Preparing for Retirement – A Home perspective
When it comes to retirement planning, many Singaporeans tend to focus on their investments and savings in their bank, Central Provident Fund (CPF) and Supplementary Retirement Scheme accounts.
However, the property you own can form a significant part of your retirement assets as well.
Other than providing a roof over your head, what you intend to do with your residential property when you retire can affect your retirement income stream, and ultimately, your quality of life during those golden years.
Here are 4 things to consider when retiring with a property on hand.
1. Be free from home loan liabilities
Home loans are long-term financial commitments that typically last between 20 to 35 years. With Singaporeans marrying later, it is foreseeable that some could still be servicing their home loans at age 60 and above. If you decide to retire early, then servicing a home loan without any income could become a problem. Thus, there’s a need to strategize how to manage your property in preparation for retirement.
You could try to plan early to reduce your loan tenure such that you finish financing your property before retirement. One way is to do partial payments when you have lump sum idle cash such as when you receive your annual bonuses.
In addition, you may wish to consider using idle cash rather than your CPF savings to pay off your housing loan as the interest rate from the CPF Ordinary Account is higher than the bank’s interest rate. Doing so will enable you to accumulate more retirement savings faster due to the power of compounding interest.
2. Renting out your property for income
One advantage of owning a property is the possibility of renting it out for income. You can consider renting out a room, or the entire unit if you are able to find alternative accommodation. Of course, rental income is not fool-proof as there is always the risks of having tenants who may not always pay on time, fluctuating rental markets, as well as shelling out extra cash for property maintenance.
If you intend to rent out the entire unit and stay with relatives, it would be prudent to consider the non-financial aspects of the move. With more people living under one roof, there will be shifts and changes in dynamics of the relationships and would require some effort to develop new norms and mutual understanding. If the disagreements and common ground cannot be found, you might find yourself in search for a new home.
You can also consider downsizing your current home. This is especially applicable if your children have flown the coop and you can make do with a smaller property which also means it takes less time and costs to upkeep it.
4. Consider Government schemes – Lease Buyback and Silver Housing Bonus
There are government schemes available that can help you unlock your property value in preparation for retirement. For instance, under the Lease Buyback Scheme, 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 from your HDB flat will be used to top up your CPF Full Retirement Sum ($181,000 in year 2020) if you fall short of it. Doing so will enable you to receive higher monthly pay outs from the national annuity scheme CPF LIFE, for as long as you live.
The Silver Housing Bonus (SHB) is a scheme that can help to supplement your retirement income. It 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 SHB, 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.
Both the Lease Buyback Scheme and the SHB come with several eligibility criteria so do ensure that you satisfy these conditions.
For most of us, having a roof over our heads when we retire offers great comfort. A property is an asset that can bring value to our retirement – as a safety net, the possibility of supplementing our retirement income via the various government schemes, as well as being used as a passive income source through rental.
As such, it is important to include your property as part of your retirement assets and see it as part of the bigger retirement plan. If you are unsure of how best to make use of an existing property to increase your retirement income, do consider meeting with a Wealth Planning Manager for a free consultation.
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