Helping your parents plan for their retirement

NAV TL;DR

If you don’t have time to read through the whole article, you can check out our short version below:

• It is crucial that our parents have a comprehensive financial plan in place so as to enjoy their desired retirement lifestyle.
• Ways to assist your parents’ retirement planning include opting for CPF top-ups, investing excess cash, reviewing insurance policies, reducing outstanding “bad” debts and a sound estate plan.

“My parents are not financially prepared for retirement, so how can I assist them?” For your parents to enjoy a comfortable, secure and sustainable retirement lifestyle, they’d need a holistic financial plan to help them get there.

Your parents may still be juggling with ongoing financial obligations, such as your younger sibling’s education and the home loan. For some, they may be saddled with the responsibility of their parents’ retirement.

Meanwhile, your parents may find themselves having to save for their nest egg and not knowing how to build passive income streams to support them when they are no longer working.

If you are starting to worry about your parent’s retirement and will like to help them plan, here are 6 useful tips to get them started.

1. Top-up CPF accounts

Our second report in the DBS NAV Financial Health Series – No Storm Lasts Forever, which analysed data aggregated from 1.2 million retail customers, examined the effects of the pandemic on individuals’ financial wellness.

It indicated that middle-aged workers accounted for the majority of those who experienced income deterioration, with almost half of the group suffering income declines of more than 30%. The pandemic reminds us that being financially resilient and having sustainable passive income flows is a critical component in retirement planning. One simple way that many of us can do to build up our retirement funds is to make regular top-ups to our Central Provident Fund (CPF) accounts.

If your parents are below the age of 55, they can earn an interest of up to 5% per annum (pa) on the first $60,000 of their combined CPF savings.

If they are 55 and above, they can earn an interest of up to 6% pa on the first $30,000 of their combined CPF savings and 5% on the next $30,000. The interest earned and compounded over time will go a long way to help them achieve higher annuity CPF LIFE payouts later.

Furthermore, they get to enjoy potential tax savings of up to $7,000 pa when they do a cash top-up to their CPF Special Account (SA) or Retirement Account (RA). They will enjoy additional tax relief of up to $7,000 if they perform cash top-ups to their loved ones’ SA or RA. Conditions apply. That is a maximum of up to $14,000 of income tax relief per year!

2. Continue to invest excess cash

As you probably know, inflation erodes the purchasing power of your money, but many are still stuck in the mentality that “saving money” is still the best way to build up their wealth. If your parents have more than enough emergency savings and have excess cash sitting idle in their savings accounts, you might want to get them acquainted with investing.

You can consider recommending investment products to them, such as the DBS Invest-Saver, which is a regular savings plan that allow them to invest in Exchange Traded Funds (ETFs) or Unit Trusts (UTs) from as low as $100 per month.

Investing regularly via a Regular Savings Plan (RSP) such as the DBS Invest-Saver takes the guesswork out of timing the market. This method of investing uses the principle of Dollar-Cost Averaging (DCA), which is a strategy where you buy more units when prices are low and lesser units when prices are high. Over time, the average cost of your investment could potentially be lower versus a one-time, lump sum investment.

Depending on their age and risk profile, they may need help on working out a suitable asset allocation of their investible savings into equities and fixed income. By doing so, they will have peace of mind while investing and still enjoy potential gains over the long-term.

If they are unsure about investing on their own, they can always contact a Wealth Planning Manager for advice, or make use of the Digital Advisory function in the NAV Planner.

3. Review insurance policies

Staying insured protects the family against unfortunate events and ensures their financial security. We do not know when the unfortunate could happen, coupled with the fact that healthcare costs continue to rise in Singapore. As our insurance needs change with our age and life stage, it would be helpful to have your parents re-look their insurance policies to ensure that they are still relevant.

Some of our parents may still hold life insurance policies that they no longer need if their children are no longer financially dependent on them. They should then consider if they still need these policies, since they may need to continue paying premiums even when they are not working in order to keep up the coverage.

As our parents grow older, the likelihood of them falling ill or being hospitalised can increase so having a basic hospitalisation plan, a critical illness plan and/or long-term care plan (such as ElderShield/CareShield or a supplementary plan) may help to tide the family through financially should there be a need to pay for medical fees, nursing home care and/or engaging a helper.

4. Reduce outstanding debt

It is important to note that unpaid debt will continue to eat into savings once your parents retire. Thus, getting rid of “bad” debts would help to eliminate interest payments that would negatively impact their retirement plans.

One strategy to pay down debt is to list down all their debts, then prioritise and pay off the debts with the highest interest rates first. This avoids the situation where the effect of compounding at a higher interest rate causes their debt to snowball and they end up paying more in interest payments than covering the principal payment.

Another strategy would be to focus on paying off smaller outstanding debts first. This would likely help them gain confidence in managing and clearing off debt.

5. Set up a sound estate plan

It is important for your parents to set up a sound estate plan. Use tools like a will, CPF Nomination and insurance nomination to articulate their distribution wishes. A Lasting Power of Attorney will also help to ensure that suitable donees are appointed to act on your parents’ behalf should they become mentally incapacitated. For some, trusts may come in handy.

6. Monetise your home to supplement retirement income

If you own a HDB flat and are eligible, there are government schemes – Lease Buyback Scheme (LBS) and Silver Housing Bonus (SHB) - available that can help you unlock your property value in preparation for retirement. Under the LBS you can sell part of your flat's lease to HDB and choose to retain the length of lease based on the age of the youngest owner. Part of the sales proceeds will be used to top up to the CPF Full Retirement Sum ($186,000 in year 2021) if your balance falls short.

The SHB allows you to sell your current property (either HDB or private) and receive a bonus if you choose to buy a 3-bedroom or smaller flat. To qualify for the Silver Housing Bonus, you will be required to top-up $60,000 of your proceeds into your CPF Retirement Account (RA) and join CPF LIFE. By topping up $60,000 in your CPF RA, you will receive the maximum cash bonus of $30,000. If the top-up is less than $60,000, you will receive a pro-rated cash bonus of $1 cash bonus for every $2 top-up made.

If you own a private home and are between ages 65 and 79, you can consider the DBS Home Equity Income Loan as an avenue to unlock some cash while remaining in your home. If you are a Singapore citizen or PR, it allows you to borrow against your fully paid private residential property to top up your CPF Retirement Account savings which will be used for CPF LIFE.

Key features include no monthly loan repayments, with the loan amount and accrued interest payable only at loan maturity, fixed interest rate of 2.88% p.a. throughout the loan tenure, and the flexibility to sell the property anytime and repay the loan with no penalty. The minimum loan amount would be the amount needed for you to top-up your CPF savings to meet the Full Retirement Sum for your cohort. The maximum amount that can be borrowed is the amount required to top-up to the prevailing CPF Enhanced Retirement Sum (S$279,000 in 2021).

Conclusion

It was reported in 2020 that Singaporeans’ average life expectancy has increased to 83.9 years old. This makes retirement planning crucial as we want to avoid the situation where we outlive our savings.

It is never too early to start retirement planning, and it is especially crucial if your parents have not started or lack the financial knowledge to do so. Starting early ensures that they can lead an ideal and sustainable retirement lifestyle, while not placing any unnecessary financial burden on the immediate family members.

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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.