Helping your parents plan for their retirement
Retirement planning may be a faraway concept for some of us, especially if we are just starting out in the working world, trying to build emergency savings and embarking on our investment journey. Our parents, on the other hand, are inching towards their retirement.
Most Singaporeans grow their retirement nest egg with compulsory savings through the Central Provident Fund (CPF). For members who turn 55 in 2022, do note that the prevailing Basic Retirement Sum (BRS), Full Retirement Sum (FRS) and Enhanced Retirement Sum (ERS) are $96,000, $192,000 and $288,000 respectively. If a CPF member sets aside $145,000 in his CPF Retirement Account (RA) to fund his golden years from age 65, the monthly payouts from the national annuity CPF LIFE is expected to be from $770 to $830. Will that be enough?
So, while you work on your own finances, it might be helpful to find out how your parents are doing on the retirement front, and offer some guidance if needed. Some parents are financially-savvy, have their insurance planned out, built multiple passive income streams and even set up a sound estate plan. However, there are others who believe that they can rely entirely on their CPF retirement savings.
In order to ensure that your finances and that of your parents are sufficient for their retirement as well as fulfilling your own life goals, it is advisable to have this conversation early so that appropriate actions can be taken.
Align your expectations
A good start is to understand your parents’ retirement expectations. Your assumptions about what your parents will do in their golden years and how they will fund their lifestyle can be quite different from what they have in mind. Having this discussion can avoid unnecessary misunderstandings. If you have siblings, it is also be a good idea to gather them together for this discussion since this is a shared responsibility.
Determine how much your parents need for their retirement
To determine the amount needed for retirement, you can use current monthly expenses as a guide. For instance, if they currently spend about $1,000 each on necessities like food, grocery and transport, that would add up to $12,000 a year. You can then use the figure to adjust for a 3% inflation rate per year and multiply it by the number of years of retirement.
If your parents have already set aside some savings or have multiple streams of passive income to cover their necessary expenses, then you would have less to worry about. If they have not, you might need to help them draw up a plan to achieve their retirement goals by setting aside a certain sum of money on a monthly basis. This sum could include their savings, as well as money from you and your siblings. You might also need to introduce them to ways to grow their money, depending on their risk appetite.
Some common ways to save or invest include:
Conservative Risk / Low Returns: Savings Accounts, Fixed Deposits, Money Market Funds, Government Bonds
Moderate Risk / Medium Returns: Corporate Bonds, Unit Trusts, Index Funds and Exchange-Traded funds, Real Estate
High Risk / High Returns: Equities, Futures, Options
The actual risk of the investment can vary greatly based on the individual fund or stock you purchase. It’s best for your parents to seek out a financial advisor or wealth planning manager to ensure they understand the risks of their investment decisions and to help structure a retirement plan that works best for them.
Protection for unforeseen circumstances
Having the right protection is an important step during retirement since health tends to deteriorate with age. Ensuring that your parents have adequate health insurance is key, as medical costs can get costly as they age. Consider purchasing additional health insurance coverage that can cover the bulk of their medical bills if they are hospitalised.
If you are the sole provider for your parents, you’d need to consider your options to provide them with financial security should you pass away prematurely or become permanently disabled. One way is to purchase a life insurance plan on your life which provides death and permanent disability benefits to fund your parents’ lifestyle should something untoward happen to you.
However, premiums for life insurance plans are often higher, whereas term life insurance plans will provide coverage for a fixed period, with lower premiums. The latter provides a more cost-efficient alternative to life insurance.
You can also consider disability income insurance, which offers payouts to cover your financial commitments if something should happen to you and you are unfit to work. Critical illness insurance is another type of plan that can offer financial support if you are unable to work because of an illness.
Lastly, any extra savings that you can set aside and invest now will lighten your financial load when they retire. Since the time horizon for this money is much shorter, your risk appetite will likely be lower. Consider less risky options which are more liquid as you may need to tap on that money in the near term.
Other ways to smoothen the retirement journey
Even if your parents have set aside a retirement nest egg, there are other ways you can help to make their transition to retirement smoother.
• Topping up their CPF accounts
Topping up our loved ones’ CPF accounts is a simple way to help them save more for their retirement. If your parents are below 55, you can top up their CPF Special Account so that their savings funds can earn a higher rate of interest. Furthermore, you get to enjoy tax benefits of up to $8,000 when you top up the CPF account of your family members. Terms and conditions apply.
• Monetise their property
Your parent’s property is an important asset that they can monetise for retirement. There are a few ways in which they can monetise their property for their golden years. These include government schemes such as the Lease Buyback scheme (LBS) and rightsizing using the Silver Housing Bonus (SHB).
The LBS aims to help retirees monetise their flat to receive a monthly income in their retirement years while continuing to live their own flat.
The scheme allows a HDB flat owner to sell a portion of his flat’s lease to HDB and receive an LBS bonus. The proceeds from the sale of the flat’s lease will be used to top up his CPF RA. The CPF RA savings will then be used to join the national annuity scheme CPF LIFE, which will provide the retiree with a monthly retirement income for life.
On the other hand, rightsizing one’s property with the SHB is a scheme that aims to help lower-income elderly supplement their retirement income by using a cash bonus of up to $20,000 as an incentive.
This is to encourage senior households to downsize to a smaller HDB flat by purchasing from either HDB or the resale market while putting a specific sum of their cash proceeds from the sales of their existing flat into their CPF RA.
If your parents are not aware of these schemes, you might want to help them find out more about the schemes here.
• Estate Planning
Some of us may have the perception that estate planning which includes writing a will is only for the rich. It can also be a taboo subject to talk about, especially with your parents. However, you can help your parents change that perception by convincing them that they might feel better knowing that they have done what they can to ensure that their loved ones will be cared for when they are no longer around.
Estate planning is about setting out how we want our assets to be managed and transferred after we pass away. For a start, you can guide them towards making a CPF nomination if they have not done so.
Having an updated will also help us distribute our estate the way we see fit among our loved ones. Most importantly, it avoids having one’s assets being tied up in legal proceedings. You can read more about the various ways you can help your parents with estate planning here.
The pointers provided above is a simple way to help your parents kickstart their retirement planning. Depending on how financially-savvy your parents are, retirement planning can be a long process. Nevertheless, Mum and Dad will appreciate your thoughtfulness in helping them plan for their golden years and making their retirement dreams come true!
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.
All investments come with risks and you can lose money on your investment. Invest only if you understand and can monitor your investment. Diversify your investments and avoid investing a large portion of your money in a single product issuer.
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