What are Retirement Planning?

A Thorough Comparison & Analysis

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For many young adults in adulthood, fresh from university and just beginning their careers, retirement planning seems like a distant goal that hardly seems to be possible.

Nonetheless, many Singaporeans have expressed concern about their own financial stability in their twilight years, despite having the topic frequently ignored and forgotten.

That’s why early retirement planning helps you to have peace of mind, realizing that as you grow older you will be able to maintain a comfortable standard of living.

Table of Contents

Benefits of retirement planning

One-Stop Financial Retirement - Benefits of Retirement Planning

The future is filled with uncertainty. Whether you are working in your 20s, 30s or 40s, you will never know what is going to happen when you finally retire.

Furthermore, once you retire, your income typically drops or you rely on pension benefits, depending on the country in which you reside. How can you be sure that when you retire, the income or pension benefits are sufficient?

Retirement planning is therefore important to ensure that you will have enough money for all the lifestyle choices that you want to have in the future when you finally retire. This removes the uncertainty in the future so that after years of work you can retire comfortably.

One of the key objectives from the day we enter the workforce is to earn money so that we can be self-sufficient. Financial independence would be the next level beyond self-sufficiency.

Financial independence is a state in which you have sufficient wealth without working for it. It is impossible to achieve true financial freedom without careful retirement planning.

Take a moment and think.

Would you prefer to be self-sufficient at the age of 55 by 

  • Continuing to work for income for the rest of your life, or
  • Would you prefer to be financially independent by relaxing with your loved ones when money comes to you without lifting your finger?

If you choose the second choice, retirement planning is the key to this stage of life!

Multiple research results have shown that the world’s median retirement age is 64 years old. In fact, this means that people are studying and working for money for more than half of their lives.

What if there is a way of stopping working for money and having fun with what life has to offer?

Planning for retirement is an art. A well-designed plan will allow early retirement. The earlier this retirement plan is established, the easier it will be to get there.

Early commitment to a retirement plan helps you to retire very quickly easily with the power of compounding interest.

Creating your retirement plan

There are 2 stages when it comes to creating a retirement plan.

Stage 1: Self Awareness

This is where you understand yourself better with questions like; Why do you want to retire? When will you retire? Is it a voluntary or involuntary retirement? 

Self-awareness is about knowing your own desires, your lifestyle, your risk habits, and all else that makes you who you are. The more you are conscious of yourself, the more you will be able to determine changes in life that suit your needs.

Here’s a fun fact: many people assume retirement is a happy thing, but it’s not for many. In fact, there are people who are forced to retire because of either illness or accident, and this is what we usually call involuntary retirement.

It is important to recognize that there are two forms of retirement during this phase of retirement planning. Voluntary retirement and involuntary retirement.

Voluntary retirement is a happy situation as you as an individual will decide how to spend your life with a purpose meaningfully. This involves finding out when you are going to retire, and your purpose during retirement. First, find the retirement purpose and secondly, the age when you want to retire.


Finding a retirement purpose

Wherever you set goals and dreams, retirement becomes meaningful and fulfilling. A purposeful retirement is when you have enough money and desires in your later years to complete your life with satisfaction.

How would you feel if at the age of 60 you were retired and left with nothing but money to spend? Is there not a retirement reason like how you have a goal when you start your career.

After all, we need to look at the enjoyment during retirement. If there is no purpose in retirement, it is as good as not retiring.

However, if you have a purpose in your retirement phrase, retirement becomes satisfactory and meaningful. This is something YOU have to find and answer it. No one else can do it for you!

 

Know when you want to retire

1) What is your duration of work – How many more years do you wish to work?

2) What is your ideal retirement age – at which age would you want to retire? Would it be 50, 55, 60, 65 or even 70?

3) How long will your duration of retired life be – How many years would you stay retired?

4) How long will be your duration of life – How long do you think you can possibly love to? 90, 100 or even longer due to the improvements in healthcare and technology?

5) Will you be financially dependent or independent? – Will you require your future generation to take care of you?

The above 5 questions do not have a right or wrong answer to it. But it will potentially help you identify the right age for retirement.

You can’t control the involuntary retirement. Most of the time it happens due to illness or injury where you are physically unable to function and need an income to support you.

Everybody’s going to get old and sick one day, forcing them to retire. The question is, will you be prepared for it when that day comes?

