Friday, September 26, 2014

Financial Realities - Youth and Retirement



S’pore youth feel financially unprepared for future: Survey


SINGAPORE — Many young Singaporeans feel they are not financially ready for the future and their projected amount of savings falls far short of the amount they believe is necessary to fund their retirement, a recent survey commissioned by NTUC Income showed.

The Nielsen survey — which polled more than 1,000 final-year polytechnic students, university undergraduates and young workers aged between 18 and 29 — also found that the majority of young Singaporeans had prudent attitudes towards financial planning. Most respondents agreed that saving was a priority and expressed the need to be in control of their financial matters.

However, despite knowing the importance of financial planning, only 18 per cent of respondents had created a financial plan for themselves, while only 7 per cent had reviewed their financial situation.

The survey, conducted in July, found that nearly nine in 10 respondents felt financially unprepared. Eight in 10 said they were not confident about their current financial situation.

Many of those polled also did not have a strong knowledge about financial planning. For example, while respondents cited about S$1 million as the perceived amount needed for retirement, their projected mean savings by retirement — at the average age of 57 — were only S$382,872.

About half of the respondents also said they had poor knowledge of insurance.

Mr Marcus Chew, vice-president for strategic marketing at NTUC Income, said the survey was aimed at identifying the gaps in financial planning knowledge among Singapore’s youth. “We would like to get them thinking about financial planning early and to help them understand that the decisions they make today will have an impact on their financial well-being later in life,” he said.


Bridging the retirement gap


Retirement adequacy and the need to plan for retirement continue to be top of mind for many Singaporeans. Retirement-related issues formed a key part of Prime Minister Lee Hsien Loong’s National Day Rally speech — in particular, plans to help lower-income Singaporeans and making the Central Provident Fund (CPF) system more flexible. Enhancements to the CPF system will be considered by the CPF Advisory Panel, which was announced on Wednesday by the Ministry of Manpower.

While the question of whether one has saved enough money for retirement may seem a simple question, the fact that retirement is often many years away makes it more difficult.

Trying to answer it generates a number of other questions: Will I have met the CPF Minimum Sum and will that be enough to meet my needs? How will healthcare and living expenses change by the time I retire and how will they continue to rise after retirement?

Global professional services firm Towers Watson, for which I work, explored these issues through a pulse survey of more than 100 human resources professionals in February, revealing insights into how Singaporeans are thinking about and planning for retirement.


With Singaporeans living longer than before, a later retirement age is necessary to ensure that the balance between working years and retirement years is sustainable financially. Department of Statistics figures for 2012 showed that a Singaporean male who had already reached 65 would be expected to live to age 83.5, while a Singaporean female could expect to live to age 86.9. Those working now will therefore need their retirement funds to last for approximately 20 years on average — and even longer as longevity continues to increase. Putting this into context, if you expect to spend S$3,500 per month in retirement, you would need a savings of S$840,000 (ignoring any potential interest earned) to last for 20 years.

In light of increasing longevity, and the ageing of the Singapore population as a whole, re-employment legislation — requiring employers to re-employ all workers who are medically fit and have at least satisfactory performance up to age 65 — has been in place for over two years. Our survey indicates that re-employment takes place in 95 per cent of cases, with renewable one-year contracts most commonly agreed upon along with the same job scope, salary and benefits. Given the success and necessity of the scheme, discussions are under way to push the age limit from 65 out to 67.

Against this backdrop, our survey found that 5 per cent of baby-boomer respondents (those aged 50 and over) expect to retire after age 70 and 35 per cent expect to retire between ages 65 and 70. In contrast, 19 per cent of Gen Y respondents (those aged below 35) expect to retire after age 70 and 17 per cent expect to retire between ages 65 and 70. While this appears to indicate an acceptance among younger Singaporeans that the retirement age will continue to increase, 42 per cent of Gen Y respondents still expect to retire before age 60. The realities of saving a fund big enough to sustain such a long retirement are likely to make this more of a dream than a reality — but time is on their side if they start saving now.


The majority of people realise they need to do more to ensure a comfortable retirement, with 60 per cent of respondents admitting to not saving enough and 11 per cent not preparing at all. Healthcare needs are the primary concern of almost half of respondents. While everyone aspires to a healthy retirement, and MediShield Life will help alleviate concerns about the availability of cover, it is important to plan adequately for healthcare costs in old age.

The impact of inflation on future living costs also needs to be considered. Even if inflation remains stable at 2.5 per cent per annum, goods would cost over 60 per cent more in 20 years than they do now — a factor that too many people fail to take into account. If you wanted your S$3,500 per month income to increase with inflation (at 2.5 per cent per annum) over a 20-year retirement timeframe, the fund you would need at retirement increases from S$840,000 to around S$1.1 million.

As Singaporeans are living longer and are having children later in life, it is very possible that people may reach retirement age with both younger and older generations dependent on them. This needs to be taken into account in planning.


