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7 Key Steps to Effective Retirement Planning in Singapore

Retirement Plan

Retirement planning in Singapore is crucial for financial stability, particularly with recent updates to the CPF scheme. From 2025, CPF members aged 55 and above will experience significant changes, such as the closure of the Special Account and an increase in the Enhanced Retirement Sum, enabling monthly payouts of up to S$3,330.

But how much do you need to retire comfortably in Singapore? Planning your retirement involves envisioning your desired lifestyle, accounting for healthcare costs, and factoring in inflation. 

In this article, we’ll guide you through some important steps to effective retirement planning, including leveraging the CPF LIFE scheme and diversifying investments to ensure a financially secure retirement.

Step 1: Understand Your Retirement Needs

retirement plan

Retirement planning is all about imparting small amounts to your Central Provident Fund (CPF). However, given the ever-changing economy, your CPF savings might never be enough. 

For instance, anyone who reaches the CPF Basic Retirement Sum (BRS) of S$83,000 by the age of 55 can receive monthly payouts about S$700-S$750 until the end of their life.

However, it’s greatly possible this amount will not be enough for you once you reach that age. If you’re 23 and meet the BRS maximum, even the highest monthly earnings may not suffice for you.

Calculate Your Retirement Expenses

Desired Lifestyle

What dictates the actual income you’d like to have by the time of your retirement is the lifestyle you want to adopt by your retirement. If you think about it, you won’t have frequent dinners outside, and you’ll mostly focus your funds on your remaining mortgage payments, daily needs, monthly utilities, and other non-priority wants or needs.

According to a July 2021 report by the Singapore Department of Statistics, retiree households, consisting of non-employed persons aged 65 and above, spend an average of $1,940 per month. 

Consider factors like healthcare costs, daily living costs, and other lifestyle costs. For instance, if you plan to travel frequently or pursue costly hobbies, your expenses may be higher than the average.

To better understand the financial requirements, let’s use a simple formula:

Monthly Retirement Needs x 12 months x Estimated Years of Retirement

Retirement Age Average Life Expectancy Retirement Years Basic Estimate(Today’s Value)

63

83

20

$465,600

65

18

$419,040

67

16

$372,480

70

13

$302,640

Healthcare Costs

Healthcare is a significant factor in retirement planning. Channel News Asia reports that severe disabilities associated with sudden strokes or chronic illnesses can lead to high long-term care costs, ranging from S$900 to S$4,000 per month before subsidies. These costs can vary widely based on individual conditions and care preferences. Planning for these potential expenses ensures you’re not caught off guard.

Inflation Impact

Inflation can erode your purchasing power over time, making it essential to account for its impact on your retirement savings. Even a modest inflation rate can significantly increase your required retirement corpus. For instance, if inflation averages 2% per year, the cost of living could rise by over 20% in just ten years. This necessitates a buffer in your savings to maintain your desired lifestyle.

According to Statista, Singapore’s inflation is expected to level off at around 1.99% by 2028. This means that your retirement savings need to account for this gradual increase in costs. 

To illustrate, let’s see how a 2% inflation rate impacts your retirement needs over time.

Current Monthly Expense: S$1,940
Year Monthly Expense Adjusted for 2% Inflation

2024

$1,940

2025

$1,979

2026

$2,019

2027

$2,059

2028

$2,100

2033

$2,320

2038

$2,560

By 2028, you would need approximately $2,100 per month to maintain the same standard of living, and by 2038, this could rise to $2,560. Hence, it is crucial to incorporate inflation into your retirement planning to ensure you can sustain your desired lifestyle throughout retirement.

Use a Retirement Planning Calculator

Using a retirement planning calculator can help estimate your needs more accurately. These tools factor in variables like current savings, expected expenses, inflation rates, and potential investment returns. Interactive calculators allow you to input your specific data and adjust assumptions to see how different scenarios affect your retirement plan. By leveraging these tools, you can gain a clearer picture of the amount you need to save.