There is no purpose and age involved as opposed to voluntary retirement. The only self-awareness you need here is to realize that this may happen to you and get covered against it early. 

Being self-aware of the reason why and when you will retire will help you kickstart retirement strategy with the right foundation.

It is important to know that retirement planning is not an option but a necessity. We can always prepare for Voluntary Retirement but we cannot prevent Involuntary Retirement from hitting us. 

Stage 2: Strategy

This is where you come up with concrete ways to manage your personal finances so that when you retire you can enjoy the ideal lifestyle.

Now that you’ve found out why and when you should retire, it’s time to plan a strategy. Retirement planning is the philosophy where you have the freedom of choice without the restrictions of money to do whatever you want.

Retirement should be getting a monthly income without having to worry about anything except where to spend this money as well as not worrying about saving the money as you will be getting this income indefinitely. 

Thus, when doing a retirement plan, it is important for you to consider the different source that generates the income you have when you retire.  The last thing you would want is to worry about money and how to financially support you or your family.

6 different sources of income for retirement plan

One-Stop Financial Retirement - Source of Retirement Income

Points to consider: 

1) Maintenance of property (as property ages, the cost of maintenance also increases)

2) Finding the right tenant

3) Renovation and restoration between tenancy agreements

4) Annual maintenance contracts (outsource) to cover minor repairs. Major repairs may need approval and instant payments.

5) Tax on income and property

Rental income refers to the full amount of rent and related payments you receive when you rent out your property. This includes rent of the premises, maintenance, furniture and fittings.

Rental income is subject to income tax. You will be taxed on your Net Rental Income (Gross Rent less Allowable Expenses). 

For details, please refer to tax for rent from the property.

Points to consider: 

1) Rating of the bond issuer (if the coupon is too good to be true)

2) Reinvestment risk on the maturity of the bond (income will be variable)

3) Bonds being defaulted (bond issuer going bankrupt and unable to pay interest)

4) Taxation on income from bond coupons

The interest received from deposits with approved banks or licensed finance companies in Singapore is not taxable.

Interest from debt securities (e.g. bonds) is also not taxable unless it is derived from:

a. A partnership in Singapore; or
b. From the carrying on of a trade-in debt securities.

For details, please refer to what bond interests are taxable, what is not.

Points to consider: 

1) The maximum duration of the Fixed Deposit is not very long, which may increase the risk of not getting enough income from the interest.

2) Reinvestment risk after the maturity of the Fixed Deposit (income will be variable)

The interest received from deposits with approved banks or licensed finance companies in Singapore is not taxable.

Interest from debt securities (e.g. bonds) is also not taxable unless it is derived from:

a. A partnership in Singapore; or
b. From the carrying on of a trade-in debt securities.

For details, please refer to what deposit interests are taxable, what is not.

Points to consider: 

1) Income on corporate performance is variable so you cannot depend on it.

2) It is an excellent way to hedge for inflation as profits are usually inflation-adjusted and hence a very good source of income hedging in retirement.

3) Corporate risk of the equity portfolio (the company can go bankrupt).

 

Individuals who derive income from investments in property, shares, unit trusts, fixed deposits etc. in Singapore need to pay income tax unless the investment is specifically exempted under the Income Tax Act.

Generally, income distribution from Real Estate Investment Trusts (REITs) and Unit Trusts (UTs) are exempt from income tax. 

For details, please refer to what investments are taxable, what is not.

It is recommended in many cases to get maximum income from a source like CPF LIFE Scheme as it is for a lifetime and we do know that people are living longer than ever before due to technology and healthcare improvements.

 

Points to consider: 

1) It may not be sufficient income to depend on for your lifestyle, as such schemes have a cap on the total contribution to such programs.

2) Changes in political agendas may affect these income levels and hence could be of concern.

 

For details, please refer to CPF LIFE Scheme.

There are usually used to build up a nest egg and build a steady flow of income. However, not all are the same.

Points to consider: 

1) Is the income variable or guaranteed?

2) How long is the income guaranteed for?

3) What is the credit rating of the insurer?

4) How much is the minimum guaranteed income and potential incremental income?

5) Does it provide a lump sum on retirement or a payout income during retirement

6) Taxation on income from life annuity products?

All annuities received in Singapore are not taxable (for example, CPF LIFE Scheme payouts) unless they are received from the following sources such as Supplementary Retirement Scheme (SRS) depending on the circumstances.

For details, please refer to what annuities are taxable, what is not.

