Inflation - How it messes with your retirement planning
If you’ve only got a minute:
To plan for a secure retirement:
- Account for inflation when calculating retirement needs.
- Shield yourself against rising medical costs.
- Start with having a clear plan that includes saving, insurance and investing.
It is no mean feat trying to tackle retirement planning. Part of the difficulty lies in getting to the starting line - determining how much you need for retirement. This entails picturing your retirement lifestyle, your health in retirement and how long you are likely to live.
Many Singaporeans worry about their retirement future. In a Manulife 2021 survey polled among 1,000 Singaporeans, 2 in 3 pre-retirees are not confident that they have enough savings to retire1.
The impact of inflation
People tend to under provide for their future because they think of their retirement needs in present-day costs.
A study by the Lee Kuan Yew School of Public Policy, published in May 2019, found that a single elderly person aged 65 and above requires S$1,379 a month to meet basic needs. This equates to S$16,548 a year.
This basic standard of living included only items that participants in the study determined were necessary for them. Items such as air conditioning and a car were considered “extravagances” and not included in the calculation.
Let’s assume you were age 27 in 2019, and plan to retire at age 62 in year 2054. We can apply Singapore’s long-term inflation rate of 2.7%p.a to determine the future amount required. To buy the same amount of goods and services with S$16,548, we need a sum of S$42,045 in 2054.
And with each passing year, the amount one needs in retirement will continue to grow with inflation. To fund a basic retirement lifestyle in 2054, we need a retirement nest egg of S$1.3m!
Estimated amount a retiree needs from year 2054 to 2076:
Amount Needed Per Year
Total over 23 years
Interested in finding out how inflation affects your retirement? Try out our online retirement calculator!
Increasing life expectancy
Singaporeans have outlived the Japanese to have the longest life expectancy in the world – at nearly 85 years3.
If we retire at 62 with a life expectancy of 85 years, we could expect to spend 23 years in retirement. With medical advancement and an increase in life expectancy, we could expect to spend longer periods in retirement and hence require a larger retirement nest egg in future.
Rising medical costs
We are living longer. But we are also spending more years in poor health. In 2017, the number of years Singaporeans lived in poor health was 10.6 years , about 1.5 years longer than in 1990.
Medical cost inflation has been far outstripping general inflation rates throughout the world. Singapore's medical cost inflation rose 10% in 2018 according to Mercer Marsh Benefits 2019 Medical Trends Around the World report. In comparison, headline inflation for that year was at 0.4%.
It is important to be aware of healthcare risks and assess your insurance coverage. Essential insurance coverage in retirement includes having suitable hospitalisation and long-term care plans.
Start planning for retirement early
There is no magic solution. But there are ways you can better prepare yourself for retirement. Taking small steps in the right direction is always a good idea.
- You need to develop a clear plan – one that involves disciplined saving.
- Illnesses and accidents can disrupt even the best-laid plans. You need to protect your financial plan by insuring adequately to cover you for life’s unfortunate events.
- Invest. Make your monies work harder and make use of compound interest.
Every step counts towards your dream retirement!
Ready to start?
Speak to the Wealth Planning Manager today for a financial health check and how you can better plan your finances.
Start planning for retirement by viewing your cashflow projection on DBS NAV Planner. See your finances 10, 20 and even 40 years ahead to see what gaps and opportunities you need to work on.
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.