Let time be your friend when planning for retirement

Time is your bff for retirement planning

It’s only a matter of time before random people call you “Auntie” or “Uncle”, and the government sends you an ElderShield letter. When that happens, you’re a step closer to retirement.

How can you know if you’ve saved enough for retirement?

Relying on the next generation is not a good retirement plan

The world’s population is aging, and so is Singapore’s. For retirement to look the way we want, it is probably wiser to have our own retirement stash.

At the current rate that our population is aging, the number of working-age citizens available to support senior citizens will fall from 4.3 in 20181 to 2.4 by 20302. It’s too great a burden to rely on the next generation as a retirement plan.

Aged 65+

How much you’ll need

A good rule of thumb is the replacement rate (or replacement ratio), which is calculated in this way:

Replacement rate = income after you retire / income before you retire

The recommended replacement rate varies from around 60 to 80%.

Replacement rate

Whether this is enough will depend on:

  1. Your lifestyle expectations;
  2. Expenses that “drop out” on your retirement – e.g. commitments for regular investments, mortgages (assuming you pay off your home loan by then), and children’s education; and
  3. New expenses that come with new hobbies, and healthcare for seniors.

Also, remember that what appears adequate now may change over time as a result of inflation.

(Visualise how much you’d need with the FutureMe tool.)

Time can be your friend or foe

If you plan to retire at a certain age and with a certain sum, it’s important to start as early as possible. Calculations published by US financial planning website NerdWallet shows why.

Say you plan to retire at 67 with $1 million, and can grow your money by 4% each year.

  • At age 25, you would need to save/invest $9,174 a year.
  • Just 5 years later at age 30, you would need to save/invest $11,769 a year.

And that task gets harder with each passing year.

The earlier you start, the cheaper it is

The three most important words: savings, investment, insurance

Many vehicles can take you to the destination of “enough money” for your retirement. But they boil down to savings, investment and insurance. Savings is the safest but slowest route. Make it go faster with cashback bonus schemes, or interest rate bonuses that are earned by taking your transactions into account.

Investing is generally a much faster route over time, if your risk and return are properly managed. Some common vehicles are stocks, bonds, unit trusts, exchange traded funds (ETFs) and regular savings plans (RSPs).

Quiz: Is your retirement planning on the right track?

More on using insurance for retirement planning

Insurance is the third way you can use to plan for your retirement planning besides savings or investment. In addition to providing higher returns than savings accounts do, insurance is relatively safe.

Most insurance also provides some simple protection (through riders) so that minor incidents will not derail your retirement planning. That said, you should probably not rely totally on these growth-oriented policies for your protection needs.

Browse through protection plans, and health insurance plans if you want coverage to:

  • Protect yourself
  • Protect your assets
  • Protect your income
  • Total and permanent disability protection
  • Critical illness cover

But if your main objective is income for your retirement, endowment policies and investment-linked policies (ILPs) can help you with that. Both types of policies provide a payout upon maturity. You also get a choice between policies that offer a lumpsum payout, or regular income stream.

The difference lies in who decides what to invest in. With endowment policies, your insurer decides according to their mandate. With ILPs, you choose which sub-fund to invest in, and can switch between sub-funds for free with some providers.

1 Source: Population.sg https://www.population.sg/articles/are-the-old-age-support-ratio-trends-similar-across-different-working-age-groups

2 Source: Population.sg https://www.population.sg/articles/the-ageing-crisis-that-isnt

Each day is a step closer to retirement. Have you started thinking about it?

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