Retirement planning is such an unsexy phrase.
When I think of that, I imagine an old wrinkly person squinting at documents in front of an advisor who is nicely suited up.
Yep, something like that.
Where got time to think so far?
In addition, retirement planning feels like a journey of charts, numbers, extrapolation and just… all things intimidating.
When Should I Start Planning for Retirement?
Is it too early to start planning for retirement when you’re in your 20s?
In fact, the earlier you start, the better it is.
By starting earlier, you’ll be able to have a longer time horizon to plan for your savings, and grow this sum of money significantly with the power of compounding.
If you put off planning for your retirement till you’re in your 40s, there is more work required in growing this sum of money in a shorter time frame.
A larger sum would also be required to save for the same pot of retirement fund.
How different would it be?
Assuming that both Ms. X and Ms. Y are 25 years old this year.
Ms X decided to set a sum aside for her retirement fund at 25 years old, while Ms Y decided to start doing so at 35 years old.
|Ms. X||Ms Y.|
|Savings per month||$250||$400|
|Started at (age)||25||35|
|Total saved at 55||$90,000||$96,000|
Although Ms. X saved less every month and less in total, the total value of her retirement fund today is $26,802 more than Ms. Y’s.
Therefore, it is never too early to start charting out a retirement plan for yourself.
So here I am, a millennial who decided to start looking into it at 25 years old.
Disclaimer: Given that I’m not a professional in this area, I’m writing this from a beginner’s perspective for anyone who is interested to get started.
As such, this article does not aim to get into the nitty-gritty details of retirement planning (please approach a trusted advisor to help you with that!).
Instead, it aims to provide a general idea of how YOU can start thinking about your own retirement.
TL;DR: A Beginner’s Guide To Retirement Planning in Singapore: How To Start Thinking About Retirement
In this article, we will touch on four simple steps to help you begin with retirement planning.
1) Determine the kind of lifestyle you want
2) Determine when you wish to retire
3) Estimate your retirement income
4) Find ways to build up your retirement nest egg
So… Where and How Do I Start Planning?
So now that we know we need to start planning for retirement ASAP.
What are some of the things we have to make sure of before we start setting aside a sum for retirement?
Here are some common ways to see whether you’re ready to plan for retirement:
1) Determine the Kind of Retirement Lifestyle You Want
One of the most important things to decide when it comes to retirement planning is to determine the type of lifestyle you would like to have after retiring.
For instance, is it your goal to be residing in a freehold condo by the waters, or would you prefer lounging in your 3-room flat with your two dogs?
What are some of the hobbies and activities you wish to be doing during your retirement years
Does it include things like travelling around the world, which would require a bit more money?
How about your day to day living, such as the type of food and transport you wish to have?
Knowing your lifestyle essentials would provide a good first step in calculating how much you need for retirement.
And we all know that the lower the cost of living, the smaller the retirement nest egg that’s needed.
Therefore, do take a moment to evaluate the type of lifestyle you wish to have at that stage of life.
That being said, it might be difficult to accurately pinpoint what we want 40 years down the road since our priorities might shift along the way as well.
Therefore, It’s always better to overestimate your household expenses instead of trying to spread yourself too thin.
The key is to have a plan that allows you to live simply yet comfortable enough on your own terms.
That being said, finding the balance is always tricky since you don’t want to under save, or over save as it means exchanging more of your current time and energy for it.
2) Determine When You Wish To Retire
The official retirement age in Singapore is 62 (to increase to 63 by 2022), and the re-employment age is 67 (to increase to 68 by 2022).
However, you can always retire before this age if you wish to.
With a growing interest in the FIRE movement, many of us are definitely toying with the idea of retiring earlier.
Determining when you wish to retire will allow you to:
- See how many years you have until you retire
- See how many years you have to enjoy retirement
We previously did a calculation for the amount of savings that are required at different retirement ages.
According to an average life expectancy of 82.9 and the following assumptions:
- Basic monthly expenses for Singaporeans after retirement is at $1,200 per month, working out to be $14,400 per year
- No inflation for easier illustration
- Assuming investments after retirement beats inflation every year
- Ignoring CPF monthly payouts
|Retirement Age||Average Life Expectancy Of Singaporeans||Years Left To Enjoy Retirement||Retirement Savings Required|
It’s pretty self-explanatory that if you wish to retire earlier, you have a shorter time to save up and would require more savings to fund for retirement.
3) Estimate Your Retirement Income
After assessing how long your retirement would be, you can determine how much you need for retirement.
Besides calculating your living expenses, there are two main areas to take note of:
- Healthcare expenses
- Unexpected changes in life events
Our healths are unpredictable, and this is an area that might incur unexpected costs.
As we grow older, our healthcare needs would increase as well.
For instance, long-term care might be needed to meet personal care and health needs.
While we have schemes like CareShield Life in place, it might not be sufficient for our needs in the future.
Changes in health are something that is unpredictable and could potentially be a costly affair.
Unexpected Changes in Life Events
Another area to create a financial buffer would be the unexpected changes in life.
This might include changes in decisions when it comes to life events.
For instance, you might switch from planning as a single to being married and having kids.
Or having sudden plans to move overseas.
CPF also has this handy Retirement Estimator Calculator which is incredibly useful.
All you gotta do is to enter some key details, including your desired monthly retirement income and return on investment.
We can see that $487,949 today is equivalent to $1,015,268 in 2058.
There is also a CPF Retirement Calculator which is more detailed, including details such as salary increment, current CPF balances etc.
Definitely worth checking out!
4) Find Ways To Build up Your Retirement Nest Egg
Now that you’ve seen the amount required for your retirement plans, how do you start building your nest egg?
Especially when money already seems to not be enough for our day-to-day activities…
While we do have our CPF accounts for our retirement funds, I personally would not prefer solely depending on it as my retirement fund.
Also, given that we can only start withdrawing it as a monthly payout from 65 years old onwards, I would prefer having multiple sources for my retirement nest egg.
According to Moneysense, some income sources could include:
- Cash savings
- CPF and SRS
- Insurance policies and annuities
- Property rental income
- Cash proceeds from right-sizing to a smaller home
- Investments (e.g. shares, unit trusts)
- Income streams (e.g. dividends)
Also, since CPF is an involuntary savings scheme that would provide us with our basic retirement income, I would still aim to maximise it to form my retirement safety net.
A common rule of thumb that is used as advice when it comes to retirement spending would be the ‘4% withdrawal rule‘.
Which essentially means that if you withdraw 4% of your total investment portfolio every year, there’s a high probability that you would not outlive your money.
However, there are quite a few articles that have debunked this advice, with different individuals voicing their own opinion on this as well.
For instance, one interesting one that I’ve come across would be by Ed Rempel, who did a 146-year study to look for the maximum sustainable retirement income.
We Need To Stop Putting Retirement Planning Aside and Start Now
Most of my friends and I don’t really talk about retirement.
If anything, it’s probably something that is expected to be discussed when we are nearing CPF payout age.
Retirement can be a really intimidating topic.
Given how Singapore is one of the most expensive cities to live in, it’s easy to assume that we will never be able to save enough for retirement.
In our 20s, retirement would also seem like something that is incredibly far away, at the end of the journey that we have barely just started.
And with retirement seemingly a few decades away, it usually ranks low on our financial priority list.
That being said, we now know that retirement requires a huge sum of money, and the earlier we start looking at it, the more well-prepared we can be.
Your future self will also thank the present you for making these decisions, and you’ll definitely appreciate what you did for yourself when you were younger.