How Much Do You Really Need For Retirement

Recently, I have stumbled upon a Video: What Will You Do When They Grow Up?

It features the story of a father who gives his all to his daughter, just as most parents would do. He spent a significant amount of money to provide the best for her - purchasing a piano for her, paying for her overseas trips and education, music lessons and mostly provided financially for nearly everything. All this money spent on his daughter was a worthy investment as she grew up to be a renowned pianist, often performing in front of a large audience. However, he had no financial resources left for himself and had to file for bankruptcy in the end.

It’s natural that parents would prioritize planning for their child’s future. But are they neglecting to plan for their own?

It made me think of my own future as well. Being a parent myself, how can I balance my own retirement planning and my children's education planning?

Whether you’re a parent or not, planning for retirement is a priority for the present.

And the million dollar question is usually how much do we really need for retirement?

Here are some considerations:

Income VS Expenses

It is important to have a clear view of how much might be sufficient for your retirement income. To project the desired retirement income, we may use either the Income Method or the Expenses Method.

The Income Method is the percentage of working income that you will need to maintain the same standard of living in retirement, usually 60 - 100 percent, according to the type of lifestyle you want.

The Expenses Method on the other hand is used to estimate the retirement income by adjusting current expenses for changes expected in retirement.

It may seem intimidating, but the first step is usually the hardest. That’s why we’re here to help you take that first step. Either method mentioned above is a good way to get started.

Basic Needs VS Luxury Wants

Basic needs are your necessities - ongoing, non-discretionary expenses like food, shelter, transportation, health care, and other essentials.

We are all aware that Singapore’s population is ageing and household sizes are decreasing significantly. This study conducted by the Lee Kuan Yew School of Public Policy (LKYSPP) determines the minimum amount a single elderly person needs for his or her basic monthly expenses in Singapore.

From the study, they found that the amount required is $1,379 per month for an elderly person living alone and $2,351 for elderly couples.

However, it's important to keep in mind that this amount is for the basic standard of living. You probably lead a lifestyle that requires more money to upkeep, this is normal as most people live at a standard that is higher than just the basics. This means that the above mentioned amount would most likely be inadequate for you too to lead an enjoyable retirement lifestyle.

So we have to take note of the following:

• How do you usually get around town?
• What kind of shopper are you?
• Where do you usually dine?
• What type of traveler are you?

The retirement lifestyle you choose may include your luxury wants and activities that are important to you, but may not be essential such as travel or entertainment. So do remember to factor those in for your retirement planning.

Mortality VS Mobility

Based on Singapore Statistics, the life expectancy on average at age 65 is 21.5. Which means that we are expected to live for 21.5 years after our retirement at age 65. And it has grown by 2.6 per cent per decade.

It is safe to assume that 1 in 2 Singaporeans will live past age 85. What if you live beyond age 90? Did you cater in extra retirement funds that can last you for the rest of your life?

Singaporeans are living longer. But the question is: is the quality of life better? We are living longer, but not necessarily healthier lives.

Gains in the number of years expected to be spent in good health did not match gains in the number of years expected to be lived.

The Global Burden of Disease Study in 2015 showed that while the average Singaporean lives until 82, he spends the final eight years in ill health.

The statistics reflected in this study is partly due to the fact that Singapore has an ageing population and older people tend to have higher rates of chronic disease and disability. Such trends mean that more time is spent in ill health among the population.

So, while it is true that Singaporeans are living longer lives and spending more time in retirement, we are spending our retirement years in poorer health. This might take away the joy of retirement and also causes physical and emotional pain to ourselves.

Retirement plans should never be made on the presumption that we will spend our old age in good health and good wealth. This is not to ask you to be overly negative, but to create a more realistic and sustainable retirement plan. All the more why it is so important to keep a healthy lifestyle and remain active.

We need to have proper planning and management of our financial resources, to sustain our life expectancy and medical costs.

Inflation VS Interest

Inflation has a big impact on our expenses and quality of life.

A cup of coffee which used to cost just $0.80 a few years ago costs $1.10 today. A plate of chicken rice that was being sold at $2.50 is selling now for $3.50. The $100 you have today will only be worth $54 in 20 years.

We can calculate the inflation rate to be typically 3% a year. But if you have an 'atas' lifestyle, you should budget for 4% to 5% a year as luxury goods appreciate faster.

Most of us are really comfortable with maintaining our current lifestyle. The creature comforts we are enjoying now are indeed very difficult to give up. Hence, our retirement plans and funds must be planned in a way that takes into account inflation rates, otherwise we are allowing inflation to erode savings and reduce our purchasing power.

Although working towards a higher pay and keeping lifestyle inflation in check, the most practical way to combat inflation rates is to actively seek out opportunities that let you put your money into financial instruments that help you gain higher interest rates.

We always need to think long term when doing our planning. In this case, a well-diversified financial portfolio would act as an effective buffer against inflationary rates.

By Default VS By Design

By default, for most Singaporeans, CPF is their retirement plan.

The Central Provident Fund (CPF) is the national retirement pension system for Singapore citizens and permanent residents.

If you are self-employed, you can choose to contribute to your own CPF account. If you are a salaried employee, 20% of your income automatically goes into your CPF and your employer will also contribute a portion of this. You can also top up your own family member’s CPF to build a nest egg. This not only benefits your family but yourself too since you get to enjoy some tax relief.

The Retirement Account is formed as we approach 55 years in age. This Retirement Account consists of our CPF Ordinary Account and Special Account. Excess money can be withdrawn but it is mandatory to leave behind the retirement sum in the account.

We can receive monthly payouts for as long as we are alive under the CPF Lifelong Income for the Elderly (CPF LIFE) scheme. This ensures that we receive a monthly income in old age.

The retirement sum is set at $139,000 from 1 July 2012 and has raised gradually until it reaches $181,000 in 2020.

The table below shows the amount of monthly payouts you will receive if you set aside the Basic, Full or Enhanced Retirement Sum. (Taken from CPF website)

We can also use the CPF LIFE Calculator to estimate our payouts.

By design, when planning for our retirement, we should look at it as adding layers and having multiple streams.

The first layer is our CPF.

The second layer can be annuities and savings plans.

Annuities and savings plans can provide safe and secure income payouts to supplement CPF Life.

You can choose to either make one single contribution or put a dedicated amount of money into the savings or annuity plan on a monthly/annual basis. When you hit a certain age, you can withdraw the payout for your retirement needs.

The third layer you can consider is to allocate some money into investment programs.

Humans retire, inflation doesn’t. The cost of living continues to increase during your retirement years. Thus it is important to have an asset that can keep up with inflation.

It's almost impossible to imagine a life without your children, but are you prioritizing their future over your own?

Use our Retirement Calculator to find out how much you need to set aside today for your desired retirement lifestyle.

What will you do when your children grow up?

When you plan your child’s future, remember to plan yours.