5 things your future self will thank you for
If you could time travel, would your “future self” come back to thank you, or kick you?
Contrary to the thirty-is-the-new-twenties mindset, research has found that your twenties matter. Today’s decisions about your career, relationships, and money will determine what your retirement looks like in the future.
How inflation and your lifestyle affects your retirement
Perhaps retirement looks like a permanent vacation to you: waking past noon, hours of playing mahjong with your friends, and never-ending road trips. Possible budget: S$6,000 a month.
Or perhaps it looks basic: hawker meals, the occasional dinner and movie date, utilities and telco bills, and birthday gifts for the grandchildren. Estimated budget: S$3,500 a month – seems manageable.
Either way, you will still need at least S$1.05 million to retire at 65, assuming you live till 90.
Reducing your spending to S$2,500 a month isn’t much defence against inflation, which shrinks the number of things that you can buy. For instance, S$10 can buy you 2 Cheeseburger Happy Meals now, which means two happy grandchildren. In 20 years, S$10 can only buy you 1.5 Happy Meals, assuming an inflation rate of about 2% p.a.
Another aspect to consider is your current lifestyle. If you are used to weekend brunches and expensive holidays, you may need more time to switch to a no-frills mode. A longer transition means you need to set aside even more money.
Here are 5 things you can do today that your future self will thank you for:
1. Think of your retirement needs in terms of layers
Like the kueh lapis cake, a local snack that is made up of layers, each layer represents the amount that comes from the different retirement savings tools.
With more layers, you get a richer cake. With time, compounding interest means that you get thicker layers – and thus, a bigger cake.
2. Treat CPF as your base layer
If you are a Singapore Citizen or Permanent Resident, the CPF Lifelong Income For The Elderly (CPF LIFE) Scheme provides lifelong monthly payouts if you meet certain criteria. You can even choose the type of payout from three plans. Those who qualify turned 55 after 1 May 2016, and have at least S$60,000 in their retirement accounts.
3. Buy insurance
Insurance coverage is important because our healthcare costs will rise significantly with age. Some plans provide pure protection, and some provide income on top of protection.
There are also plans that are bundled with regular investments, which allow you to invest in a wide range of funds while getting life coverage. Others promise a regular income stream, but with lesser life coverage.
4. Diversify your investments
The first rule of investing is: diversify. The second rule: diversify. The third? Diversify.
Invest in different types of things to spread your risks. For instance, invest some money in equities, and some in safe bonds with near-guaranteed returns.
Invest in different types of companies to get a variety of risks and returns. For instance, buy some blue chip equities, and some penny stocks. Buy some in Singapore, and some from another major developed country.
Invest in expertise, to get a good mix between DIY and professional advice. For instance, you could buy Exchange Traded Funds (ETFs) on the stock exchange, and some professionally-managed unit trusts.
5. Always have some cash on hand
While this money is not going to beat inflation, you will need it for the rainy days, and if your investments need more time to be liquidated. Having spare cash also allows you to invest at opportune moments.
Besides keeping cash in your savings account, you can also consider participating in the Supplementary Retirement Scheme (SRS). It helps to reduce your current tax bill, and can be used to purchase various types of investments.
All this talk about millions and layers may seem daunting, but it is possible to get ready for your retirement with as little as $10 a day. Here’s how you can get started: