It seems just like yesterday when I graduated from university.
The past decade has been a whirlwind – I’ve gotten married, moved into a new house and expanded my family to include 2 lovely daughters!
Before getting married, I would go on holidays and only save around 20% of my savings. As I did not have any dependants, I thought that I did not need to set aside an emergency fund.
Everything is not the same now.
I thought I was pretty thrifty but after paying for my wedding, honeymoon, downpayment for my house and home renovation, I was shocked at how fast my savings depleted. The realisation that my savings could barely cover the next phase of my life caught me completely unaware.
Not just that, I now have my kids' futures to think about and that is the scary part. My savings have to increase, not just for my children's education and future, but also my own retirement. Many parents prioritise providing for our children’s needs – both in the immediate and longer terms – and we overlook the importance of planning for our own needs, and in particular, our retirement.
I was quite worried about this and my friends were asking me why? Why plan for my retirement now when it is still so far away?
Reason number 1:
I don't want to rely on my children
In a recent survey, it was reported that only 20% of young adults think that their parents have enough money for retirement. That is pretty worrying especially when more than two-thirds of this group expect that they will have to downgrade their lifestyle just to look after their retired parents. I have been very fortunate because my parents have planned for their retirement, so I don’t have worries on that front. This is why I was able to channel most of my savings into setting up my own business. It is also exactly why flight crews always instruct parents to wear our oxygen masks first before putting them on our children – we need to take care of ourselves in order to take care of them. I definitely hope I will not be an added responsibility for my children.
The best way to care for my children is by planning ahead for my future needs.
Reason number 2:
I want to retire comfortably
There will always be unforeseen circumstances that may catch us unaware. These oftentimes require us to dig deep into our pockets and set us back in our retirement savings. I have seen ex-colleagues being retrenched at a moment’s notice. I have seen ex-bosses being struck by illnesses that wiped out their entire savings.
If I don’t think about retirement now, I might not have enough savings to buffer for these unexpected events. I do not want to be forced to continue working in my golden years, which is why I need to actively save up as early as possible. Even though I run my own business, I make it a point to have employers’ and employees’ contributions to build my CPF savings. For example, my MediSave Account (MA) savings can be used to pay for future hospitalisation and certain outpatient treatments, as well as MediShield Life premiums.
I really hope to have more than sufficient savings to feel assured even in the event of a serious health scare, or any unexpected event. I want to be able to travel around the world and live a good life, without worrying about money after retirement.
Reason number 3:
I need the magic of compound interest
Many of us think that we need to set aside a big sum of savings every month just to retire comfortably. That is not true! What is easier is to start saving as young as possible. With the magic of compound interest, you only need to save a small figure each month to reach a comfortable retirement sum.
Based on a compound interest calculator, you will get $36,503 by saving $100 every month over 20 years at 4% p.a. interest (compounded yearly). On the other hand, if you save $200 every month over 10 years at 4% p.a. interest (compounded yearly), you will get a lower amount of $29,435. Even though the amount of money contributed to the account is the same, a person who saves over a longer period of time will earn more interest and end up with a larger amount of savings. Simply put, the interest you gain from your capital will also earn interest as time passes, making money ‘roll’ or snowball exponentially. That is why it is important to start saving as early as possible, so that our money can grow over time!
How am I planning for my retirement?
Maintaining a healthy lifestyle
I try to exercise weekly, eat healthily and cut down on soft drinks. Even for snacks, I do not eat potato chips anymore but go for nuts and fruits. By keeping myself fit, I can better take care of my family.
Wealth is not just in the financial sense, but in terms of our general well-being, which will automatically translate into financial savings.
Allocating a fixed percentage for savings through topping up my CPF Special Account
Currently, I save 10% of my salary for retirement and as a self-employed, also contribute voluntarily to my three CPF accounts. I expect my salary to increase as I age, and so the amount I set aside in my retirement funds each month will increase accordingly. A good place to park this savings is by topping up my Special Account (SA).
Many people might think that CPF is 'money that cannot be used' and that is not true, CPF helps us set aside savings for our retirement in our SA, which are meant for retirement, and earns risk-free interest at up to
5% per annum*. These savings will be used to provide monthly payouts when we retire.
Topping up my SA savings with cash** not only allows me to earn tax relief of up to $7,000 a year, but it’s also a good way to make use of compound interest. Putting in a small amount of $100 each month will allow my savings to grow to $14,000*** in just 10 years!
Because my business is just starting to grow, there are fluctuations in my income. As such, I am more keen to save up in CPF as a form of passive income. More risky investments would only be considered when I have excess cash.
Topping up my CPF with a fixed percentage of savings each month assures me that I’ll continue to have sufficient savings in my CPF accounts to meet my retirement needs.
Transferring my funds from Ordinary Account (OA) to Special Account (SA)
After my CPF OA got wiped out for my house****, I worked for a few years to gain enough savings before I dared to venture into starting my own business. This is necessary so I still have enough to pay my housing loan while getting no income for some time.
To prepare for retirement, I also considered transferring funds from my OA to SA in future. This is because money in OA earns up to 3.5% interest* while SA earns up to 5% interest*. This additional 1.5% interest is huge when compound interest comes into play. As this transfer is irreversible, I will not be transferring the funds now because I intend to pay for my children’s education and my housing loan, but I hope to start doing so in the next 5 years, when I have excess funds in my OA.
Decades fly past in a blink of an eye. I used to feel that retirement is too distant as I have 30 odd more years to go till I hit 65. However, as I see my children grow older, it scares me that they are growing so fast.
As parents, we should plan for our own retirement early and not wait till our children are grown before prioritising our retirement planning. Not only do I want to feel secure and worry-free in my golden years, I also wish for my children to be able to lead their lives freely and comfortably without having to worry about funding my retirement.
Plan your retirement early so you can reap the benefits during your golden years. After all, the future is closer than you think!
Disclaimer: The opinions reflected in the above article are of my own. This article was brought to you in collaboration with CPF Board. Follow me on Facebook for more updates on how to better manage family finances.
*Inclusive of an extra 1% interest paid on the first $60,000 of a member’s combined balances, of which up to $20,000 comes from your Ordinary Account (OA).
**Cash top-ups can be made to any recipient who is Singaporean or a permanent resident. You can enjoy tax relief of up to $7,000 per calendar year if you are topping up for yourself and additional tax relief of up to $7,000 per calendar year if you are topping up for your parents, parents-in-law, grandparents, grandparents-in-law, spouse and siblings. For other terms and conditions on tax relief, please refer to the section on the benefits of topping up
***Based on the base interest of 4% p.a. on your Special Account (SA)
****With effect from 28 Aug 2018, flat buyers taking an HDB housing loan have the option of retaining up to $20,000 each in their CPF OA. Previously, flat buyers had to fully utilise the balances in their OA to pay for their flat purchase before they took up an HDB housing loan.