Monday, March 28, 2016

Retirement planning: How much is enough?

Finance experts break down the growing range of possible means to save for retirement in Singapore.

By Nicole Tan
27 Mar 2016

SINGAPORE: Retirement means different things to different people and industry observers say retirement aspirations of Singaporeans have evolved over time.

Mr Edwin Ooi is 27 this year and he is already planning ahead. He intends to stop working full-time by the age of 45 and said that as a financial adviser, his work experience helps him manage his own money.

"On a month to month basis, I'll try to save up to about 30 per cent of my income and that goes into various portfolios of investments," said Mr Ooi. "50 per cent is more of expenses, but I do have surpluses here and there, so that eventually goes into savings or are parked to my investments."

He said he started thinking about early retirement at the age of 16 as he aspired to have more freedom with his time: "Retiring early would mean that I would have more time to spend with family and to do things that really matter in life."

"One thing unique about the industry I'm in is that there's no actual retirement, but more financial freedom. So working towards financial freedom would mean that I can still work on an ad-hoc basis, but I would have more time to spend doing things that really matter to me," he added.


Finance industry experts said there is a growing number of individuals like Mr Ooi, whose attitudes towards retirement stray from the conventional.

"(Retirement) used to be (about working) for a company for 20 to 30 years and then stopping, and that was it - you didn't work again," said Mr Mark Surgenor, Head of Wealth Sales for at HSBC Singapore's Retail Banking and Wealth Management. "Now people are thinking in a much more active way about retirement."

He added: "They're thinking about moving into retirement, by perhaps doing a bit less of their day job, and picking up some other work that's close to what they do, or something that's close to what they really enjoy.

"They might plan to do that for five to 15 years. Ultimately, they may eventually want to completely stop but it's much more of a phased approach now."

According to a recent survey by HSBC, seven in 10 people working in Singapore above the age of 45 would like to retire within the next five years.

The study showed that top reasons for wanting to retire include having the freedom to travel and pursue other interests (62 per cent), spending more time with family (42 per cent) and switching to another career or voluntary work (25 per cent).

However, half of them said they would not be able to retire within five years mainly due to financial constraints.

"Let's be realistic about this, life gets in the way of these things," said Mr Surgenor. "People get married, people go on holiday, buy a new house or perhaps want their children to study abroad. These are great expenses that come up - sometimes they're planned, sometimes they're not planned. So that does get in the way."


Market polls like the DBS-Manulife Retirement Wellness Study done in November 2015 showed that people living in Singapore start planning for their retirement at an average age of 38.

The surveys also showed that about four out of five people in Singapore are not fully aware of how much they will need to put aside. Some observers cite industry benchmarks that suggest how much is enough.

Said DBS Bank's regional head of Bancassurance Richard Vargo: "It really depends on a person's current lifestyle and their aspirations to maintain that lifestyle - to increase or reduce that lifestyle or modify it during retirement years.

"Industry benchmarks throughout the world say roughly 60 to 70 per cent of a person's current monthly income should be adequate during retirement years, recognising certain expenses will be reduced during your retirement years."

Finance experts said the needs vary widely across different income groups. However, they are able to estimate the monthly expenditure for a basic lifestyle by breaking it down to some daily essentials, though this is still a far cry from a one-size-fits-all formula.

According to advisers, utility and phone bills would cost up to S$300 a month. Meanwhile, food expenses could be as little as S$400 a month, but higher if one preferred more luxurious dining.

Getting around could cost as low as S$200 for public transport, but it could cost up to thousands of dollars to maintain a car. As for entertainment, industry observers budgeted about S$300 a month.

Based on these back of the envelope calculations, it can be gauged that monthly expenditure for basic daily needs would be about S$1,200.

Said former retirement ambassador at Fundsupermart Wong Sui Jau: "We can put a certain 'x' dollar amount which is probably adequate for most cases. If you want to expand on that, you probably want a more luxurious kind of lifestyle.

"Now S$1,500 is on a more basic level which allows S$300 to S$500 for entertainment per month. Of course this doesn't include housing, but we made certain assumptions, most of the time by the age of 60 plus, most of the house should be paid for."

He added: "It doesn't factor in things like medical. Some people are in very good health and don't need to spend much, if any, on medical and some people who are in poorer health need to spend much more on a per year basis."


Amid changing retirement needs, the Government implemented changes to the existing Central Provident Fund (CPF) Life scheme at the start of this year.

Rather than the previous "Minimum Sum", Singaporeans now have three annuity plans to choose from - Basic, Full and Enhanced Retirement Sum.

Depending on the amount saved in their retirement account, monthly payouts range from S$600, to S$1,900 when they reach 65.

Said Mr Wong: "If you were to look at the ballpark numbers of what we were looking at just now, at S$1,500, even if you take the standard one, which is S$1,200 per month paid out from CPF Life, you probably need to make up about S$300 per month from your cash and savings and such. S$300 is not that difficult to make up on a per month basis from your cash and savings and investments.

"Now if you're taking the highest one which is $1,700 to $1,900, it covers a lot of the basics and of course makes certain assumptions. One very important assumption we have to make is inflation is not a big issue."


Observers said CPF Life is a good starting point, but if individuals want additional funds on top of that, there is an increasing range of options available to ensure a sustainable stream of income post-retirement.

From insurance and savings plans, to investing in capital markets and property, experts said that how individuals choose to save and invest will depend on factors such as risk appetite, which will also change over time.

"When you talk about retirement planning or investing, it's not a one-size-fits all type of solution," said Associate Professor Jeremy Goh from the Singapore Management University's Lee Kong Chian School of Business. "At the end of the day, it's all about asset allocation.

"When you're young, you tend to tilt your portfolio towards equity, because when you're younger you can afford to take risks. As you get to pre-retirement, (you reach a) point where you cannot afford to take risk and you shouldn't be taking any risk."

He added that at this point a person's portfolio will mainly be in fixed income security, a "very safe type of instrument".

He added: "You would also want to buy some annuities. Convert some of the valuation in your portfolio into annuities to split all the cashflow from one lump sum into monthly cashflow to sustain day to day needs."

Associate Professor Goh talked about the effect of compounding, which is interest earned on interest being paid.

"Compounding gets even bigger if you're looking at a portfolio where the expected returns are higher," he said. "So if you're looking at 8 per cent return on a portfolio, if one starts 10 years earlier, the numbers are just staggering."

Experts said it pays to start young and not just because of financial reasons. Ultimately, they said to plan early is to be better prepared for future spending needs, especially the unexpected.

- CNA/hs

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