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Dear Readers,

I believe this is a question that many Singaporeans ask ourselves. But a lot of time, we are asking this only when we are nearing our retirement. This is not the only question that i have asked myself lately as i am approaching my retirement. Below are some other questions that I have.

  1. Can I retire comfortably in Singapore?
  2. Am I willing to compromise on my standard of living after retirement?
  3. Is my CPF savings enough? Will I have enough money to last through my retirement now that the life expectancy is 83.15 years?
  4. Will I be a burden to my children after some time into my retirement?
  5. Will the medical cost increase over time?
  6. Will I want to sell my house to fund my retirement in future?
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1. Can I retire comfortably in Singapore?

I guess, this is one of the most important question that I will be asking myself. Living is one thing, but the quality of our lives is as important. There is no point having a long life, yet constantly worry about finances. In the worst case, we may be financially challenged to bring food to the table.

The latest Household Expenditure Survey (HES) 2017/18 shed some lights into this matter. Based on the second quartile (20th to 40th percentile, or lower-middle segment), this spending is about $600 per month today. In the 4th quintile (or upper-middle segment) of retiree households in the HES 2017/18, spending is about $1,130 per month.

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The recent Lee Kuan Yew School of Public Policy (LKYSPP) study among 100 focus group participants, most of which were aged 55 and above, across a diverse range of backgrounds found out that a single elderly person would need $1,379 per month for their “basic needs”. By basic needs, it went beyond subsistence living to include also having enough to enable one to thrive in one’s golden years.

For comparison, we can take a look at the table below:

Types of Goods and ServicesHES 2017/18
(2nd Percentile)
HES 2017/18
(4th Percentile)
Lee Kuan Yew
Minimum Income
Study
Food & Non-Alcoholic Beverages108.8208.2198.2
Clothing & Footwear3.018.958.4
Housing & Utilities103.5144.3241.4
Home Furnishing, Household
Equipments and Maintenance
71.4131.093.8
Healthcare70.7166.679.5
Transportation17.163.1110.0
Communication34.354.928.3
Recreational Activities16.868.7234.7
Food Serving Services103.3158.1201.9
Miscellaneous Goods & Services62.0109.489.8
Others7.310.943.2
Total598.21,134.11,379.2
20 years later @ 2% inflation889.91,685.22,049.4

As I am 45 this year, assuming that I will be retiring at the age of 65 and the inflation rate to be 2% per annum, we can see from the above results that I will need minimally $2,049.40 monthly during retirement. So, this is the magic number! But I will also need to consider that i may live to a ripe old age of 85 with the advancement of healthcare and medical technology.

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So based on the above parameters (2% inflation applied throughout my retirement from 65 -84), I will need AT LEAST $561,713 (refer to table below)! Do take note that this is the minimum required. If you, like me would like to go for holidays and once in a while, splurge on food, I believe that number will need to be larger.

2. Am I willing to compromise on my standard of living after retirement?

After working hard for most parts of my life, and raising up my children, I will hope that my standard of living will remain the same during my retirement at least. It is a time in which I will like to spend quality time with my children and my children’s children. Occasionally, I may be tempted to splurge on gifts for them, especially my grandchildren.

With that in mind, I believe that $2,049.40 (Based on LKY Minimum Income Study above) required monthly is not going to be enough. I will add 50% to that number which will eventually mean that I would need $3,074.10 monthly personally.

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3. Is my CPF savings enough? Will I have enough money to last through my retirement now that the life expectancy is 83.15 years?

CPF LIFE is the current incarnation of the Central Provident Fund’s retirement scheme. I believe that most Singaporeans will be depending on this income stream. If you have little savings inside your CPF account at the age of 65, you will be receiving lesser compared to those Singaporeans who have a huge savings inside their CPF account. Below is a screenshot from CPF website on the benefits of CPF LIFE.

CPF Website: How is CPF LIFE attractive?
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There are basically 3 plans under CPF LIFE namely:

  1. Escalating Plan
  2. Standard Plan
  3. Basic Plan
CPF Website Screenshot
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Using the Standard Plan as an example, to receive a monthly payout of $2,080 – $2,230, I will need $415,300 in my RA at 65. A much lesser sum of $186,000 is required if you set aside the amount in your RA at 55. This is because CPF interest rates of up to 6% will help you grow your savings through compound interest. Note: first $30,000 – 6%, next $30,000 – 5%, remaining balance – 4%.

