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230621 High Income Retirement Planning Mistake

Avoid This Retirement Planning Mistake That High Income Earners in Singapore Are Making

profileJoel Koh

Just the other day, I came across this article from The Straits Times with the attention-grabbing headline that 1 in 2 high-income earners in Singapore has money problems.

The article references this report that was commissioned by St. James’s Place (SJP) Wealth Management and undertaken by Sandpiper Communications.

For this report, 1,045 Singapore respondents between the ages of 25-54 from households with a minimum annual income of $70,000 to over $250,000 who held personal investments in stocks, property, shares, funds, etc. were surveyed. Also, SJP classifies these respondents as high-income earners.

But to contextualise it further, I looked at the latest data from SingStat published on 8 Feb 2021.

Monthly Resident Household* Income from Work (Excluding Employer CPF Contributions) for 2020Per cent
Total100
No Working Person13.3
Solely Non-Working Persons Aged 65 Years & Over7.5
(subset of non-working persons)
Below $1,000 2.1
$1,000 - $1,999 5.9
$2,000 - $2,999 6
$3,000 - $3,999 6.1
$4,000 - $4,999 6.1
$5,000 - $5,999 6
'High' Income Earners
$6,000 - $6,999 5.5
$7,000 - $7,999 5.1
$8,000 - $8,999 4.8
$9,000 - $9,999 4.2
$10,000 - $10,999 4
$11,000 - $11,999 3.4
$12,000 - $12,999 3.1
$13,000 - $13,999 2.7
$14,000 - $14,999 2.4
$15,000 - $17,499 4.7
$17,500 - $19,999 3.3
$20,000 & Over 11.3
*A resident household refers to a household where the household reference person is a Singapore citizen or permanent resident.

Under SJP’s classification, it would be safe to say that about 54.5 per cent of Singaporean households can be considered high-income earners.

If you extrapolate it roughly, this would mean that more than a quarter (27.3 per cent) of Singaporean households have stated that they are facing money problems.

But what caught my eye was the follow-up article which stated that

most high-income earners simply let the bulk of their money remain untouched in their bank accounts’ with ‘40 per cent of them saying they have only one source of income – the money from their full-time work that will not be used for any investment to grow their savings further. 

Whereas 36 per cent stated they have two sources of income, 15 per cent stated they have three while a small number responded that they have four or more.

In my opinion, this is something that most people cannot afford to do in Singapore.

I would go so far as to say that this is a retirement planning mistake, as not making your money work harder for you would typically mean that you would have to work longer before you can retire.


TL;DR: High Income Retirement Planning Mistake

  • According to the SJP survey, about four in 10 high-income earners in Singapore leave their money idle in the bank and do not invest it.
  • This can potentially be a problem if you are looking to live and retire comfortably in Singapore due to inflation and other factors.
  • The Monetary Authority of Singapore (MAS) Core Inflation Rate in Singapore over the last 20 years (2000 to 2020) stands at 1.52%.
  • Alternatively, you can consider topping up your Central Provident Fund (CPF) Special Account (SA) or start investing.

Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice or recommendation of any sort offered or endorsed by Seedly. Investors should always do their due diligence before investing in any investment products or adopting any investment strategies.


Why Leaving Your Money Idle in Bank Accounts Can Be a Problem

I would think that aside from those who in the top tier of earners in Singapore (e.g. earning $20,000 a month) who live within their means, leaving your money idle in your bank account can become a problem if you are looking to live and retire comfortably in Singapore.

St. James Place Wealth Management

Even amongst the high-income earners in Singapore, almost half of the people surveyed believe that they have not saved enough for a comfortable retirement.

You might be thinking what does planning for a comfortable retirement entail. Well, that really depends on what kind of lifestyle you want during retirement.

But for this illustration, we will be using some national statistics.

From 2022, the statutory retirement age in Singapore will be raised to 63 years of age.

Whereas the average life expectancy for Singapore in 2020 was 83.66 years, a 0.16 per cent increase from 2019. As medical science advances, I expect life expectancy to continue growing in the future as well.

Thus, planning for your retirement would involve ensuring that you have enough cash and liquid investments that will last you at least about 21 years (83.66 – 63) after you have retired.

Let’s say you have done your sums and realised you need about $2,500 a month after retiring. That means you will still need $630,000 to last you 21 years!

Even if you have managed to save up that much, it would not be the best idea for you to keep all your money in a savings account which a realistic interest rate of 0.40 – 1 per cent per annum (p.a.) if you are not a high spender or have millions in savings to qualify for the higher tiers.

As such, these savings accounts’ interest rates do not even beat inflation.

Inflation

Speaking of inflation, do note that the average core inflation rate (MAS Core Inflation) in Singapore over the last 20 years (2000 to 2020) stands at 1.52 per cent.

This is the number you want to beat if you want to preserve the status quo as the price of goods and services will be constantly increasing over time due to inflation.

Unfortunately, almost anything that you buy will go up in price as time goes by.

