Retirement becomes a growing concern once you enter your 40s. This is why it's very common to see people who started work putting off financial planning but people in their 40s - 50s lamenting they should start earlier. As what a friend commented, "it's a stage of life."
Depending on your own upbringing, perception of money and financial literacy, your retirement strategy (if any) will differ. Through my job as a FA, I've had the privilege of meeting people from diverse backgrounds and I've since compiled 5 common ways people plan their retirement.
Of course, there are many others who have no retirement plan mapped out in their lives and they probably can't retire (even if they delude themselves and think they can...). However, writing an article on 5 Bad Money Mindsets Singaporeans Have About Retirement feels a little depressing. Hence, I've chosen some common models we can learn from instead!
Some of these strategies left me impressed and motivated to adopt for my own retirement...
1. The Super Savers
The very first time I entertained the possibility that one does not need financial instruments to retire was when I encountered this client who earns a 5 figure salary and saves 80% of her income. Her behavior translates to 2 truths. Her lifestyle cost is minimal. She will save even more as her income increase. She is in her 30s.
This year, I've met another couple who can minimally save $100K per year. They are in their 40s this year. This means that if they can successfully keep this up for the next 20 years, they will have $2,000,000 in savings purely through being frugal. This is assuming their incomes did not grow any further throughout these 20 years. Also this is not inclusive of their CPFs.
Do they really need financial instruments to retire? Not really.
Should they explore using financial instruments?
Yes! Essentially, if saving hard could give them such an outcome, then using financial instruments simply means accelerating the process. Above all, there's the consideration of inflation. Hoarding cash would result in a definite loss of spending power.
Even if one is very good at amassing significant amounts of cash, keeping every cent in the bank account essentially is like slowly burning money.
If one is low risk, they can adopt some lower risk financial instruments whose objective is to preserve wealth and not grow the wealth. Many of such instruments may even be principal guaranteed in nature.
2. Your Children
Children who turn out well can also be a viable retirement strategy. I've heard stories of a son who is a doctor and he gave his mom a credit card to buy anything she wanted. He explicitly told her that she needn't consult him before purchase and he pays for a maid to do the housework as well.
While many spendthrift parents may look on with envy, a parent who brings up good kids typically is financially sensible. So from my knowledge, this mother hasn't been spending her son's credit card other than on groceries.
Very often, children brought up well will have good education. Hence they are often in respectably paying jobs. If a parent has more than 1 filial child, then the combined allowances from the children can provide a good retirement income.
Honestly, this isn't a strategy I'd recommend even though if it works, it is definitely viable. Firstly, you will bring additional stress to your kid and cost of living is getting more challenging in the country.
Secondly, there's a lot of risk in this plan. I've seen instances where high income kids neglect their parents. Sometimes, sad cases may include the parent living with their kids but have difficulty getting along with their in-law. Then they end up in the void deck passing time instead of the comforts of their own home. Also what if your kid don't even turn out as capable as you envision? What if their own livelihoods are a struggle and they need YOUR HELP instead? Or what if they migrate?
Thirdly, making your children your retirement plan may make them not like you! A lot of kids today are struggling financially as the sandwich class simply because their parents didn't plan their retirement well. Sometimes, it's a matter of circumstance. They sacrifice for their children hence as a family, it is only right to support them back. Sometimes though, it's just bad money management. Often such circumstance may lead to resentment. Would you want your kids to dislike you in your golden years?
If you really intend to bet everything on your kid then I'd suggest you better strive to win the best parent award during their growing up years. Also, invest in their education. If they show signs they won't do extremely well in life, then maybe you might want to have a plan B and start planning your retirement...
3. Conventional Retirement Planning
This is the most common form of retirement planning. Most sensible Singaporeans will try to complement financial instruments with their CPF. These instruments can be a combination of endowments, investments, and disciplined savings.
I've met a client who shared her joy that there's an endowment plan maturing every 2-3 years in her 50s which she totally forgot about. She likened the feeling to winning the lottery every 2-3 years and it is a guaranteed win.
This was the fruits of her early retirement planning during her 30s and 40s. Even my own parents actively managed their savings in high return fixed deposit accounts (last time fixed deposit rates can be double digits to high single digits) during their early years. Through the power of compounding, the pot grew despite both of parents never earning 5 digits throughout their lifetimes.
This approach is ideal for most people. However, the effectiveness of this approach depends on how early you start. Too many people end up with too little savings at the critical age of 40 - 65 and rely on taking out their CPF to start retirement planning. Honestly, this is bad strategy. CPF gives a risk free 2.5% and 4% in the Ordinary and Special Account. How much better off would you be?
Essentially, in your 40s, you either need to have a decently high disposable income with not too high expenses or a sizable savings (AT LEAST $100K on top of your emergency funds) you can do something with. If not, it's a sign you are in deep trouble for retirement even if you might delude yourself that you aren't. Com'on it's math... take a calculator and get a reality check!
