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16 December 2022
Having enough savings for our retirement is one of the big financial goals (and uncertainties) for many of us. A quick way to think about it is that most people typically earn a salary for 40 years but have to make it last for 60 years (with approximately 20 years in retirement).
This means that during our working years, besides spending on necessities and our wants, we also need to account for our retirement nest egg. Simply saving money may not be enough either, as inflation inevitably chips away at our spending power over time.
To protect our spending power, we need our retirement savings to grow faster than the rate of inflation.
In order to live a retirement on our own terms, we need to have sufficient savings. This will depend on how far away we are from our desired retirement age as well as the retirement lifestyle we wish to lead.
One way to grow our retirement pot is to invest our savings. Especially for those who have a longer runway to retirement and/or limited knowledge, we can build a retirement pot that delivers the market return. This way, we can ride out the ups and downs of the market, to earn the market return in the long run. Historically, investing in globally diversified stocks can give us a return of 6.5% to 7%.
Alternatively, we can also invest in bonds, or fixed income. Generally speaking, bonds tend to be safer than stocks. Another benefit is that they also typically pay a regular interest distribution on a semi-annual basis – giving us more visible cash flows.
However, as we may have seen in 2022, the financial markets can be extremely volatile. Stocks have fallen steeply, while bonds haven’t been spared either as interest rates have risen in tandem with inflation.
Even if we don’t have the stomach for volatility when investing our retirement savings, we can still rely on safer forms of retirement income.
Another common way to fund our retirement is our homes. Once the children leave to start their own families, we can either choose to rent out spare bedrooms, or even monetise our homes via the Lease Buyback Scheme (by selling part of our HDB flat’s lease while continuing to live in it) or Silver Housing Bonus scheme (by moving to a 3-room or smaller flat) and enjoy a cash bonus of up to $30,000. Part of the net sales proceeds will go into our Retirement Account (RA) to boost our retirement nest egg.
Today, we can top up our CPF Special Account with cash, via the Retirement Sum Topping Up (RSTU) Scheme. The main benefit is that our principal is guaranteed, and we get to earn a risk-free floor interest rate of 4% per annum (p.a.). Furthermore, topping up allows one to enjoy up to $8,000 of tax relief and a further tax relief of up to $8,000 if cash top-ups were made to our loved ones*.
The maximum that we can top up to is up to the Full Retirement Sum (FRS) for that year: $192,000 in 2022 and $198,800 in 2023. However, many of us may not opt to do so e.g. preference of having cash on hand. Some of us may also prefer to invest a smaller amount and divert the rest of it into our Special Account in extremely volatile periods.
The earlier we start building our retirement nest egg, the bigger the head start we will have. Besides inculcating this habit early, the main benefit is enjoying compound interest.
The simplest way to explain compound interest is earning an interest return on past interest returns. i.e. earning interest on interest. Assuming that we do not have any savings in our Special Account (SA), and we contributed $1,000 cash to our SA at the start of January 2023, as SA has an interest of 4% p.a., after one year, we would have $1,040 (i.e. we earned $40 in interest). After the second year, we will have $1,081.60 (i.e. we earned $41.60 in interest).
While the initial interest gained may not seem like a lot, we should not underestimate the power of compound interest. This $1,000 contribution to our SA will grow into $1,480 in 10 years, $2,191 in 20 years, and $3,243 in 30 years.
This does not take into account the fact that our first $60,000 of combined CPF savings earn an extra 1% of interest per annum, and that we can also benefit from a dollar-for-dollar tax relief.
It’s never too early or too late to start growing our funds, as long as we start today. When planning for how much we will need in retirement, crunching the numbers by ourselves can be tedious.
Thankfully, we can use CPF’s handy new tool: CPF planner – retirement income. The tool helps project whether our current account balances* in CPF, salary and saving habits can meet our desired retirement goal.
*Note that only the Special Account (SA) balance is projected. Singpass login is required.
I used the CPF planner – which provided a tangible target to work towards in building my retirement nest egg. Since we need to input our Singpass login details, the calculations below are personalised to me – a writer in his mid-30s. You may have the exact same goal and see different figures.