Example tools:

Set Realistic Savings Goals

Setting realistic savings goals is crucial to ensure you reach your retirement target. Begin by calculating how much you need to save each month based on your desired retirement corpus and the number of years until retirement. Here’s how to break it down:

  • Assess Your Total Retirement Needs: Determine your total retirement corpus by considering factors like desired lifestyle, healthcare costs, and inflation. For example, if you estimate needing $1,940 per month (the average spending of retiree households in Singapore), factor in inflation and the number of years you expect to live in retirement.
  • Current Savings and Expected Returns: Account for your current savings and the expected rate of return on your investments. Use conservative estimates to avoid shortfalls.
  • Monthly Savings Calculation: Subtract your current savings from your total retirement needs to find the remaining amount you need to save. Divide this amount by the number of months until retirement to get your monthly savings goal.
  • Adjust for Realistic Scenarios: Be prepared to adjust your monthly savings goal as your financial situation and investment returns change. Regularly review and update your savings plan to stay on track.

Step 2: Utilize the CPF LIFE Scheme

The CPF LIFE Payouts offers three distinct plans to cater to different retirement needs:

  • Standard Plan: This plan provides steady monthly payouts that do not adjust for inflation. It starts with higher payouts compared to the Escalating Plan but does not increase over time. This plan is suitable for those who are willing to adapt to a more modest lifestyle as living costs rise.
  • Basic Plan: The Basic Plan offers lower monthly cash payouts, which progressively decrease once your CPF balances fall below $60,000. This plan is a legacy option from when CPF LIFE was first introduced. It’s suitable for those who do not mind starting with lower payouts that will diminish over time.
  • Escalating Plan: The Escalating Plan starts with lower payouts that increase by 2% annually for life. This plan helps protect against inflation, ensuring your payouts grow to maintain your purchasing power. It’s ideal for those concerned about rising living costs.
escalating plan

(Image source: CPF.gov)

Choose the Right Plan

Selecting the right CPF LIFE plan depends on your retirement goals and willingness to adjust your lifestyle over time:

  • Match to Lifestyle and Inflation Concerns: If maintaining your current lifestyle and accounting for inflation is a priority, the Escalating Plan may be the best fit. It provides increasing payouts that can help offset the rising cost of living.
  • Steady Income Preference: For those who prefer a stable income without adjustments for inflation, the Standard Plan offers steady payouts. This plan is suitable if you anticipate a modest retirement lifestyle with fewer expenses over time.
  • Cost-Conscious Option: If you are comfortable with lower initial payouts that decrease over time, the Basic Plan can be sufficient. It’s a practical choice for those who plan to live modestly and do not mind the gradual reduction in payouts.

Step 3: Develop a Diverse Investment Strategy

It’s a rule of thumb for many beginning and successful investors: never put your eggs in just one basket. Depending on just one industry, trade, and even the stock market is never a good way to invest. For example, if the agriculture sector sees a recession, you’ll lose everything if you’ve only made agricultural investments.

Wise investors diversify in markets that have the best potential to grow. If they spot underdog industries seeing a huge rise, they can spend less to buy stocks from that industry and watch their investments grow as large as possible. 

Here are key asset classes to consider:

  • Stocks: Investing in stocks allows you to own a piece of a company and benefit from its growth. They offer high returns but come with higher risk.
  • Bonds: Bonds are fixed-income securities that provide regular interest payments. They are generally less risky than stocks and can provide a stable income.
  • Real Estate: Real estate investments can generate rental income and appreciate over time. They offer diversification and can be a hedge against inflation.
  • Mutual Funds: Mutual funds pool money from many investors to invest in a diversified portfolio of stocks, bonds, or other securities. They are managed by professionals and offer a convenient way to diversify.

In an article by Bankrate, some financial advisors suggest that clients consider adding commodities such as gold or silver to their portfolios. Doing so further diversifies beyond traditional assets like stocks and bonds, potentially enhancing overall portfolio stability.

Manage Investment Risks

Effective risk management is crucial for maintaining a healthy investment portfolio. Here are steps to help manage risks:

Regularly Review and Adjust Your Portfolio

Continuously monitor your investments to ensure they align with your financial goals and market conditions. Adjust your portfolio as needed to maintain a balanced risk-reward ratio.

Understand “Long” and “Short” Positions:

Keeping a long position means you’ll hold on to your stock.

Doing this is viable if you have blue-chip stocks from renowned companies. Those are truly expensive, but they grow exponentially, especially if they’ve performed exceptionally well for the year. Alternatively, short positions mean you’ll hold your stock only for a short time because you predict it will drop exponentially within a few months.

Then, after selling, you’ll buy it again once the price is more affordable, and you predict the prices will rise. Careful use of these two techniques can help you make huge profits. However, it can lead to huge losses too, so be careful!