Example, you have $100,000 in your retire account:

($30,000 x 6%) + ($30,000 x 5%) + ($40,000 x 4%) = $4,900

Screenshot from CPF Website
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Taking the median from the above table as a ballpark, I will assume that I will have $120,000 CPF savings at the age of 55 to enjoy a monthly payout of ​$960 – $1,030. That will leave some gaps for me to fill as $1,030 is definitely not enough. But it does provide around 30% of my required retirement income monthly.

4. Will I be a burden to my children after some time into my retirement?

This is an easy question! As long as have enough financial reserves in my bank account, I will not become a financial burden to my children. Of course, I will need to have some kind of plans to ensure that.

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5. Will the medical cost increase over time?

The average healthcare inflation rate was 2.30% over a period 20 years (from 2000 to 2020) in Singapore. So I guess, this is another good reason for me to plan early for my retirement.

6. Will I want to sell my house to fund my retirement in future?

This is definitely something that I will not like to explore. I love my current location with good amenities around like hawker centre, coffee shops, supermarkets, etc. Therefore, in order that i do not sell my house to fund my retirement, I will have to plan ahead!

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Summary

By answering all the important questions, I realised that I would need to start planning for my retirement. While exploring this topic, I have come across some interesting facts/information and I will be sharing them below.

  • 60% of Singaporeans face an uncertain future by not prioritising their retirement planning.
  • Singaporeans have world’s longest life expectancy at 84.8 years.
  • Parents spend almost 20% of their income on their children but less than 7% on their own retirement planning.
  • A 2019 study suggests that a single person aged 55 to 74 living without chronic illness needs $1,721 a month to meet basic needs.
  • 2 in 3 Singaporean retirees regret not planning earlier for retirement.
  • 1 in 4 Singaporean retirees having adopted lifestyle changes and consciously spending approximately S$1,500 less every month.
  • 1 in 3 retirees continue to work post-retirement to increase their savings.
  • 1 in 2 indicated the need to supplement their Central Provident Fund (CPF) savings with other sources of income.
  • Based on their current savings, 1 in 4 retirees are not confident in living out the rest of their retirement in comfort.
  • Close to 1 in 2 Singaporean aged 40 to 59 said they wish they had started financial planning much earlier, with only 38% in this bracket believing they have enough to retire comfortably.
  • 1 in 4 of Singaporeans have not considered when they would retire, identical to the number of respondents who cited that they have not starting planning at all.
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Solution

In order to ensure a blissful retirement, I will need to plan for multiple income streams during my retirement. From the above findings, I know that CPF will most probably provide around 30% of my monthly expenses. As such, I would need to see how I can fulfill the other 70%.

With that in mind and the fact that I am an avid stock market enthusiast, I tried to see if i can use investment to fund my retirement. This is not something new. Insurance companies have been doing that for their clients. Usually and most of the time, they will invest into fixed income instruments and therefore, the return is lower as their risks are lower.

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But as I have another 10-20 years to retirement, I think I could take some calculated risk. There are some strategies that I can employ to manage this risk, and maximise risk-adjusted returns for me to enjoy my retirement.

I ask myself, what if I invest 5 years and then let the portfolio generate returns over time by itself. This thought was inspired by insurance plans in the market in which they allow policy holders to save monthly for a period of 5 years and wait 15-20 years to see the return.

As for my own plan, I will structure it in a way that I can actually start withdrawing a annual income from the portfolio at the start of the 6th year. And this income will continue throughout the rest of my life.

Structuring the Plan!

Risk Management Strategies

Asset Diversification

I will be using different underlying assets (ETFs and Unit Trusts) to test this idea. This is a way to manage portfolio risks. Currently, the S&P500 index has 505 companies which include big names like Apple, Microsoft, Amazon, Alphabet, Facebook, NVIDIA, Berkshire Hathaway, etc.

