Simple Steps to Retirement Planning
“Age is an issue of mind over matter. If you don't mind, it doesn't matter.” – Mark Twain
We all know that we should be preparing for retirement. However, the many articles and solutions out there are overwhelming and can quickly cause "analysis paralysis".
So, in order to help you out, we've broken down the process into a few manageable steps.
#1. Save as much as you can
This amount can differ a lot from person to person. As this article explains, most self-help financial articles tend to assume that readers already have enough to live a comfortable life.
If that is not the case for you and you are still struggling to cover your essential expenses, you may have to put off retirement saving for now. Nonetheless, making a habit of regularly saving even small amounts will add up in the long run, and is a good discipline to inculcate.
However, if your income is more than sufficient to cover your expenses, a good practice is to put up to 15% of your annual pay towards retirement. This amount should exclude any CPF contributions.
Ideally, you should invest this amount in a globally diversified portfolio to help you build up your nest egg at a quicker pace.
SRS investments can meanwhile offer tax benefits, especially if you contribute regularly and withdraw upon reaching the statutory retirement age. You can also deduct your annual contribution from your taxable income.
#2. Simplify Your Portfolio
As you approach retirement, it will be important for you to have a clear, accurate picture of your complete investment portfolio. If your portfolio is spread out among several investment companies or banks, collecting and keeping track of all that information can be headache-inducing.
One way to simplify this process is to consolidate your accounts at a single institution, such as GYC. This will give you simplified reporting and lower investment costs. You'll have the opportunity to save on fees, as your account size will benefit from scale. Speak to your adviser to find out more.
#3. Prepare for Different Expenses
In retirement, you'll likely spend less on income taxes, commuting, after-work drinks and your work wardrobe. But you might spend more on hobbies or travel, and likely more on health-related expenses as you age.
If you used to receive free medical coverage through your previous employer, you will now need to pay significantly more for your personal medical coverage. And if you used to receive medical insurance through your previous employer, medical insurance or costs in retirement are things you'll have to plan for.
#4. Don't Be Embarrassed to Seek Advice
Piecing together an effective retirement plan can be complicated, involving a series of decisions that require research and information – and you should then maintain and update your plan as your circumstances, investments, and regulations change.
You may have more time to think about your finances in retirement, or may simply be very adept at handling your investments. However, in addition to having a useful second opinion from a fiduciary industry professional, you need to also factor in age-related cognitive decline – including Alzheimer's or dementia – which would impair your ability to manage your finances alone.
A personal and fiduciary adviser can help you structure a customized investment and retirement plan based on your particular goals, lifestyle and giving desires. In the later years, your adviser will be helping you to guide and prepare your beneficiaries to inherit and manage whatever assets you wish to bequeath to them.
#5. Try to Pay Down Debt
Ideally, you'd head into retirement debt-free ... but in the real world, that's not always possible. You might also prefer to have some debt on hand as a personal preference, for example if taking on low-interest loans can free up funds that you can then invest for higher expected returns.
So, it may be okay for you to retire before you pay off your mortgage, cars, or credit cards. However, make sure you understand the implications of retiring with debt, and have a plan to pay it off.
#6. Ensure You Have Enough to Meet Your Retirement Sum
In Singapore, the Retirement Sum Scheme provides CPF members with a monthly income to support a basic standard of living during retirement. The money in your retirement account is used to purchase an annuity (CPF Life) to provide this monthly income for the rest of your life.
It is a good solution for those who are concerned about meeting basic fixed expenses during retirement. If you are still worried, you can also consider annuitising additional amounts of your savings. There are pros and cons to this – as we have written about before.
#7 Determine What Age You Will Retire At
As you're deciding when to retire, you'll need to think about how much money you're likely to spend each year.
Financial planners often tell people to plan to spend a lower percentage (e.g. two-thirds) of their pre-retirement expenses in retirement. This estimate is based on the assumption that, once you retire, you would be spending less on work related items, taxes, debt, everyday expenses, and saving for retirement.
However, this overly simplistic rule does not work for everyone. Your ideal retirement might include expensive travel, high lifestyle expenses, high healthcare expenses, and gifts to family members.
To have some idea on the amount of money you need and find out more about preparing for retirement, you can take this simple quiz.
