If you were to ask 10 people this question – are you retirement-ready, about 80 percent to 90 percent of people will honestly say that they are not. It is common for many people not to think much about this subject, until they reach the age of 55 or even 60, when they are already in retirement.
What do people mean when they talk about retirement-readiness? I would to suggest three definitions. First, they mean financial freedom, so as to ensure financial peace of mind, and not to have any financial worries, e.g. not to worry where their next meal will come from or where to lay their head at night.
Second, is the freedom to do what they love to do, be it painting, listening to music, playing golf or just shopping. Third, it is the freedom to choose to work, rather than being forced to work to earn a living.
The main concerns
Let’s examine some of the concerns of retirees today. One top concern is increasing life expectancy. According to the US Census Bureau International Database in June 2008, Singaporeans are following the Japanese population of living up to a ripe old age of 84.2 by 2050, whereas in 2007, we were living up to age 81.8 only. In fact, Singaporeans are living longer than our European and American counterparts. The good news for the women is that they can expect to outlive the men, by as much as four years. Perhaps child-birth has prepared the women to be better able to cope with life than the men!
The second top concern is the rising cost of living. Just look at the rising cost of hospitalisation and medicines, transportation costs, food and miscellaneous costs, and you will be convinced. People are demanding for more modern clinics with a faster turnaround time, people will not tolerate bus and train breakdowns, food costs have escalated, and the cost of daily necessities has climbed. The favourite chicken-rice and fried kuay-teow costs much more in recent years compared to that of a few years ago, especially in air-conditioned food courts.
The third concern is changing health patterns. In 1957, about 55 years ago, the top four causes of death were pneumonia, heart disease, cancer and tuberculosis (TB), and the components ranged from seven to almost 10 percent each, totaling 31.6 percent. In 2010, cancer alone has ballooned to 28.5 percent or almost one-third of the cause of death, with ischemic heart disease a close second at 18.7 percent, while pneumonia has dropped to third at 15.7 percent, and cerebral-vascular diseases, including stroke 8.4 percent, totaling 71.3 percent.
According to a recent report by the International Longevity Centre Singapore, people aged 60 and above live in small households, the seniors are more active daily, but hypertension is a worrying trend, as more seniors report having high blood pressure.
The big question in everyone’s mind is – is my CPF balances enough for my retirement? The painfully truthful answer is that CPF can provide only 25 percent of funds needed by a Singaporean upon retirement, according to a recent French financial group AXA’s survey.
The Singapore Prime Minister Lee Hsien Loong was reported in “The Straits Times” in 2000 as having said, “It is important that each individual takes personal responsibility, plans ahead, anticipates and prepares for the later years.” The article further summarises, “self-reliance is the key in the Singapore retirement system”.
This is confirmed by a Survey on Retirement conducted in February 2011 by Citibank Singapore, “Singapore residents believe they will have to work for as long as they can to supplement their retirement income.” In the same survey, when asked what the importance to a happy retirement is, 75 percent replied “Not having to worry about money”, 74 percent “Keeping fit” while 73 percent “Loving family and friends”. It is interesting that 68 percent stated “Good financial planning” makes for a happy retirement.
The importance of retirement planning was highlighted by the same survey, which showed that “those who plan for retirement have a wider range of retirement options at their disposal and more monies than non-planners, in fact 191 percent or almost twice as much”.
Singaporeans acknowledge that increasing longevity will have a negative impact on their retirement and they cite a lack of sufficient savings as a cause for concern. As a hefty 28 percent or almost one-third of Singaporeans does not have a financial plan, it shows that they are not prepared for their retirement future. Those who plan and seek financial advice have over 264 percent or more than two and a half times the retirement assets of those who do not plan.
So what should we do? Here are some simple steps to take:
Do a financial checkup, just like a health checkup at the clinic. This will determine what you will need to have to be retirement-ready.
Then decide what plans you already have in place right now.
The difference between the earlier two figures will show retirement gap, which then needs to be filled.
The solution is to put in place a regular savings plan as soon as possible when a person starts working so as to build up a lump sum cash fund. This cash fund will serve as an emergency fund to meet unforeseen medical and accidental expenses, and for the final expenses upon death occurring. This lump sum also provides a continuous income flow.
Building your nest egg
So what are some financial instruments to buildup this lump sum cash?
A. The most obvious one is to purchase an annuity or more than one annuity. A good start is the CPF Life plan, which can be funded with the CPF-SA and CPF-OA balances. Additional annuities can be purchased in cash to top-up where the CPF balances are insufficient. An annuity is a lump-sum investment with an insurance company, which in turn pays the annuitant for the rest of his life, until his passing. Upon passing, any unutilised balance will be refunded to the next-of-kin or beneficiary.
B. Investments can take various forms, like stocks and shares, unit trusts, equity-linked funds, mutual funds and Exchange-Traded Funds (ETFs). These have varying risk levels and the investor must be aware of his own risk appetite and risk tolerance.
C. Alternative investments are investments in paintings, curios (baubles or knickknacks), wine and postage stamps, and so on. These give diversity to investments and have differing risk levels.
D. Life insurance plans refer to endowment insurance, not life and term insurance. Endowments are basically savings plans and can help the retiree to save for the future needs. Endowments are very low-risk instruments, but also give low returns. These can be in a lump sum or by regular payments.
E. Properties refer to properties purchased to generate rental income for retirees. This can be in the form of rental of domestic or commercial properties. Rental can provide long-term regular income, after netting-off expenses and taxes.
F. Health insurance means hospitalisation and surgical insurance. This is necessary even in old age, as older people tend to have osteoporosis. A fall may have dire consequences and therefore retirees need health insurance.
F. General insurance refers to travel insurance, which is very popular with retirees, as they tend to go for vacations frequently and motor insurance, as some retirees still like the freedom of driving cars.
Here’s a five-step process:
1. Seek professional advice and assistance.
2. Work with a financial adviser to identify your financial needs.
3. Discuss the tailor-made solutions developed by the adviser.
4. Implement the financial plan systematically.
5. Review and update the plan annually.
Act as soon as possible. “Procrastination is the thief of time.”
Albert Lim has been in the financial services industry for the past 18 years. He is currently a senior financial consultant at Financial Alliance. He is also involved in RSVP Singapore’s social enterprise, ProGuide.
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