When it comes to their primary source of retirement income, Singaporeans are looking to a number of different options. About 34 per cent of our survey respondents will rely primarily on the CPF savings, 18 per cent on their life insurance plans and 12 per cent on investment properties, but an alarming 20 per cent indicated their savings in banks as their main source of retirement funds. While putting money in a bank is safe, inflation will erode the real value of bank savings over time, particular as interest rates lag behind inflation.

An emerging option is drawing down on the value of one’s property — whether through downsizing, renting out a room or equity release. The recently announced changes to the lease buyback scheme should also help generate more interest in this option.

One form of retirement savings that provides tax efficiencies is the Supplementary Retirement Scheme (SRS). Our survey showed that 20 per cent of respondents were expecting to use SRS savings to some extent to enhance their retirement income.

However, based on Ministry of Finance data, SRS penetration has been surprisingly low to date. Given its potential, more people should consider this alternative in their wider retirement planning.

As the Singapore population ages, retirement planning becomes more and more important. Thinking about when you might retire, how long you might live and what kind of income you might need is the starting point. Then you need to think about what you might get from your current planned savings — both from the CPF or from other sources. From there, you can derive what gap you might need to bridge when you reach retirement.

One thing is clear: The sooner you start, the better. Pledging to save a proportion of your future salary increases can be a relatively painless way to start.


Mark Whatley is a senior consulting actuary with Towers Watson, specialising in advising employers on retirement and other employee benefits. He has been based in Singapore for eight years.

[And here are Five Myths about Retirement.

Caveat: That is an article by MoneySmart. They would like you to invest. Preferably with them. They generally pooh-pooh safe investments because safe investments don't need salesmen. All these investors tell you that for higher returns you need to invest in riskier investments. Of course. That's what the higher interest or returns are for. And of course riskier investment needs sales-persons to sell them.

But there are some good point in that article. And you shouldn't just believe me. Or believe the article. Or this other article.  Make up your own mind. 

On the one hand, they have a vested interest in getting you to invest. On the other hand, I am not rich (so why listen to me).

Anyway, here are 5 "rules" for youth just starting to earn an income.

1 Establish a reserve/emergency fund. Besides being for emergencies (all kinds that can be solved with money), it also provides you with a safety margin so you do not feel stressed or pressured to make decisions under poverty conditions. Expect the unexpected. Life is not fair. Be prepared for unfairness. Insure yourself, your property, your assets, the things you need most, rely on to work. Insure them against disaster. Not just with insurance, but also with a back-up plan. Plan, and then make contingency plans for when your plans don't work or when circumstances change, or when your goals, targets, objectives change. Planning for best case scenarios is not planning. That is hope and fantasy masquerading as plans.

2 Don't live on credit. The first time you are eligible for a credit card is almost like a validation that you have arrived. One is tempted to live on credit. Don't. It is expensive and ultimately, unsustainable. If you find yourself looking forward to payday to pay off your credit card bill (or worse, paying off the minimum), you are in trouble. At at early stage in my life when I got credit cards I was living off credit, and then waiting for payday to pay off my credit card bills. Which wiped out my salary for the month. Then I would ingeniously arrange to go for lunch with my colleagues to expensive restaurants (they would take credit cards) and when the bill came, I would "volunteer" to pay with my credit card ("Sorry, I have no cash with me, okay with you guys if I pay first with card? You can pay me later.") Basically, I used my friends as ATM machines.  And I could live off their "repayments". If you are doing this, be aware that you have a problem. Treat a credit card as a convenient form of payment. And possibly the channel for some good deals or offers.

3 Plan for your retirement. Retirement is not 55 or 62. Retirement is when you have attained financial freedom or security for the rest of your life, and do not need to work for  a salary. This can happen at 65, 62, 55, or even 30. Or for some people, never. If you don't plan for it, you may never retire. So how do you plan for your retirement?

That is too complicated to cover in a few short paragraphs. But for a start, try to have enough for the minimum sum to get a full CPF Life. $1200 a month is not much, but it is something.

4 Simplify your life. Focus on the Essential. Too often, people are distracted by the non-essentials, the frills, the silliness. Like Weddings. They have a lavish wedding dinner at a grand hotel, a spectacular church wedding with flowers and decorations to the ceiling, a designer wedding gown, a fabulous honeymoon. And then they return and start their married life with depleted savings, or worse, indebted. And will this make their marriage stronger?

What can you do that is affordable and independent? What can you do to reduce your recurrent costs, minimise your financial commitment. 

For example a car is huge money pit. COE, Road Tax, ERP are all avoidable taxes. Avoid them.
5 Live Honestly. Get what you pay for and pay for what you get. If you hear any stories about scams and con artist, usually what happens is somebody thought they could get something for nothing, and they got conned. Live honestly. Save for the things you want. Use credit cards for convenience, but pay the bills in full when it arrives. Know what you are paying for. Sometimes you pay for quality. Sometimes you pay for convenience. Sometimes you pay a premium for status, branding, or marketing. Nothing wrong with any of those as long as you are conscious of your choice and why you are choosing it. Nothing is for free. ]

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