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Dollar-Cost Averaging

Dollar-cost averaging is an approach to investing that involves periodically investing a set amount of money regardless of the market price of the securities being purchased. In the long run, this is a highly strategic way to invest. As you buy more shares when the cost is low, you reduce your average cost per share over time.

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Time in the Market

Instead of “timing-the-market”, we will employ “time in the market” strategy. Trying to make buy or sell decisions based on short-term fluctuations can create an extremely uncomfortable investment experience over time. Moreover, statistics about “timing-the-market” strategy are discouraging. Market always appreciate in value (refer to chart below) over time.

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Testing the Plan!

With the above strategies in place, I will use S&P 500 as one of the underlying asset to test the model and see whether the plan will work.

Parameters of the Model:

Monthly Savings$1,000
Wrap Fees1%
Sales Charge2%
Underlying Asset Return (S&P500 Annualised return is 10%)10%
Withdrawal as a percentage to total capital outlay/ Annum5%
Nett return (Factoring annual wrap fees)9%
Withdrawal amount per annum$3,000
Parameters of Plan

First 5 Years: Monthly Investing
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5th to 40th Year: Annual Withdrawal Phase

From the above spreadsheet, we see that the plan actually works!!! My total capital of $60,000 ($1,000 monthly for 5 years) has allowed me to withdraw an annual amount of $3,000 every year (beginning of 6th year onwards) after the accumulation phase (1st to 5th Year).

In total, I would have withdrawn $108,000 and my portfolio value at the end of the 40th year is $948,927! All these with just a capital of $60,000.

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Real Market Scenario

Curiosity gets the better of me. I want to know if this plan works if I am to plug in real market data into it. As all of us know, market is never going to go up in one straight line. There are bound to be crisis happening along the way. I will use S&P500 annual return from year 1981 to year 2021 (Year-to-date). We see many different crisis happened during this period of time as indicated below.

  • Savings and loans crisis – 1980s
  • LatAm sovereign debt crisis – 1982
  • Stock market crash – 1987
  • Junk bond crash – 1989
  • Gulf war – 1991
  • Tequila crisis – 1994
  • Asia crisis – 1997 to 1998
  • Dotcom bubble – 1999 to 2000
  • SARS – 2003
  • Global financial crisis – 2007 to 2008
  • Swine Flu Pandemic – 2009
  • Euro Debt Crisis – 2011
  • MERS – 2012
  • Global Oil Crisis – 2015
  • Sino America Trade War – 2018
  • Covid-19 Crisis – 2020
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By using real market data, I am trying to “stress test” my plan to see if it survived. I even started it in a year when the S&P500 saw a negative return of 9.73% to push the boundaries. And amazingly, the results were very positive.

So let me share the results:

In the above, I am assuming that I am 45 years old in the year 1981 and started the plan. In 2021, I will be age 85 and I have withdrawn a total of $105,000 and my portfolio value stands at $895,442! Total capital outlay from 1981- 1985 is $60,000. Throughout this period of 40 years, my portfolio has never gone into the red! Amazing!!!

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Advantages and Disadvantages

With any plans out there, there are definitely pros and cons to it. I have included them below.

Advantages:

  1. Ease of implementation.
  2. Ability to customise based on individual needs.
  3. No lock-up period.
  4. Ability to adjust amount to save and amount to withdraw anytime.
  5. Potentially higher return relative to endowment plans.
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Disadvantages:

  1. Subject to market risks.
  2. Returns are not guaranteed.
  3. Requires discipline.

The three risk management strategies that I had mentioned earlier are there to mitigate the disadvantages. Dollar-cost averaging and “time-in-the-market” work to manage market risk. From the real market data above, it worked for the past 40 years. Generally, S&P500 has always appreciated over time.

As for the self-discipline factor, I will leave that for you to handle. 🙂

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Conclusion

Just like we keep fit and exercise to prepare our body for retirement, we will need to prepare our finances for retirement as well. We need to create as many income streams as possible for our retirement and this is definitely one of them. It’s not a get-rich-quick plan and we need discipline to execute it. I will say this will definitely complement my CPF LIFE and other insurance-related retirement plans that I have.