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Start early so your nest egg can grow

Survey after survey points to the fact that many Singaporeans are inadequately prepared for their silver years. -ST
Magdalen Ng

Tue, Apr 09, 2013
The Straits Times

SINGAPORE - Whether it's a morbid fear of death or just the unpleasant acknowledgement that we are all getting old, many of us just do not want to think about retirement, much less plan for it.

Survey after survey points to the fact that many Singaporeans are inadequately prepared for their silver years.

The same surveys often show that we actually know full well how important it is to build up a retirement nest egg, yet many people have yet to start doing so. About 40 per cent of Singaporeans to be exact, according to an HSBC Insurance study.

Experts have long extolled the merits of starting your saving early.

Mr Christopher Tan, chief executive of financial advisory firm Providend, tells The Sunday Times: "If one is accumulating towards retirement, you should give yourself at least 10 years to accumulate.

"Anything less, I would say it is very difficult. In fact, 10 years is already very tough. The more time you have, the less pressure on getting returns and the lower risks you need to take."

Fortunately, it is never too late to start, although those who are very near retirement age will likely have to set aside a larger sum each month and stick to relatively conservative investment tools.

Mr Daniel Lum, director of product and marketing at Aviva Singapore, notes: "With a short time horizon, you should focus on capital preservation as there is less time to rebound from large losses.

"While there isn't one magic formula that would be suitable for everybody, there is a wide range of investment, savings and insurance options available in Singapore to cater to different needs."

Assessing your needs

Deciding when you intend to retire governs how many years you have left to save.

And what you will need will be determined by lifestyle choices such as whether you plan to own a car, travel yearly and how often you plan to eat out.

Also take into account continuing liabilities like insurance premiums.

How long you will live is in the lap of the gods but statistics show that 50 per cent of Singaporeans aged 65 today are expected to live beyond 85, and a third beyond 90. It might be advisable to add a few years to that for good measure.

AIA Singapore and Aviva Singapore, for instance, have online retirement calculators to help you with the maths.

Getting started

Mr Ong Lean Wan, director and chief executive at research-driven and fee-based financial consultancy Life Planning Associates (LPA), says the first step in retirement planning is to top up Central Provident Fund (CPF) accounts.

For most Singaporeans, the basic source of retirement income will be the monthly payout from their CPF accounts. If at age 55, the CPF member has the full Minimum Sum of $131,000, it works out to be an approximate monthly income of $1,100 for life from age 65 under the CPF Life annuity scheme.

CPF savings earn a guaranteed minimum interest rate of 2.5 per cent per annum, as legislated under the CPF Act. Mr Ong says this kind of guarantee is hard to find in any other investment option.

There is also a tax relief of up to $7,000 per calendar year if you top up your CPF account with cash. The top-up for members under 55 will be made to their Special Accounts. Additions will be made to the Retirement Account for those aged 55 and more.

Top-ups for Special Accounts are capped at the Minimum Sum of $139,000 but less the amount of cash already in the account plus any of the savings that may have been used for investments.

As an example, if you have $39,000 cash in the account, and have not made any investments, you can top up your account by $100,000.

Retirement Account top-ups can be made up to the prevailing Minimum Sum but minus the cash balance already in the account.

Similarly, if you have $100,000 in your Retirement Account, you can add a maximum of $39,000.

However, Deputy Prime Minister Tharman Shanmugaratnam said that the CPF Life scheme is not designed to meet the needs of higher-income earners but to help a two-member, lower-middle income household or those that fall between the 20th and 40th percentile by income.

Manulife Singapore chief executive Annette King notes that one downside might be that the money in the CPF accounts will be locked in, and that some liquidity is still necessary to deal with any emergencies or unforeseen circumstances.

She adds that people who can afford a better lifestyle after retirement could consider using the many plans offered by insurers to supplement their income on top of the CPF Life payouts.

Private plans

Typically, consumers can make a one-time single-premium payment or pay the premiums yearly or monthly over a fixed number of years.

However, before committing to any such plans, you should review your finances and see if you can afford the premiums for the next 10 years if your liabilities or expenses might increase.

Mr Eddy Lim, head of protection and savings propositions at AXA Singapore, acknowledges that younger people especially may have difficulty working out how much they will be able to afford, especially if they intend to get married and buy their first property.