Diversification 

Shon Anderson, a CFP and chief wealth strategist, emphasizes the importance of diversification: “Each asset class performs differently in various economic and financial environments. So, when you have multiple asset classes, you should have more opportunities to have pieces of your portfolio make money in almost any environment.”

Step 4: Plan for Healthcare Costs

By carefully planning future healthcare expenses and securing adequate insurance coverage, you can protect your retirement savings and ensure financial stability in your later years.

Estimate Future Healthcare Expenses

Planning for healthcare costs is a critical factor in planning for your retirement funds. According to Channel News Asia, the cost of long-term care for severe disabilities in Singapore can range from S$900 to S$4,000 per month before subsidies. These costs can vary widely based on the type of care required—whether at home, in a day care center, or a nursing home.

Retirees also need to consider routine medical expenses, medication, and potential emergency treatments. Manulife’s survey indicates that 53% of Singapore respondents view rising healthcare costs as a significant risk to their financial goals. Given the potential for high medical costs, it’s essential to factor these into your retirement planning.

Explore Insurance Options

To mitigate the financial burden of healthcare expenses, it’s crucial to explore various insurance options available in Singapore:

  • Medisave: This is a national savings scheme that helps CPF members set aside part of their income to meet future personal or immediate family hospitalization, day surgery, and certain outpatient expenses. It’s a key component of healthcare financing in Singapore.
  • Medishield Life: Medishield Life is a basic health insurance plan that covers large hospital bills and selected costly outpatient treatments. It is designed to provide Singaporeans with peace of mind by covering high medical costs.
  • Private Insurance Plans: Many retirees in Singapore opt for additional private insurance plans to supplement Medisave and Medishield Life. Private plans can offer more comprehensive coverage, including critical illness insurance, long-term care insurance, and hospital cash insurance. Additionally, insurance policies are protected under the Policy Owners’ Protection Scheme which is administered by the Singapore Deposit Insurance Corporation (SDIC).

Mark Czajkowski, Chief Marketing Officer of Manulife Singapore, emphasizes the importance of insurance in managing health-related financial risks. Consulting with a financial advisor can help you explore suitable insurance solutions tailored to your healthcare needs.

Step 5: Create Multiple Income Streams

Once you’re retired, you cannot set foot into an office again. You can still apply for menial jobs, but company owners are likely to turn them down due to your age. However, you can still earn money and boost your retirement fund once you’re retired. You can receive a monthly regular amount from the Central Provident Fund, your stock market investments, business investments, or all of the above.

Aside from investments, exploring passive income sources can further enhance your financial stability in retirement. 

Here are some key sources of passive income to consider:

  • Rental Income: Investing in rental properties can provide a steady stream of income. This involves purchasing real estate and renting it out to tenants. The rental payments can serve as a regular income source, helping to cover living expenses.
  • Dividends: Dividends are payments made by companies to their shareholders, usually on a quarterly basis. Investing in dividend-paying stocks can provide a reliable income stream. Look for companies with a strong track record of consistent dividend payouts.
  • Annuities: Annuities are insurance products that provide regular payments in exchange for a lump-sum investment. They can be a reliable source of income, offering a fixed amount periodically, which can be especially beneficial in covering routine expenses.

Balance Your Income Streams

To ensure financial stability in retirement, it’s important to balance and diversify your income streams. Here’s how to achieve this:

  • Diversification: Spread your investments across different asset classes to minimize risk. Relying on a single income source can be risky; instead, combine rental income, dividends, and annuities to create a balanced portfolio.
  • Regular Reviews: Periodically review your income streams to ensure they are performing as expected. Adjust your investments if necessary to maintain a stable income flow.
  • Emergency Fund: Maintain an emergency fund to cover unexpected expenses. This fund should be easily accessible and can provide a financial cushion without disrupting your primary income streams.

Step 6: Avoid Common Retirement Planning Mistakes

Understanding common retirement planning mistakes can help you avoid costly errors. Here are key pitfalls to watch out for:

  • Underestimating Expenses: Many retirees fail to accurately estimate their future expenses, including healthcare, lifestyle, and unexpected costs. This can lead to a shortfall in retirement savings.
  • Over-Reliance on a Single Income Source: Depending heavily on one income source, such as a pension or CPF payouts, can be risky. If that source falls short or is disrupted, it can significantly impact your financial stability.
  • Ignoring Inflation: Failing to account for inflation can erode your purchasing power over time. Even modest inflation rates can significantly increase your cost of living over the years.

