Retirement planning is a part of every individual’s life, regardless of their occupation. When it comes to the self-employed person (SEP) though, it can be a different ball game. Self-employment comes with a unique set of opportunities, but also challenges when compared to the average employee. These call for a personalised approach to retirement and anchoring your financial future.
Who is a self-employed person?
The Central Provident Fund (CPF) Board and the Inland Revenue Authority of Singapore (IRAS) defines a self-employed person (SEP) as someone who engages in work for others under a contract for service. In other words, if you earn your income from selling goods or services, you are an SEP. Examples include freelancers, business owners, hawkers, and taxi drivers among many others.
The crucial role of retirement planning for SEPs
Amidst the exciting allure of flexible work hours and the promise of self-employment, there is a concealed array of responsibilities and duties that come with being a SEP. For one thing, drawing a line between work and life can be difficult because of the inherent intermingling of these domains in the lives of SEPs. This can cause a SEP to put retirement planning on the backburner.
But with inflation infiltrating every facet of our lives, retirement planning is no longer just an option. It has become a necessity. In a position where traditional safety nets, such as Employer CPF contributions, are absent, the onus is on the SEP to actively manage and grow their retirement savings. Recognising the unique challenges faced by SEPs is the first step to weaving a retirement plan stable enough for your future.
Distinct challenges faced by SEPs
Irregular income streams
The income of SEPs is largely dependent on clients or customers, the oscillating demand of their services and the ebb and flow of the market. Incomes fluctuate from month to month, and periods of time with no profit, or even revenue, are not uncommon. The SEP often find themselves navigating this web of financial uncertainty. This can mean relegating retirement planning to a secondary priority, as more immediate concerns like making a living take precedence.
Absence of Employer Provident Fund contributions
Unlike employees of companies, SEPs do not benefit from employer contributions to their CPF accounts. The responsibilities of an employer include paying CPF contributions for Singaporean or Permanent Resident employees who earn a salary of more than $50 per month. This contribution changes based on the ages of the employees. For salaried folks, this means that up to the age of 55 years old, a contribution of 17% of their wages will be contributed to their CPF by their employers.
For self-employed individuals, the responsibility of ensuring they save regularly and make contributions to their CPF accounts rests entirely on themselves.
Lack of mandatory retirement benefits
Speaking of CPF, traditional employees are also required to contribute a percentage of their wages to their CPF. For those under the age of 55, current regulations stipulate that a contribution of 20% must be made to their CPF accounts (these contributions are capped at a monthly salary amount of S$6,000). This structure is in place to ensure that people have funds in place for retirement. Salaried folks largely don’t have to navigate too much within the security and framework that this structure provides. SEPs, however, must traverse the retirement landscape without the safety net of mandated contributions. This makes planning all the more important.
The importance of early planning
All this is to say that a substantial amount of responsibility falls on the shoulders of the SEP to initiate their retirement planning process. Early retirement planning is especially significant for SEPs. Not only does it enable the compounding benefits of investments (which can significantly grow one’s earnings), but starting early is essential in providing a buffer. Unforeseen circumstances can occur at any time, and planning your retirement journey early allows for adjustments with ample time.
However, between worrying about your business and juggling your work-life balance, retirement planning is more often than not postponed, to be “done later”. Furthermore, for a notable portion of the self-employed, planning comes in the form of simply selling off the business to be used as a retirement fund. This comes with its own uncertainties.
Urgency compared to employed individuals
While some SEPs may consider selling their businesses as a retirement fund, this approach is not without risks. The process involves finding suitable buyers, valuing the business, and is heavily dependent on market conditions. There is also no guarantee that the business will be sold at the expected price, which can severely place a dent in one’s retirement planning. In contrast, employed individuals benefit from consistent contributions over time, offering a more reliable avenue for retirement savings.
Tailored strategies for SEP retirement planning
Therefore, knowing the strategies that can help make your retirement smoother and more stable is vital. Here’s a compilation of resources which you can use to start planning now.
Crafting a flexible retirement plan for irregular cash flow
Designing your retirement plan can only begin once you know what your retirement needs are. The intricate interplay of your dynamic financial situation, anticipated expenses, the erosive effects of inflation, and the complex tapestry of your lifestyle all come together to determine the shape your retirement planning takes. Factor this in, and understand that your retirement plan has to be flexible enough to account for these factors.
The evolving healthcare landscape also means that planning for healthcare costs and insurance is pertinent. Since medical expenses will not be covered by employer benefits, a diligent SEP should safeguard their physical wellbeing by accounting for personal healthcare coverage.
Maximising tax-advantaged accounts
The Supplementary Retirement Scheme (SRS) is a complement to the CPF by the Singapore government. Anyone who is at least 18 years of age, is mentally sound and is not an undischarged bankrupt can open an SRS account. Individuals can then contribute to the account as often as they like, and at any time (subject to the maximum limit for the year).
This means that an SRS account allows the benefit of flexibility, compared to a savings account where a minimum amount of money must be put in. Whenever income is irregular, you can choose to prioritise where to channel this money to.
To set up a good habit system though, you should commit to a regular sum in regular periods. The CPF Board maintains that the benefits of contributing to the SRS accounts are that contributions are eligible for tax relief. Investment returns are also accumulated tax-free (except for Singapore dividends) and just 50% of the withdrawals from the SRS account are taxable at retirement. Thus, not only does the account offer tax benefits, but you can allow your investments to grow over time.
Voluntary CPF contributions
Just because CPF is not mandated for SEPs does not mean that individuals cannot voluntarily contribute to their CPF accounts. According to the Ministry of Manpower, the CPF is a social security saving scheme and is divided into three accounts. The Ordinary Account (OA) is used for retirement and housing needs, the Special Account (SA) for retirement and the MediSave Account for healthcare.
Once an individual reaches 55 years of age, the savings from their SA and OA are transferred to their Retirement Account (RA) which will form the individual’s retirement sum. Since salaried folks are mandated to contribute to their CPF (as well as receive contributions from employers), the amount is often substantial.
It’s noteworthy, also, that you can also claim tax relief for topping up your CPF SA or RA.
Self-employed individuals should therefore take advantage of these benefits by voluntarily and consistently contributing to their CPF and build a robust retirement savings fund.
Managing your finances is not limited to saving and earning more. Embarking on an investment journey is just as important, particularly for the self-employed. Investing, when done properly, is a means of fortifying your wealth by ensuring financial growth and fighting the eroding effect of inflation, amongst others.
Diversifying your investments across various assets like stocks, bonds, mutual funds and Real Estate Investment Trusts (REITs) lets you minimise risk while potentially generating higher returns. A combination of investment diversification with retirement planning allows the self-employed individual to foster resilience against unforeseen variables and strengthen their future.
The bottom line
Retirement planning is not simply a one-size-fits-all endeavour, specifically so for SEPs. The complexity of uncertain income, absence of a structured retirement scheme, and lack of employer benefits presents SEPs with the challenge (but also perhaps, opportunity) of designing their own retirement path. Starting early, personalising your approach, and exploring diverse investment avenues are some ways to ensure a financially secure and worry-free retirement.
What’s more, from as early as 2024, gig workers will be getting basic protection including insurance and CPF. As circumstances change, SEPs must also be flexible to ensure they are financially protected well into their silver years. This is especially so given how we use technology in today’s digital age for various aspects of our lives, including retirement planning.
Leverage this technology and take advantage of Planner Bee’s retirement calculator to get started on your planning.