This planner is also especially useful for me as well since I’m still waiting for my BTO flat.
(all screenshots taken from CPF Planner – Retirement Income calculator)
The first thing I had to do was to set a retirement income goal, which, admittedly, can be tricky. Fret not – there is the Retirement Income Guide to estimate the monthly amount I would need when I retire at 65.
In determining the monthly income that I require, the Retirement Income Guide posed to me a set of questions related to my general household expenses, such as utilities and home maintenance, healthcare and medical needs, and my passion in terms of where I would like to travel e.g. in Asia or Europe, as well as my preferred venues when dining out.
After understanding how much I need based on my preferred lifestyle in retirement, I have to “factor in inflation” to understand how much I will eventually need when I turn 65.
Regardless of how old we are, there’s no doubt inflation will affect our purchasing power over time. While we are combating runaway inflation this year, Singapore’s average core inflation rate over the past 20 years has been below 2%.
Taking into account that I have about 30 years till my retirement, my $2,300 payout goal translates into $4,170 after inflation. This is nearly double what I would need today!
To check if I am on track to hit my retirement income goal when I turn 65, I can input my current salary. In this simulation, I keyed in an amount that I should be able to earn – about $4,000, along with a very conservative increment rate that only keeps pace with the average rate of long-term core inflation in Singapore, in this illustration. If my wages grow faster than the rate of inflation, I may be better off by the time I hit retirement.
While both the Special Account (SA) and Ordinary Account* (OA) savings are transferred to the Retirement Account (RA) at age 55, this calculation only takes the current and future Special Account (SA) savings into consideration (as savings in the OA will likely be used for housing needs).
For example, my personal calculations would have been skewed if OA savings were used since a large chunk of it will be used for the downpayment of my upcoming BTO flat.
Toward the end of the planner, I got a summary of my ability to meet the desired retirement income goal.
My estimated monthly payouts fall short of my payout goal. I can only expect to get $2,380 a month (dark green bar) and my shortfall is $1,790 (blue bar). This means that I could choose to either adjust my expectations for retirement or work towards building my CPF nest egg to meet it.
One way to overcome any shortfall in savings is by making cash top-ups via the Retirement Sum Topping Up (RSTU) Scheme. The planner allows us to simulate various scenarios – where monthly cash top-ups are made, or transfers are made from OA to SA.
While we can top-up our Special Account up to the Full Retirement Sum (FRS), we will only get tax relief on the first $8,000 of top-ups each year to our own account. We can also choose to break this amount down into regular monthly contributions.
I used this figure to simulate how much I would be able to get in retirement income if I decide to make a regular top-up to my SA each month and coincidentally, this is almost exactly what I need to do if I want to hit my retirement income goal at 65!
What’s helpful is that I can also download the plan in a PDF file for my future reference.
Planning for our retirement does not have to be tedious and based on made-up numbers which may not be accurate.
What I found useful with the CPF Planner was that it was personalised, and that it was helpful in signposting where I was standing in terms of my desired retirement lifestyle – how far away I was, especially if it took a 2% rate of inflation into consideration.
The Planner’s cash top-ups simulation was also handy in helping me to understand the amount I needed in the form of CPF top-ups to build up my retirement nest egg.
By adopting a habit of saving a regular sum for my retirement each month, I can increase my current projected retirement income of $2,380 per month to more than $4,170 per month via the CPF LIFE scheme.
Above all, I also treasure the assurance that comes with being ready for retirement. I believe that retirement planning is something personal that each of us needs to do for ourselves and I would be able to live the retirement lifestyle that I want if I made an effort to start planning for it today.
This article was written in collaboration with CPF. All views expressed in this article are the opinion of DollarsAndSense.sg based on our research. DollarsAndSense.sg is not liable for any financial losses that may arise from any transactions and readers are encouraged to do their own due diligence. You can view our full editorial policy here.
This article was first published on Dollars and Sense. Information is accurate as of the date of publication.