The self-employed Singaporean’s guide to planning for retirement

19 Jan 2017 

​People have been asking me what my retirement plans are. This is especially relevant considering that being self-employed means I do not have my pay squirrelled into the CPF automatically, hence I have to be a lot more disciplined in my savings and planning. Since I believe in planning early for our retirement, here are three aspects of my retirement plan so that you can be inspired to start planning for one!


1)    If you do not want to fret, start by cutting your household debt!

I am living in a 5-room HDB flat in a matured estate, and the bulk of my household debts comes from the mortgage payment of my HDB housing loan. I'm paying the monthly mortgage mainly by cash because as a self-employed person, I do not have a lot of money in my CPF Ordinary Account (OA). My plan is to do a partial capital repayment every year to reduce the loan duration and also to lower the total interest paid. It is important to pay off my housing loan before reaching retirement so that my family will always have a home to stay in.

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Due to the income variability as a self-employed person, I'm also building up my CPF savings by doing a voluntary contribution (VC). By doing so, I can reduce the amount of taxes paid through tax reliefs, and also build up a buffer in my OA. Doing a VC to 3 CPF accounts allows me to take advantage of the risk-free interest rates in each CPF account so that my money can work harder for me to build up a sizeable retirement nest. You can see how the magic of compounding interest works for you when you do a yearly VC of $10k for 10 years from age 35.


Do note that the figures calculated above are based on the assumption that the member is above 35 years old in January 2017 and will make a VC of $10,000 in January yearly. Additionally, CPF interest is computed monthly, and is credited and compounded to your account balances yearly.


The maximum amount that I can contribute voluntarily is capped by the CPF Annual limit, which in 2016 is $37,740. My plan is to do a VC every year until I have accumulated at least 12 months of my monthly mortgage payment in my OA. It will give me great peace of mind to know that I can stop working for 12 months and still have the financial means to pay for my house.


Upon accumulating this amount of money in my OA, I will transfer the excess from the OA to the CPF Special Account (SA) for the higher interest so that compounding can do its work. Upon reaching the age of 55, both the OA and SA account balances will be transferred to the Retirement Account (RA) and the proceeds will be channelled to the CPF LIFE scheme that I will talk about later.


2)    I'm pink with a glow because I've a healthy cash flow! 

In order to have a comfortable retirement, I need to have a source of income during my retirement years for living expenses. If I decide to retire earlier at age 55 and anticipate living to 82 years old—the average lifespan of Singaporeans—I will need to have 27 years of living expenses to take care of. Since the CPF LIFE scheme will only give me monthly payouts for life from age 65 onwards, I will need to find another source of income until I start receiving my CPF LIFE payouts. My plan for building a cash flow for living expenses consists of three income taps that I will utilise at different stages. In order for the taps to generate cash flow, my savings will now be used to fund three tanks.


Tank #1: Investment portfolio

The first tank is my investment portfolio of stocks and bonds that will provide a dividend income from the age of retirement, and that can be before the CPF LIFE scheme starts giving me monthly payouts. I can choose to start my CPF LIFE payouts anytime between age 65 to 70.


Read also: Retirement: What Singaporeans in their 60s can do to get higher monthly payouts


However, building up this tank requires a certain level of knowledge in investments that might not be suitable for people who are either risk-averse or not interested. Hence an alternative plan for this first income tap can be renting out rooms to supplement your living expenses.


Tank #2: CPF Retirement Account (RA)

Upon reaching age 65, a second tap starts streaming out income. This second tap comes from the monthly payouts from the CPF LIFE scheme. However, I have to fund it first during my working years. Thus, this second tank is the 3 CPF accounts that I voluntarily contribute to every year. As mentioned earlier, once my OA has accumulated more than 12 months of monthly mortgage payment, I will transfer the excess to my SA to grow the retirement account for a bigger monthly payout under the CPF LIFE scheme. The bigger the retirement sum, the greater the monthly payout in the future, so it is important to start funding it as early as possible for it to reach a critical mass.


Tank #3: Medical funds + CPF Medisave Account (MA)

The third tank is an account set aside for the purpose of paying insurance and payment of medical bills. A big part of this tank comes from the MA. This tank will provide the means to fund my future medical bills and the tap will be turned on as and when needed. I will elaborate more in the next point.


3)    The best defence is a good offense!

In order not to let unexpected situations derail my retirement plan, it is important to prepare for such eventualities. An adequate and proper insurance plan will help to prevent irreparable damage to my assets, which will affect the cash flow generated.


One of the most useful plans that everyone must have is the hospitalisation and surgery plan. This will take care of hefty bills if I have to go to the hospital for treatments. Since I wanted additional coverage in private hospitals as well as public hospitals, and also the option to choose my own doctors, I opted for an Integrated Shield Plan (IP) instead of the basic Medishield Life that the IP is built upon. You can look at the diagram below to see the differences between the three possible healthcare plans. Either way, the premiums for the Medishield Life or the IP can be paid in part or full from your MA.

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Thus, it makes sense to shore up my MA since I can enjoy tax reliefs, earn a higher interest in the CPF accounts and also let the magic of compounding help build up a sizeable tank to pay for my medical fees. Besides the mandatory contribution to my MA as a percentage of net trade income, a fellow self-employed member can make a voluntary contribution to 3 CPF accounts.


It is important to note that the money in the MA is restricted in its usage subjected to the various claim limits and yearly cap, hence it is imperative to have an additional external fund to take care of healthcare expenses in the future, on top of our MA. For example, there are deductibles and co-insurance in insurance, so we still have to fork out cash to pay for some of these expenses before we can use the money inside our MA. Therefore, it is important to have an external fund outside of my CPF to pay for such expenses first. Together with my MA, this external fund will form the third tank to ensure that our healthcare expenses needs are met during our retirement.


Start early, end well

They say that if you fail to plan, you plan to fail. A good finish comes from a good start. I hope that after reading my retirement plan, you can see how the three aspects of reducing household debt, creating a cash flow and saving up for future medical needs will all weave together to form a good and comfortable safety net in my golden years. I also shared how I voluntarily contributed to my CPF accounts to take advantage of the various schemes designed to help me achieve my retirement needs. Have you started planning for your retirement?


Writer's profile:

The writer is a self-employed full time tutor who loves cats. He loves to tuck under the sheets, with a cup of hot tea by the bedside, and read until he falls asleep.

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