4. The Property Downgraders
Another common strategy in Singapore is downgrading our property to free up money for retirement. Most people will try to sell their bigger, more expensive homes in their 50s (potentially because their kids are grown up and have moved out) and move into a smaller, more affordable home.
There's a few ways people will achieve this.
They buy a big flat or private property and hope to live there till they are old then sell it off for a profit and move into a smaller home.
They upgrade their homes a few times to own a home of sizeable appreciation value then hope to sell it off and downsize when they are retiring.
This is probably Singaporean's most favourite fall back plan. A home to many Singaporeans is a good store of value because they hardly have the discipline to constantly invest their money. As a result, a huge amount of money stored in the bank accounts would result in eroding its spending power. This being the case, buying a home enables people to spend a large amount of cash at one go. This is also why many Singaporeans are known to be asset rich and cash poor.
Of course, this strategy has its own set of pitfalls. For example, you need to buy the right home if not you can't sell it at the value that you want eventually. Also, during the working years, a lot of money is being stored in the property which means there's limited liquidity unless one sells the home.
Also, there's this constant assumption by many Singaporeans that a HDB is a good asset that can be unlocked for money. However, the money unlocked may not be substantial for a decent retirement given the age of the flat during that period of time.
While property is definitely a viable retirement strategy, too many people view it too simplistically. It's not as simple as just because you have a home and you sell it, you can retire. If a person is stuck with a home they can't sell or rent for an ideal amount, they have a problem which can be substantial because a lot of money is stuck in the house.
Moral of this story?
Don't put all your eggs in one basket.
5. The Hardcore Investors
There's also a group that believe strongly in the capital markets. They actively invests a good portion of their incomes and over the years may even have the option of early retirement. The idea is you grow your money at a certain percentage and withdraw through the 4% withdrawal rate yearly during retirement. It's supposed to sustain you all the way if your investment return is a healthy figure and your lump sum is a certain multiple of your expenses.
During this recent recession, a client did ask me, "you invest in stocks right? how are your stocks doing? My stocks in the SG market like not making much money."
This is the biggest problem with investing. You need to understand the markets enough to do decently well. Also, are you investing in a major market or a small market simply because you are born there?
If one does not have the skill, interest or time to invest, they may not be able to roll out this strategy well. Having said that, I personally don't see investing as rocket science. You simply need to have the interest and knowledge to bother to learn how to do it. You also need to be highly unemotional and objective so that you don't let your emotions get the best of you.
Often, another common issue is the risk appetite. If one wants to adopt this strategy but only invest a tiny fraction of their liquid funds, they may not have achieved the sizeable amount of money to get a return that can sustain their entire retirement journey. Also, the human reaction to losses may differ with age. When we are 30, a 50% drawdown may mean nothing because we can earn it back. When we are 65, a 50% drawdown may be alarming because this might be all we have.
What I personally subscribe to
These are the 5 common retirement strategies people adopt to retire. Is there a superior method? Not really.
Personally, I like a hybrid. I believe in conventional retirement because its fairly safe and manageable if done early. I've been wowed by my frugal clients, I'm actually tempted to try!
People who know me knows I invest pretty aggressively so I can be described as a hardcore investor. As of now, property is the most foreign to me because I don't understand the instrument sufficiently as an investment vehicle. However, I understand how property investors earn from it so it's something I'll eventually want to teach myself. I personally believe property is a key component of a Singaporean portfolio because we own the homes we live in.
I'll advocate diversification. There's no one size fit all but we can learn the best practices and diversify our risk by having a reasonable exposure in the various methods.
After reading this article, you may have some questions or may want to get started on retirement planning. You can reach me by dropping me a message.
Be sure to share the article if you feel this information is helpful. You will enable a lot more people to learn about retirement.
About Janice
I specialize in portfolio optimization (ensuring you get maximum value for every dollar you put in) and retirement planning. Clients look for me primarily to outsource their retirement planning needs so that they can focus on other aspects of life that interests them. Many of whom are very good in earning their incomes in their respective professions and wish to ensure their monies continue to work harder while they focus on what they are good at. Refer to client testimonials here.
I've helped many clients who are referred to me reduce the costs they are paying for their insurance or help provide solutions when they deem they are stuck with huge commitments bought when they were younger but unsuitable for their present life stages. You can reach me at 94313076 or my social media accounts on Facebook and Instagram.
Disclaimer: The content created are based on my personal opinions and may not be representative to everyone or any organisation. If you have any doubts or queries pertaining to insurance or investment, please seek professional advice from a trusted adviser in an official setting. You may also reach out to me if you do not have a present adviser using the message box under 'Let's Talk'.
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