Do you wish to retire comfortably and without worry?
Many Singaporeans long for the freedom to spend time with their loved ones, doing the things they enjoy, but this wish has become increasingly difficult these days with the rising cost of living.
Studies show that 9 in 10 Singaporeans do not feel prepared for retirement. And it’s little wonder given the grim statisitics that less than 10% of Singaporeans will have less than $2000/mth to live on after age 55.
Here are the 5 tips.
1) Know your Golden Number
To achieve a goal, you must first know what is it you are after.
To retire on Time and on Target, you need to set your Timeline and your Target
a) Timeline – What age do you plan to retire by? If there is no timeline set, your retirement will simply become a rolling target that is shifted back year after year, and the number of years you can truly enjoy will become shorter and shorter.
b) Target – How much money do you want to have during retirement? This can be in terms of the amount of income you want on a monthly basis, or the amount of lump sum you need to accumulate to last you through your retirement years.
What to do?
CPF website has a useful calculator to help you calculate how much lump sum you need to accumulate by retirement age to last you through your golden years.
http://www.cpf.gov.sg/multimedia/retirement/retirement.html
Once you determine your Golden Number, you can then take steps to work towards that, with the following 4 tips
2) Start Building Your Nest Egg for the Future Today
a) Start Saving today!
Set up a Retirement Account and put aside a portion of your income into this account every month. The money in this account can only be invested and compounded, never to be withdrawn.
b) Stay Focused
Too often we fall prey to temptation and end up spending our savings on short term material things or pleasures e.g a new IT gadget or a holiday. Don’t lose sight of your bigger, longer term goal – to retire comfortably, on time, on target.
What to do?
One way to discipline ourselves is to open accounts which we can’t have easy assess to, no ATM cards, no online banking facilities, no cheque book.
A even better approach is to systematically invest the money into a regular investment account which allows you to grow your money steadily through dollar cost averaging.
Start young! The earlier you start, the more time you have for your money to grow and compound.
3) Supplement Your Nest Egg with Passive Income Sources
Some people may find that the retirement target amount (calculated in tip 1) to be daunting and overwhelming. Some common worries include
“How can I save up $1million by age 65?”
“What if I don’t have enough savings to last me through retirement?”
What to do?
You can supplement your nest egg and make the retirement figure more achievable by building passive income streams that can produce a regular income for you. Think of it like having multiple golden geese that lie golden eggs for you. These can be in the form of
- Dividends from stocks,
- Rental income from properties,
- Profits from systemised businesses,
- Royalties from books,
- Annuity payout from insurance plans etc.
If done properly, the cash flow from these golden geese can supplement a significant portion of your retirement funds and even make you financially free before retirement!
This is a concept that I learnt from the Cashflow 101 game, a financial board game designed by Robert Kiyosaki, the author of “Rich Dad, Poor Dad”. Playing the board game is a fun and educational experience where I learnt how to build up my passive income to cover my monthly expenses and escape from the rat race. You can join in the game and have fun learning too, click here for more info.
Here’s an example
By having passive income to supplement your retirement funds, the amount of nest egg you need to accumulate will be dramatically reduced and it becomes a much less daunting goal.
Take the example of Mr Tan aged 30, who’s targeting to retire at age 65 with a monthly income of $3ooo. For his retirement funds to last him 20 yrs til age 85, he needs to accumulate a grand total of $1.1million by age 65.
But say he invested in dividend stocks and bought an annuity plan that gives him a combined passive income of $1000/mth, this means he only need to draw $2000/mth from his nest egg.
His total nest egg size required now is reduced from $1.1mil to just $735k. This can be achieved with an annual savings of $3,952, invested at a return of 8% p.a.
4) Reduce Your Liabilities
Another key step to achieve your retirement more easily is by clearing off your debts and minimizing your liabilities. The lower your liabilities, the lower your fixed expenses are and the easier it is to support your monthly expenses with your passive income streams. Examples include clearing off your credit card loans, car loans and other personal liabilities.
In the previous example of Mr Tan, if he is able to clear off his car loans and reduce his monthly expenses by $500, then he will only need $2500/mth instead of $3000/mth during retirement.
With a passive income of $1000/mth, he will only need to draw a net $1500/mth from his nest egg. In other words, his nest egg required is now just $551k and can be achieved with an annual savings of just $2,964, invested at 8% p.a.
What about my home loan?
Say you have saved up $100,000 in your retirement fund, should you use the money to pay off your housing loan or invest it? It pays to weigh the savings from clearing off your home loan vs the potential reward of investing the same amount.
For example, if your housing loan is obtained at a low interest rate e.g HDB’s loan of 2.6% p.a and you can potentially get an annual 5% return from investing your money in a dividend paying stock, wouldn’t it be wiser to invest your cash and receive a net 2.4% return on your money? Moreover if you are paying for your HDB loan through CPF, which give an annual return of 2.5%, your interest is almost fully covered and you can put your cash to smarter use.
In the cash flow game, we learn the difference between good debt that allows you to leverage your money vs bad debt that sets you back. Generally, home loans interest rates are lower than other loans like car or credit card so it makes sense to leverage the home loan and invest your money in other instruments that can provide a higher return.
5) Manage Your Risks
Make sure you are sufficiently protected against any potential medical liabilities that can jeopardise your retirement plan. This includes protecting not just yourself, but also your loved ones including parents and children; as their medical expenses can not only derail your retirement plans, it can also cripple the family.
Ms Yamada, a boutique director, realised the importance of having proper medical insurance when her mum suffered a stroke and was bedridden for 18 years. See story here
‘Buying proper insurance helps,’ she told The Sunday Times. ‘Thankfully, my parents purchased illness policies and my mum could rely on my father’s teaching pension even after he died. If not for the insurance and pension, my sister and I would have become bankrupt from the medical bills’ Ms Yamada’s mother spent the last six years of her life in a nursing home at the cost of $4,500 a month.
What to do?
Ensuring proper hospitalisation and critical illness coverage will help to offset heavy medical burden and keep your retirement plans on track. And it’s possible to secure comprehensive hospitalisation coverage for yourself and family using your Medisave. You can also use Medisave to secure long term disability care for your parents which helps to relieve the financial burden of long term nursing care. Also review your insurance coverage along the way to make sure it provides sufficient and relevant protection for yourself and your family.
Your 5 Golden Tips to Retire On Time, On Target
1) Know Your Target
2) Start Growing Your Nest Egg Today
3) Supplement Your Nest Egg with Passive Income
4) Reduce Your Liabilities
5) Manage your Risks
Apply these 5 tips wisely and cheers to your successful retirement on Time, on Target!
To Your Success and Happiness,
Yong Hui