"It doesn't mean that to plan for retirement, you will have to fork out large sums of money. If you can take out maybe $200 or $300 a month, it will still add up over the long run," he says.

You can also choose the age at which you start to receive your money.

Given the wide array of plans in the market, it may be difficult to pick and choose, but Ms Viviena Chin, chief executive of Eternal Financial Advisory, says her clients tend to prefer plans that have lifetime payouts and guaranteed capital returns.

Few private plans offer lifetime payouts, but Tokio Marine's TM Retirement Life and Manulife's Manulife 3G do offer this.

The other plans usually have options on the payout mode, either lump sum or annual or monthly payments over a fixed period of time.

LPA's Mr Ong cautions against just taking the advertised investment returns wholesale, or at face value.

"Usually only a part of that is guaranteed, and the rest are projected rates, which depend on the economy. In recent years, many insurers have cut their terminal bonus rates because of the financial crisis, so only the guaranteed part matters."

Newer retirement plans

AXA Retire Happy has a unique feature - it offers a guaranteed rising retirement payment at 3.5 per cent a year, although there is also an option for level payouts. The increasing payout will help ease the problem of inflation during retirement.

The guaranteed returns can be up to 2.75 per cent per annum, and there is a non-guaranteed terminal bonus at the plan's maturity. This is largely dependent on how well the participating fund performs AIA Retirement Saver dishes out a guaranteed bonus worth 24 times the guaranteed monthly retirement income payout at the age of 65, to "celebrate retirement".

It is capital guaranteed, and also has a non-guaranteed annual cash dividend feature to help cope with inflation but this is dependent on the performance of its underlying participating fund.

Manulife's ManuRetire Secure, unlike the other retirement products, is not a participating fund-based solution, but rather is an equity-based fund. As such, the returns can be as high as the market achieves.

It uses the Citi Octave SGD Index as its underlying investment strategy.

There is no capital guarantee, but the downside risk is capped at 80 per cent of the highest historical unit price. Customers make a single premium payment, and can continue to invest as and when. In the event that there is a need to cash out, surrenders in the first three years are subject to charges but there are no charges from the fourth year.

Aviva MyRetirement has guaranteed returns of up to 2.38 per cent per year and customers can choose whether to receive their payment in a lump sum or over 10 years.

Payment can be made over eight years or up to five years before the preselected retirement age. There is also a capital guarantee when the selected retirement age is attained, which means that all the premiums paid up to that age will be returned to the policyholder in full.

Other options

Great Eastern's Family 3 gives out non-guaranteed cash bonuses yearly from the end of policy's second year. From the 10th year, there will be a lifelong yearly payout comprising guaranteed and non-guaranteed cash benefits. In the event of death, the sum assured will constitute a legacy for the family.

One feature of this plan is that the ownership of the policy can be transferred to your child when he or she turns 22. It will continue to pay annual cash benefits, and the eventual death benefits can be accrued to the third generation.

NTUC Income's Classic Annuity is a single-premium product that can be bought with funds in the Supplementary Retirement Scheme. It provides lifetime income after you retire. The fund is expected to earn a non-guaranteed long-term average return of 5.25 per cent per annum.

Endowment plans, such as Prudential's PruSave or PruFlexiCash, can also be used in retirement planning as they provide a lump sum or regular payout on maturity.

Other than these plans, if you still have additional disposable income, Aviva's Mr Lim says it is wiser to have a diversified portfolio to avoid over-exposure in any one asset.

Providend's Mr Tan adds: "You can either buy (additional products) directly from the stock markets or bond markets but a more practical way to do it is through unit trusts or ETFs (exchange-traded funds), where you can be better diversified without needing a large sum of money."

Even after all this preparation has been done and policies put in place, it is important to review your financial needs and retirement plans regularly. Ms Chin does so for her clients yearly to ensure that any potential gaps are plugged early.

Ms Chin takes into account any changes in financial situation, such as a pay increment or an additional mortgage payment.

"For example, if they have a windfall, or expect to be able to collect rent because they have bought an investment property, then maybe some of the funds can be channelled to other areas to make their money work harder for them," she says.

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