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6 myths on retirement

Financial planning - to achieve financial adequacy - must begin early. But first, dispel the myths

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Lawrence Loh on 07 Jun 2020

The Straits Times

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Financial adequacy has nothing to do with money madness, the craving for it and not having enough, even though many people are obsessed with amassing wealth.

 

It is about having enough to pursue a desired lifestyle, devoid of financial worries.

 

A frequently asked question is: "Can I afford to retire in Singapore?"

 

An OCBC Bank survey conducted last month during the circuit breaker period revealed that some two-thirds of working people did not have enough savings to last beyond six months if they were to lose their jobs. This is indeed daunting.

 

A few years ago, The Straits Times published an article, "Majority unprepared for retirement: Survey", which focused on financial adequacy for retirement, and the fear of retiring due to a lack of it.

 

Related to this issue are a number of myths.

 

MYTH 1: THE CHILDREN MUST BE FINANCIALLY INDEPENDENT

 

This simply implies that people who have children late are doomed to continue working until their children finish school and are gainfully employed.

 

Not necessarily true. If they have proper financial planning, it will allow them to retire and continue to support their children through school.

 

In fact, the time before they embrace parenthood is opportune for amassing savings for the future, being spared the expenses needed to raise children.

 

My discourse with some young people, including some young parents, was shocking. Some do not see the need to save. One particular person was influenced by her businessman father who did not believe in saving. For him, when times were good, money came easy. Banks were more than willing to advance loans. Unfortunately, his business hit a bad patch. Banks withdrew their support as his business had chalked up high debt. He had no savings to tide him over this setback and had to sell his bungalow, which was once his beacon of success.

 

Covid-19 and similar unforeseen occurrences, which put jobs and livelihoods at stake, underscore the importance of saving. Savings give us comfort and help us to weather the storm, in case we lose our jobs.

 

MYTH 2: I MUST NOT HAVE FINANCIAL LIABILITY WE NEED TO DEFINE THE NATURE OF THE FINANCIAL LIABILITY.

 

Ideally, the house that we live in should be fully paid for.

 

For investment properties, the rental income should at least be sufficient to cover all expenses related to them. Of course, we should aim to have a surplus or an investment income.

 

In bad times, the properties can be sold. However, we need to be mindful that this may not always result in recouping our investment, as we are subjected to the vagaries of the market.

 

In any case, this form of liability, even in retirement, is acceptable.

 

MYTH 3: RETIREMENT PLANNING IS FOR SENIORS

 

Young working adults, pre-occupied with chasing their careers and enjoying life, tend to relegate retirement planning to the back burner, believing that time is on their side. This is certainly not advisable.

 

The monthly salary gives a false sense of security and misplaced complacency. Spending $8 or more on a cup of coffee is a case of "no skin off my back".

 

Despite this, do not forget that retirement planning should be a priority early in life, so as to accord a sufficiently long runway to grow one's savings.

 

Unfortunately, many people, as surmised by various surveys on retirement, discover this too late.

 

MYTH 4: IT IS NOT NECESSARY TO HAVE A LOT OF MONEY IN RETIREMENT

 

With the escalating cost of living, retirement does not come cheap, especially if we want to achieve a desired lifestyle that is as close to or the same as the one we have been enjoying pre-retirement.

 

MYTH 5: MY PROPERTY CAN TAKE CARE OF MY RETIREMENT FUNDS

 

This may not be a tenable assumption, given the uncertainty and volatility of the property market. More so when it is the only roof above our heads. So the only way to derive money from the property is to either downgrade, reverse mortgage, lease buyback, or participate in the Silver Housing Bonus Scheme (the latter two for HDB flats only).

 

Early retirement planning can mean that we have adequate funds for retirement, without having to sell our home.

 

It is common for retirees to be asset-rich but cash-poor, as they are reluctant to trade their homes for cash, due to sentimental reasons.

 

MYTH 6: 70 PER CENT TO 80 PER CENT OF PRE-RETIREMENT INCOME IS NEEDED IN RETIREMENT

 

Estimating the amount we will spend in retirement is complex and unique to each individual. Hence, the commonly used 70 per cent to 80 per cent rule of thumb can be deceptive.

 

While we can expect spending during retirement to reduce over time as we age, because of diminished activity and consumption, we can also expect increased spending because of inflation and rising healthcare costs.

 

Predicting how these two contradictory influences will affect total spending is a challenge, if not impossible.

 

A more reliable option is to estimate a budget based on our personal situation and retirement goals, and test these numbers with various inflation assumptions and potential healthcare costs. Even so, it is only a guesstimate, as the future is unpredictable.

 

An HSBC survey in 2015 found that Singaporeans are not financially prepared for the future, partly due to a lack of understanding on how to plan it.

 

About 56 per cent said they were most concerned about long-term financial security. Of this group, 40 per cent said they could not manage well or have no specific alternative in place should something unforeseen occurs.

 

So when do we start financial planning?

 

It should commence the moment we start work.

 

The young generation is generally very fortunate compared with their parents and grandparents, as most do not have to support their families.

 

Consequently, they have more disposable income. However, many are spendthrift and careless spenders.

 

So for them, financial planning as a discipline must begin early. The habit of saving money needs to be internalised.

 

For a young employee whose earning power is initially not high, care in managing expenses is important.

 

After accounting for expenses, he should try to save as much as possible, given that he will be incurring heavy expenditure going forward, for instance, car loan, housing loan, insurance, income tax, marriage expenses, cost of raising children, vacations, and so on.

 

With time, the financial situation will improve, as he ascends the corporate ladder, with higher salary, better bonuses, and other monetary incentives.

 

For many at around 40 years old, this is the time when their career is fairly stable, their income stream is steady and largely predictable, and the family unit, for those who are married with children, is established.

 

This is the time to go beyond saving, and start growing their money through prudent investing.

 

• The writer, a retired executive vice-president of SPH advertising sales, is a savvy investor.

 

Source: The Straits Times © Singapore Press Holdings Limited. Reproduced with permission.

 

 

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