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Dream or nightmare?
Find out how much you need to stash away now to live comfortably
when you retire
By Lorna Tan
YOU have been working hard and dutifully putting aside what you
hope will be sufficient savings to build a nest egg to ensure a
worry-free retirement.
But the grim reality is this: It simply may not be enough unless
you take a serious look at your current lifestyle and finances, and
have realistic expectations of how much you need to retire
comfortably and how long you think you may live.
You may not realise it, but you make choices about your retirement
every day. If you buy a fancy car and take an Alaskan cruise
instead of settling for cheaper means of transport and a vacation
nearby, you will have less to pad your nest egg with.
Last year, a Singapore Management University (SMU) and OCBC Bank
study on money management behaviour found that 74 per cent of
Singaporeans want to retire before 62, the current mandatory
retirement age. Yet, most are ill-prepared for their golden years.
For many, there seems to be a significant gap between the level of
retirement funds they dream of and their ability to achieve that
sum.
This 'retirement gap' was highlighted by the Life Insurance
Association (LIA) at a recent luncheon. Based on a life expectancy
of 82 - that is, another 20 years after retiring at 62 - LIA
president Jason Sadler said savings of at least $250,000 per person
would be needed to maintain a 'reasonable' living standard.
This figure was based on the median earnings of Singaporeans of
about $2,500 per month. If a person needs 60 per cent of
pre-retirement earnings when he retires, this would work out to
$18,000 a year or $1,500 monthly.
'Many Singaporeans have the misconception that the money in their
CFP accounts will be adequate to meet their needs after retirement.
The reality is that many Singaporeans will not be able to have as
comfortable a lifestyle as they would like to enjoy in their
retirement years if they were depending only on their CPF savings,'
Mr Sadler told The Straits Times.
According to a report recently released by the Committee on Ageing
Issues, more than half of Singaporeans might not have enough funds
in their CPF savings to last through their retirement years. This
reinforced the findings of the SMU-OCBC survey, which indicated
Singaporeans aged 55 have only about $120,000 on average in liquid
assets, including CPF monies.
And even if you are able to satisfy the CPF minimum sum requirement
of $120,000, which will be in force by 2013, it will provide
retirees with only $950 a month for 20 years - enough only for
subsistence living here.
Mr Patrick Lim, an associate director of financial advisory firm
PromiseLand Independent, said the modest lump sum requirement of
$250,000 is already formidable for many.
And inflation - the rate at which the prices of goods and services
rise over time - will affect hard-earned savings, regardless of the
kind of retirement lifestyle that a person wants.
Put simply, the value of money does not stay static. Almost without
exception, a pile of dollars will represent less spending power
later.
Assuming an investment return of 4.5 per cent and a 2 per cent
inflation rate for the different age groups, Mr Lim drew up a table
setting out how much you need to set aside each month to accumulate
the required retirement fund, based on the sum of $250,000 at
today's value, when you reach 62. See Table 1.
Based on his calculations, a 40-year-old person would need a lump
sum of $146,989 now, or to put aside $850 monthly, to arrive at
$387,117 in retirement savings at age 62.
How much do you need to retire?
FINANCIAL planning outfit ipac's director of wealth management, Mr
Ben Fok, said even that minimum lump sum of $250,000 cited by the
LIA is insufficient for a comfortable lifestyle.
'This may be enough to meet the most basic needs, but it won't be
enough if you want to take holidays, dine out or buy gifts for your
grandchildren. Furthermore, if $250,000 is all you have and nothing
else, then a huge medical expense would wipe off a large portion of
your savings,' he said.
Assuming the lump sum of $250,000 is invested for 20 years with
projected annual returns of 3 per cent a year, total compounded
returns would be $16,809 or $1,400 a month for the 20 years, he
said.
To determine how much you will need during retirement, financial
advisers say it is important to know what you want to do in your
golden years.
Said Ms Anne Tay, OCBC's vice president of group wealth management:
'As a general rule of thumb, you will need about 70 per cent of
your last drawn salary at the time of retirement. The 70 per cent
figure is recommended to maintain your current lifestyle. If you
are willing to downgrade or change your lifestyle, you may need
less than 70 per cent.'
Financial planners also highlighted that it is prudent to plan for
at least 25 years of retirement instead of 20, after age 62. After
all, actuarial statistics indicate that more than 40 per cent of
Singapore males are likely to live beyond age 82. As for Singapore
females, more than 50 per cent will live beyond 82, said insurer
NTUC Income.
The earlier we start saving, the less we will need to save, says Mr
Fok.
By working out the different amounts of monthly savings required to
achieve $100,000, he said that if you have 30 years before reaching
retirement, you will need to save $172 a month with a return of 3
per cent a year over the next 30 years to achieve $100,000.
Of course, this level of savings is simply multiplied by two for
$200,000, or three for $300,000, and so forth.
See Table 2, which highlights the importance of saving early.
However, if you have left things rather late and have just five
years before retirement, you need to save $1,547 a month, and grow
that sum at 3 per cent a year to attain $100,000.
How to bridge the retirement gap?
MR FOK proposes four ways to tackle the gap. First, you can spend
less during your working years and save more. The money saved can
be invested. Second, you can retire later, at age 65 instead of
62.
Third, you can revise your expectations for retirement and reduce
your retirement income, so the capital sum required is not so huge
as to be unattainable.
Last but not least: Put your money in more aggressive investments,
but bear in mind that investment returns may be volatile, he
said.
Mr Lim said one rock-solid way to fund retirement expenses is to
buy a participating annuity as it offers a lifetime of guaranteed
monthly or annual income, no matter how long you live.
This ensures you will never outlive your stream of guaranteed
income.
For instance, a 61-year-old retiree with a single lump sum of
$250,000 stands to receive annual payouts of $14,253 annually (for
males) and $13,334 (for females) by purchasing an Income annuity
plan.
Retirement tips
TO GET you started, here are some tips from DBS Bank and
OCBC:
Start retirement planning and saving now, regardless of your
age.
Assess the kind of lifestyle you would like during
retirement.
Establish a retirement plan. The plan should include your goals,
your desired retirement age, the amount of income you will need
during your retirement years, and the level of risk in your
investment portfolio and strategy to meet your goals.
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