Implement Solutions

To mitigate these common pitfalls, consider the following strategies:

  • Set Realistic Budgets: Develop a detailed and realistic budget that includes all potential expenses. Use conservative estimates to ensure you are prepared for various scenarios. Regularly update your budget to reflect changes in your financial situation.
  • Diversify Income and Investments: Create multiple income streams and diversify your investments to spread risk. This includes combining rental income, dividends, annuities, and other investments. A well-diversified portfolio can provide more stability and resilience against market fluctuations.
  • Account for Inflation: Incorporate inflation into your financial planning. Consider investment options that offer returns above inflation rates, such as stocks and real estate, to preserve and grow your purchasing power.

Step 7: Maximize Social Security and Prepare for Longevity

Understanding and maximizing your CPF benefits is crucial for a secure retirement. Here are some key strategies:

  • Maximize CPF Interest: Your CPF savings can earn up to 6% p.a. if you are above age 55 or 5% p.a. if you are below age 55. The power of compound interest means that the longer you leave your money with CPF, the more it can grow over time.
  • Retirement Sum Top-Up Scheme (RSTU): Making cash top-ups to your Special Account (SA) helps boost your interest earnings and leverage compound interest. Even a small monthly contribution to your CPF retirement account can make a significant difference over time. Additionally, you can claim tax relief of up to $8,000 per calendar year for cash top-ups made to yourself, and another $8,000 for top-ups made to family members.
  • Transfer Ordinary Account (OA) Savings to Special Account (SA): If you have excess savings in your OA, consider transferring them to your SA, which earns a higher interest rate of 4%. This transfer is irreversible, so assess your housing financing needs before making any moves.

Mitigate Longevity Risk

To ensure you don’t outlive your savings, consider these strategies:

  • Use Annuities: Annuities can provide a steady income stream for life. They help mitigate the risk of outliving your savings by offering guaranteed payments. CPF LIFE is a good example of an annuity scheme that ensures lifelong payouts.
  • Flexible Withdrawal Strategies: Develop a withdrawal strategy that balances your income needs with the longevity of your savings. This can include withdrawing from different sources at different times, adjusting withdrawal rates based on market conditions, and being flexible with your spending.

4 Key Rules of Retiring to Remember

Start Planning Early

The earlier you start saving and planning for a financial future, the more time your money has to grow. Compound interest can significantly boost your savings over the years, making it easier to reach your retirement goals. Begin by setting clear financial objectives and creating a detailed savings plan. Even small, consistent contributions can add up over time, giving you a substantial nest egg when you retire.

Diversify Your Investments

Retirement isn’t all about saving money through CPF contributions and third-party life plans. It involves you making the right investments. 

You can earn money past retirement by making the right investments while you’re young. Take advantage of Singapore’s stock and foreign exchange market. Investing wisely helps you gain dividends that allow you to earn enough by just moving your investments into better avenues for growth.

However, don’t put all your eggs in one basket. Spread your investments across different asset classes such as stocks, bonds, real estate, and mutual funds. This approach helps protect your portfolio from market volatility and ensures that poor performance in one asset class is balanced by better performance in others.

Regularly Review and Adjust Your Plan

Your retirement plan isn’t set in stone. Regularly review and adjust it to ensure it stays aligned with your goals and the economic environment. Changes in your personal circumstances, market conditions, and retirement objectives may necessitate adjustments to your plan. Regular check-ins with a financial advisor can help you stay on track and make informed decisions.

Prepare for Unexpected Expenses

Unexpected expenses, especially healthcare costs, can significantly impact your retirement savings. Have a contingency plan in place to cover unforeseen costs. This might include setting aside an emergency fund, securing adequate insurance coverage, and regularly reviewing your budget to accommodate unexpected expenses. Being prepared ensures that surprises don’t derail your financial stability in retirement.

Closing

Retirement isn’t the end-all, be-all of your income. By making contributions to your CPF and planning your long or short-position investments, you can increase your total retirement income by a huge mile. By following this guide, you’ll find it’s truly easy to have a smooth and hassle-free retirement.

Key takeaways:

  • Begin saving and planning as early as possible to take advantage of compound interest. 
  • Spread investments across various asset classes to minimize risk and ensure financial stability.
  • Anticipate high healthcare costs and secure adequate insurance coverage to protect your savings.
  • Account for inflation to ensure your savings maintain their purchasing power over time.

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