Assets in old age become a liability; Income, on the other hand, is the only true assets

That is why when we retire, it is important to build as much guaranteed income as possible while using the variable income to counter inflation and lifestyle upgrades requirements. Each source of income has a different rate of return and different guarantees.

Therefore, we should have a percentage of income which come from different sources and every one of them. 

How much should you save for retirement?

If you follow the table below, you should be able to retire at age 65 with approximately 50% of your last income after retirement. It is recommended to save 20% of your income for retirement as a moderate guideline

One-Stop Financial Retirement - How much to put aside for retirement

Why is retirement planning important?

Retirement should be the best time of your life when you can relax and enjoy your life by reaping the benefits of what you earn in so many years of hard work. To achieve a worry-free retired life, here’s why you should plan to plan ahead

One-Stop Financial Retirement - Why is retirement planning important

What is the retirement investment strategy?

One-Stop Financial Retirement - Retirement investment strategy 2

What is the financial product best used for retirement planning?

One-Stop Financial Retirement - Pros and Cons of Plans

Investment-linked insurance policies (ILPs) are examples of variable income products.

There may also be a portion providing coverage for life insurance while the component of the investment generates variable revenue.

The premiums paid for ILPs will be used for investment purposes, while some of them will be sold to pay off the policy’s insurance portion.

ILPs is useful for creating a flexible income stream as a long-term investment. It’s ideal for younger consumers with higher risk tolerance. ILPS is also ideal for investors who want to invest in markets but do not meet the capital requirements to invest directly in markets.

Annuity plans are insurance policies with fixed payouts for a defined period of time on a regular basis. Generally, they’re used to replace the income streams if a person outlives at an older age.

Annuities are excellent products for the building of guaranteed income streams. It is best used for those with a low-risk appetite who want a guaranteed and stable income.

Personally, we think that this is the best product for retirement purposes, as the individual may not have any income streams at the retirement age. Therefore, annuity policies are used to replace these streams of income.

The endowment policy is life insurance that is intended to pay a lump sum after a particular term or death. This is very helpful when a person tries to achieve a specific goal financially. The lump-sum shall be used to meet that purpose.

Endowments are excellent products for investments over a fixed period and also give rise to income guarantees. For example, once your kids go to college, it can be used to fund for kids education where you need a lump sum.

Endowment plans mature with a strong cashback guarantee.

The endowment plan is not the best retirement product on its own. Nevertheless, accumulating wealth and turning them into an instant annuity in the future is a good investment.

Retirement Sum Scheme (RSS) & CPF LIFE

We will not be going into this very detail as we will be covering these related issues under the CPF Schemes (Retirement) section.

Everyone loves this part as this is about withdrawing money from your CPF and everyone has been waiting for this day to come.

Under the CPF Board, the RSS and CPF LIFE are two retirement schemes. The RSS offers monthly payouts to CPF members to support a basic living condition during retirement until the funds of your Retirement Account (RA) run out.

In 2009, in view of the increasing life expectancy in Singapore, CPF LIFE was launched to provide monthly lifetime retirement payouts.

One-Stop Financial Retirement - CPF - Types of Retirement Schemes
You can use the CPF LIFE Payout Estimator for a more detailed comparison of the payout
you can receive from each plan based on your Retirement Account savings. 

However, the payout from Government Schemes(CPF) may not be able to sustain your current lifestyle.

Thus it is important to have multiple sources of retirement income.

Supplementary Retirement Scheme (SRS)

We will not be going into this very detail as we will be covering these related issues under the IRAS Schemes (SRS) section. 

The Supplementary Retirement Scheme, also known as the SRS, is part of the government initiative to meet Singapore’s retirement needs. While CPF contributions are compulsory, there are voluntary contributions to our SRS accounts.

SRS contributions qualify for tax relief. Investment returns are tax-free before withdrawal, and only 50% of SRS withdrawals are taxable after retirement.

In conclusion...

The cost of living in Singapore is pretty high and is increasing yearly. Just because you’ve retired, it’s not going to magically go down.

In fact, the living costs may even increase, because (1) getting older usually means more medical bills as well as (2) free time costs money to fill up.

So when you retire, how do you find out how much of your costs will be?

Get your Retirement Plan comparisons from the top providers in Singapore here!

By starting your retirement plan, you can better prepare yourself for the future. End of the day, after working hard for your whole life,
it will be good if we can retire happily.
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