For example, an item that costs $100 today assuming a 1.52 per cent interest rate will cost about:

  • $116.30 in 10 years.
  • $1,486 in 20 years.
  • $1,811 in 30 years.

Alternatively, you could look at it from the perspective of inflation eroding the value of money over time.

Let’s say you have $100 today. Assuming the same 1.52 per cent interest rate, your money will be worth only:

  • $86 in 10 years.
  • $74 in 20 years.
  • $63.60 in 30 years.

You Might Not Have Enough For Your Retirement

Now that you are clearer about the impact of inflation on your money, it is time to examine how it is going to factor into your retirement planning.

Let’s say you have done your financial planning and realised you need about $30,000 a year or $2,500 a month after retiring in 15 years time.

You will also need to factor in inflation using this inflation calculator to see how much cash you will need in 15 years or more to retain the same purchasing power as today.

Assuming an interest rate of 1.52 per cent here is an illustration of how much you need to save to support yourself for 21 years after you retire.

Number of Years From NowAmount Needed Annually After Factoring in Inflation
15$37,617.97
16$38,189.77
1738,770.25
18$39,359.56
19$39,957.82
20$40,565.18
21$41,181.77
22$41,807.74
23$42,443.21
24$43,088.35
25$43,743.29
26$44,408.19
27$45,083.20
28$45,768.46
29$46,464.14
30$47,170.40
31$47,887.39
32$48,615.27
33$49,354.23
34$50,104.41
35$50,866.00
Total~$922,500

If you leave most of your money languishing in your bank account, it will be so much harder to plan for retirement as you would have to save about $922,500 from working before you retire in 15 years time.

This means you would have to put aside about $4,948 a month for fifteen years, given that your bank gives you a 0.5 per cent p.a. interest rate on your bank account to save up for your retirement after factoring in inflation.

This could mean that you would have to work longer before you can retire if you cannot meet your retirement goals by just working and not investing.

Tough.

How to Get Better Returns

Well if you don’t fancy working longer, there are a few ways you can accelerate your retirement planning.

Top Up Your Central Provident Fund Special Account (CPF SA)

One way will be to top up cash to your Central Provident Fund (CPF)’s Special Account which currently has a base interest rate of 4 per cent p.a.

Also, here are some pros and cons you need to consider before thinking about topping up your CPF SA with cash.

Pros: Grow Your Retirement Savings & Save On Your Income Tax

By topping up your CPF SA, you can:

  • Grow your retirement savings earlier by taking advantage of time and compound interest.
  • Save on your taxable income by up to $7,000 a year for individual contribution.
  • Save on another $7,000 taxable income by doing a top-up for your spouse, parents, parents-in-law, grandparents, grandparents-in-law, or siblings.
  • Relatively high and risk-free returns.

Cons: You Say Goodbye to Your Money for a Very Long Time

As the Chinese saying goes, “You first taste bitter before you taste sweet”.

This is admittedly a very Asian mentality.

But what I’m trying to get at is that pressing the button to transfer the money into my SA was pretty painful.

However, in my opinion, doing this CPF SA top-up is a very prudent decision in the long run.

But, do note that your money will be effectively locked in until you are 65 years old (yes, that’s a damn long time) where it will be streamed out as monthly payments under CPF LIFE.

Also, there is no guarantee that the CPF LIFE payout age will not be changed in the future.

But, if you managed to save up more than the various retirement sums, you can withdraw any Retirement Account savings (excluding top-up monies, government grants, and interest earned) above the Basic Retiremum Sum (BRS) with property pledge or the Full Retiremum Sum (FRS) or Enhanced Retirement Sum (ERS) from age 55 onwards.

For context here are the current retirement sum figures:

Retirement Sums for Members Reaching Age 55 from 2020 to 2022
202020212022
Basic Retirement Sum (BRS)$90,500 $93,000 $96,000
Full Retirement Sum (FRS)$181,000$186,000$192,000
Enhanced Retirement Sum (ERS)$271,500$279,000$288,000

Using this method, the $922,500 amount is relatively easier to attain as you would have to save about $3,840 a month for 15 years.

In comparison, you have to put aside 33 per cent more money if you just left it in your bank account.

Invest Your Money

Alternatively, if you do not want your money to be locked in and are willing to take on more investment risk, you should consider investing.

But before you even start make sure you have checked the items off this beginner investing checklist first.

Once you have done that, you can begin your investing journey with our Singaporean’s Ultimate Guide to Investing.

If done right, even an investment portfolio that returns a modest 5 per cent p.a. over the years can help you reach your retirement goals easier.

Using this method, the $922,500 amount is relatively easier to attain as you would have to save about $2,018 a month for 15 years.

In comparison, you have to put aside about 40 per cent more money if you just left it in your bank account.

Of course, this method is generally riskier than putting money into your CPF.

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About Joel Koh
History student turned writer at Seedly. Before you ask, not a teacher. I hope to help people make better financial decisions and not let money control them.
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