By Rohith Murthy
If you haven’t started saving for your retirement, you really might want to soon. Especially after reading this article. 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:
- 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.
- 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).
- 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.
- 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.
- 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: Start Saving for Retirement Now
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.
Rohith Murthy is the co-founder and managing director of SingSaver.com.sg