How many times have you thought to yourself: "I can't wait to retire!"
Life as a retiree sure sounds great. No more rushing to work amidst the peak hour MRT crowd, no deadlines to worry about, and hopefully, no more hefty mortgages or downpayments to stress over. But how many of us are really prepared for our ideal retirement scenario? If you believe in one of the retirement myths below, you may be unprepared to face up to the reality of retirement.
For those who may need a little help, here are some tips for you to stay on the right track to achieving your dream retirement.
Myth 1: I won't splurge during my retirement, so I don't need an extravagant amount of retirement savings
This one seems like a no-brainer, right?
This makes sense as most of us will have less expenses and commitments in retirement. Most of us would aim to pay off our bigger purchases (e.g. house, car) by the time we retire. We would probably spend less as we ease into a less hectic lifestyle.
But did you know that the commonly recognised financial benchmark for retirement is "70% of your current income"? That is to say, you should expect to have at least 70% of your current income in order to enjoy a comparable standard of living during retirement.
If you look further into this "70% benchmark", you may realise that you are underestimating how much you actually need for a comfortable retirement. In order to enjoy your current lifestyle during retirement, your retirement budget should not only include your day-to-day expenses, but also accommodate additional expenses that may see you unexpectedly "splurging", or spending beyond your means.
Here are three examples:
1. When you retire, you become time-rich, which means you may seek out more and new ways of spending your free time, such as trying new hobbies, going on holidays and dining out. Even if you don’t indulge in extravagant or impulse splurges, over time, you’ll find that many small expenses add up to a significant sum.
2. Medical and health-related expenditures are likely to increase as you age. Even with insurance coverage, other expenses such as hiring a helper or spending on supplements may catch you off-guard.
3. Due to wear and tear, your material possessions and household appliances may require replacement from time to time. As some of these may be necessary items and require immediate attention, like a washing machine or ceiling that requires plastering, you’ll need to spend beyond your monthly budget to cover them.
Tips for a better retirement:
Take a realistic view of your health and lifestyle during retirement. If you foresee yourself indulging in a specific hobby, cater for it in your monthly budget so that you can work towards a more realistic figure. Likewise, it would be wise to factor in funds that you can tap on for any unexpected expenses.
You should also review your healthcare coverage. Do ensure that you have sufficient coverage to tide over any unexpected medical or hospitalisation bills. Not only that, you should set aside some savings that can go towards rising premiums as you age. MediSave will also come in handy for a wide range of approved medical expenses to keep your health in check.
Myth 2: I work extra hard and save more, so I can retire earlier!
Most Singaporeans have the kiasu mentality, and work hard to save as much money as possible. However, the key to retirement is not just about YOU working hard, but making sure that your savings are working HARDER.
Even if you stow away a portion of your income into a savings account every month, just doing that alone is not enough as you are not giving your hard-earned savings a chance to grow.
Don't shortchange yourself with little reward to show for all that hard work.
Tips for a better retirement:
To reap better rewards from your hard work, make it a point to save a percentage of your monthly income (a good rule of thumb is 20%) and look at how you can grow your savings.
Instead of setting aside all your savings in a bank account, invest a portion of it in various financial instruments to spread your risk and returns.
One such "instrument" is your CPF Special Account (SA), which offers higher interest rates* as compared to your Ordinary Account (OA). Over time, your SA savings will compound to a significant sum.
Let's take a look at this example below:
Let's assume that Praveen has $10,000 each in a fixed deposit, his OA and his SA. At an average interest rate of 1.49%^, the $10,000 in his fixed deposit account would have grown to $14,470 when he turns 55. On the other hand, the same amount in his OA would have grown to $21,500. The largest difference can be seen in his SA, which will see $10,000 grow to $54,548, when he reaches age 55!
*Your CPF savings in the OA earn a base interest of 2.5% per year, while savings in the SA, Medisave Account and Retirement Account (RA) currently earn interest of 4% per year. You are paid an extra interest of 1% per year on the first $60,000 of your combined CPF balances (with up to $20,000 from the OA). From the age of 55, you will earn an extra interest of 2% per year on the first $30,000 and an extra 1% per year on the next $30,000 of your combined balances (with up to $20,000 from the OA).
To maximise the growth of your savings, you can leverage on the higher SA interest rates by making a transfer from your OA to your SA.
With smart financial planning, you can pace yourself better, enjoying life as you work towards your retirement goals.
Myth 3: I can focus on retirement only later in my life
Regardless of your age, there will always be more "pressing" financial obligations aside from retirement, which often seems so far away. Expenses relating to housing, family, and elderly parents will all take priority, as they need to be dealt with immediately.
However, purely focusing on these at the expense of your retirement simply means that you are sabotaging your future self, as you will have to work harder in future, for a longer period of time.
You will also be caught off-guard if you have any unexpected financial crises that crop up along the way and delay you further.
The bottom line: Don't fall for the myth that retirement can be dealt with "later".
Tips for a better retirement:
It’s good to get a head start on your financial planning, so you can have a longer runway to earn more interest in your investments and to maximise your earning capabilities while you’re younger and healthier.
One practical way to keep track of your finances is to draw up a budget. This will allow you to manage your current financial obligations and future financial goals.
The 50-30-20 rule is a good starting point, and depending on your own specific needs or goals, you can tweak this accordingly. The most important thing is that you stick to your budget. Stay consistent, and reap both your short- and long-term rewards.
You can also learn more about how you can tap on CPF to support you in various stages of your life — from buying your first home to building your retirement nest egg.
Don't fall for retirement myths
At the end of the day, making your ideal retirement a reality is within your control. Avoid falling for these myths, and remember to plan ahead by saving more and leveraging CPF and other investments to grow your retirement fund.
Stick to the plan, and you will be ready to enjoy retirement when the time comes.
^Based on the average interest from 4 different banks (as at Dec 2019) shown below:
Fixed deposit rates:
- DBS – up to 1.4% (minimum deposit of $1,000) (36 months)
- OCBC – up to 1.55% (minimum deposit of $5,000) (36 months)
- UOB – up to 1.65% (below $50,000) (36 months)
- STANDARD CHARTERED – up to 1.37% (below $20,000) (36 months)
Average FD Rate = 1.49%
Information updated as at 27/8/2020