leave you with the option of not moving.

5. Costly, messy divorces late in life

Divorces can do significant financial damage, and if they happen at a late stage in life (e.g. less than a decade before retirement), a large chunk of your retirement funds can vanish. You may also be forced to sell the flat at an inopportune time, if your spouse is also a co-owner. The cost of legal fees can also be exorbitant.

Conclusion

For these reasons, you should start saving for retirement NOW. In addition to saving for your retirement, you should keep the habit of maintaining a personal emergency fund (about six months of your income) to deal with such unexpected situations. If you have a good wealth manager or financial planner, your portfolio's performance may be higher than expected. That could also give you the edge you need to deal with these types of problems.

Singaporeans financially unprepared for retirement

  • Retirement can seem a long way off when you are young. Nevertheless, it is crucial to start making retirement plans as early as you can.
  • Start thinking about the kind of lifestyle you want when you retire and how much you will need to fund it.
  • It is easy for retirement savings to suffer when times are hard. With the worst of the global economic downturn behind us, start looking for advice on how to replenish any depleted funds in your retirement pot.
  • Unforeseen life events can damage your retirement savings. No one can see into the future, but do consider what could happen and how this will impact your financial planning.
  • According to the HSBC-commissioned independent research study into global retirement trends, future retirees in Singapore foresee their savings to last only 13 out of an average of 23 years in retirement.
  • More than 53 per cent of working-age Singapore respondents said they are unable to retire comfortably with 15 per cent believing they will never be able to fully retire.
  • The most pressing issue was that almost a third of those aged 45 and above or nearing retirement, are either not saving or have no plans to do so.
  • 53 per cent of working-age Singapore respondents said paying off their mortgage and other debts remains the biggest barrier preventing them from saving enough for their old age.
  • The global report also showed that if people were to plan ahead and do things differently prior to retiring, chances are their future standard of living would improve.
  • 40 per cent of retirees believe that retirement planning should start at the latest by the age of 30 so as to save enough to live on comfortably.

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