Give your retirement plan a head start

This article was first published on The Straits Times on 13th February 2022.

Retirement may seem far off when you are in your 20s and 30s. Still, it is prudent to start early — ideally, when you start earning an income—as building a sizeable nest egg is easier with time on your side.

You reap the benefits of compounding, whereby your money will grow at a faster rate as you earn interest not only on the initial principal sum, but also on the accumulated interest of previous periods.

For example, public relations practitioner Ms Ooi Shi Yun, 29, started planning for retirement in her mid-20s.

“It was a prime time to start building my wealth and planning for retirement. Starting a full-time career was a step closer to financial freedom,” says Ms Ooi, who is currently single and plans to retire by the age of 60.

To achieve that goal, Ms Ooi diligently sets aside about 30 per cent of her four-figure income every month, which she uses for investing, endowment insurance premiums and Central Provident Fund (CPF) top-ups.

“We can’t grow our wealth overnight. As such, I believe that we need a long-term view when it comes to building our nest egg.”

Getting a head start is all the more important with today’s rising cost of living.

The first step is setting up a comprehensive financial plan, says DBS Bank’s head of financial planning literacy, Ms Lorna Tan.

While it may be difficult to accurately define what a “comfortable retirement income” means while you are young, these estimates should include a buffer so as to take into account the risks of inflation, longevity and rising healthcare costs.

“Most people tend to underestimate how much they really need in retirement,” says Ms Tan.

“Start by visualising your desired retirement lifestyle — that is, your needs and wants — and the estimated expenses. As you journey through life, continually build and review the income flows.”

The foundation of your nest egg

For employed Singaporeans and permanent residents, CPF savings and the national annuity scheme — CPF Lifelong Income For the Elderly (CPF Life) — will often form the foundation of your retirement plan.

CPF members aged 55 and above receive an additional 2 per cent interest on the first $30,000 of their combined balances (capped at $20,000 for Ordinary Accounts, or OA) and a bonus 1 per cent for the next $30,000.

This means that members in this age group will earn up to 6 per cent interest per annum on their retirement balances.

CPF members below 55 years old earn interest rates of up to 3.5 per cent per annum on money in their OAs, and up to 5 per cent per annum on their Special (SA) and MediSave Account savings.

DBS’ Ms Tan says: “I consider my CPF savings the fixed income component of my investment portfolio. After all, CPF interest rates are not to be sniffed at.”

CPF Life is a national longevity insurance annuity scheme that provides you with monthly payouts for as long as you live. Payouts can start from age 65 to 70.

You can top up CPF accounts at the start of the year to leverage the risk-free interest rates, grow your money, and boost payouts during your retirement years.

The early bird gets the worm — interest earned within the year is credited to your account by January 1 of the following year. This means you would earn more interest by topping up your accounts in January, rather than December.

You can also transfer your OA savings to your SA to earn higher interest.

But there is a catch. This is a one-way trip, which means you won’t be able to take the money out of the SA until retirement comes around. Therefore if you need the funds to buy a house, you may want to put off doing this.

Enhancing your retirement fund

You can also boost your retirement income with different types of insurance policies such as:

Retirement income insurance plans

For a single premium or regular premium payments over a certain duration, these plans offer monthly payouts based on your expected needs and lifestyle during retirement.

Such plans are particularly useful during the first 15 to 20 years of retirement, when you may incur higher expenses due to the desire to travel, pursue hobbies or even attain higher education while you are still physically able and mentally agile, says Ms Tan.

For instance, RetireSavvy by DBS lets customers adjust plans whenever they want, to help them better manage unforeseen changes in life.

Customers can also top up their premium any time after the first year, up until five years before their selected retirement age. Customers can update their income payout period, retirement income rate and/or defer retirement age during the policy term.

Endowment insurance

Endowment policies provide protection coverage while growing your money.

Reasons for buying endowment plans include short-term needs like saving for a car, as well as long-term needs like funding your children’s tertiary education, or retirement.

These plans come with a range of maturity periods, from as short as two years, to up to 30 years. Once the plan matures, you will receive a guaranteed payout plus bonuses, if any. Bonuses are not guaranteed and are dependent on the investment returns of the participating fund.

Ms Tan says: “If you’re saving to meet a specific goal, try choosing a maturity period that gives you the payout when you need it. For example, if your endowment plan is meant to fund your child’s education fees, you can opt for a maturity period of about 20 years.

“For longer-term goals like retirement, you might choose a maturity period of 30 years. You can also consider buying several endowment plans with staggered maturity periods to receive a flow of payouts during your retirement.”

Setting up for a comfortable retirement

You should ensure that you have adequate health insurance such as hospitalisation, critical illness, and long-term care plans. Protection against medical crises and rising healthcare costs will become increasingly important with age.

Aim to fully pay up any outstanding mortgage before you retire. As you plan for retirement, you can also consider optimising your home as an asset. For instance, if your children are no longer staying with you, you can consider downgrading to a smaller place to unlock more cash.

Setting up an estate plan is another thing to consider. Besides writing a will and doing your CPF nominations, remember to make a Lasting Power of Attorney so that you can appoint responsible donees to look after your welfare and financial matters if you become mentally incapacitated.

Finally, leading an active lifestyle and preparing yourself emotionally for retirement will also help you walk into these golden years with ease.

This is the fourth of a five-part series on insurance.

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Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.