When Should You Start Planning for Retirement?

Retirement may feel far away to you, a distant possibility that will likely materialise only in your 60s or later. After all, Singapore is raising its retirement and re-employment ages to 65 and 70 respectively by 2030. Before that arrives, you’ve got bills to pay and loans to cover.

But when exactly should you start looking ahead to retirement, and how do you ensure you’ll have enough of a nest egg to live off by then?

We consider how to prepare for your golden years.

What will your money be worth?

A major factor to consider when anticipating your retirement is inflation. It guarantees that your present cost of living will be higher in the future. On average, Singapore experiences an inflation rate of around 1–2% each year, while global inflation ranges from 2–3%.

However, how much inflation will affect you depends on how you want to live after retirement. If you’re gunning for a more luxurious retirement, perhaps with lots of travelling and staying in premium accommodations, you should factor in an increase of another two to three percentage points in inflation, as the prices of high-end goods and services increase more quickly.

A knock-on effect of more expensive prices in the future is that your present savings will be worth less. You may want to grow your funds to meet your long-term needs.

How much will you need?

When thinking about your retirement, you’ll need to consider its probable duration – when do you envision retiring, and how long might you live (Singapore’s average life expectancy is around 84)? Use this estimated time period to calculate how much you’ll need to cover your lifestyle.

There are two popular ways to help you work this out, using either your present income, or expenses.

The first, the income replacement ratio method, suggests that you’ll need around two-thirds to three-quarters of your income, given that you will likely be spending less in retirement (again, this depends on your desired lifestyle). This assumes that your income will keep pace with inflation till just before retirement.

The second, the adjusted expense method, uses your current expenses to estimate your needs, adjusting it for changes in spending post-retirement. For instance, you probably won’t need to pay for your children’s education any more, but you may need to pay more for insurance. This figure will need to be adjusted for inflation.

How much do you save?

Singaporeans’ basic coverage for retirement usually comes from the CPF Lifelong Income For the Elderly (LIFE) scheme, which gives you monthly payouts based on how much you’ve put in your Retirement Account. Figuring out how much of your retirement income will come from that is a good first step.

Your Retirement Account draws from your Special and Ordinary Accounts when you turn 55. Here are the monthly payouts you can expect, as of 2021, based on how much you have in it:

Retirement SumAmount in Retirement AccountMonthly payout from age 65
BasicS$93,000S$770–S$830
FullS$186,000S$1,430–S$1,530
EnhancedS$279,000S$2,080–S$2,230

After deducting the payouts from CPF, you can apply the 4% rule to determine how much to amass for the rest of your income. Divide your projected yearly income by 4%, and that will give you a rough figure of how much you should save. Upon retirement, you can withdraw up to 4% of your savings each year, while still leaving sufficient balance for your portfolio to continue generating income for 30 years (assuming it holds around 60% stocks and 40% bonds).

Planner Bee’s retirement calculator is a useful tool that can help you get a sense of how much to put aside. It factors in things like your current age, planned retirement age, CPF payouts, and current investments to help you evaluate how much more to save. It also automatically adjusts its estimate for inflation.

How do you grow your money to get there?

Besides saving, investing can help you grow your nest egg to your desired amount.

You can grow your Retirement Sum through topping up your CPF accounts – the Ordinary Account and Special Account accrue 2.5% and 4% interest respectively. If you’re under 55 years old, 1% bonus interest is given for the first S$60,000 of your combined CPF balance (including MediSave, and capped at S$20,000 for the Ordinary Account).

There are also a number of ways to supplement your CPF income. You could purchase a private annuity plan, which provides more payouts. You can typically choose to pay your premium as a lump sum, or over a set number of years. One benefit of a private plan is that they can start paying out before you turn 65, unlike with CPF.

Investments that compound over time, such as stocks and Exchange Traded Funds, can also help you grow your savings and beat inflation, even if you start with a small amount. But if you can’t get returns that beat the Special Account’s 4%, and don’t need the liquidity, it might be better to top up your Special Account instead.

Lastly, investments that give you passive income, such as rental and dividend-earning stocks, could also supplement your retirement income.

So when do you start preparing?

It’s never too early to start considering your goals for retirement and calculating the amount that you’ll need. You’ll get an idea of when you should begin preparations to fund your retirement, depending on how much you’ll need, how you’d like to grow your money, and other financial demands pre-retirement.

Some strategies, including maximising CPF, will help boost your savings the earlier you start, through compounding. Or you may want to keep your funds liquid at first, and sink them into a single premium annuity plan later in life (and/or top up your CPF balance).

Whichever route you take, preparing for retirement should be done with purpose, so you can make sure inflation doesn’t cause you to be left wanting during what should be an enjoyable phase of life.

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