Retirement 101 in Singapore Part 2 Income Replacement at Retirement
Despite all the complaints about the high cost of living in Singapore, Singaporeans are still one of the top savers in the world, saving about 47% of GDP and coming in at No. 4 behind Kuwait, Bermuda and China (including Macau) in a world bank study in 20131. This can be mainly attributed to the compulsory contributions we make to our Central Provident Fund (CPF). The relatively low tax regime has also allowed for a high savings ratio.
From anecdotal evidence, many of the clients we work with have various sources of income at retirement, other than the savings from CPF. Since CPF Life was introduced in 2009, Singaporeans have also been assured of a lifetime income from their CPF savings. Although the official retirement age is 62, CPF payouts for those born after 19542 commence at age 65, whether they are on the minimum sum scheme or on CPF Life. Hence, for those seeking early retirement, there is a need to provide for other sources of retirement income before the distribution from CPF kicks in. Recall in Part 1 of our newsletter that an average household’s monthly expenditure is $4,7243 in 2013. If we were to assume inflation is constant at 3% and we can also get 3% rate of return for our retirement savings, we would need to accumulate over a million dollars in asset by the time we retire at age 65 for us to live comfortably for the next 20 years.
Retirement Income Needs
Based on the current CPF Full Retirement Scheme, a sole breadwinner setting aside the full retirement sum at age 55 would only be able to achieve about 18.5% of retirement funds adequacy.
For double income families, their CPF savings would be able to provide 37% of their retirement income needs. As often cited, the CPF Minimum Scheme should be seen as providing for a family’s basic needs, with other sources of retirement income the frills that would complement the basic necessities.
In order to help our clients achieve their retirement goals, we would usually develop a financial or retirement plan to help them have a holistic view of their asset positions at retirement. A good financial consultant would be able to show you how your retirement portfolio would perform based on current assumptions but it takes a great financial consultant who will walk you through the retirement planning journey to fine-tune your retirement plan as you progress towards retirement.
Cashflow At Retirement (CaR)
We like to show our clients how well their “ CaR” is performing based on what they are currently doing, “CAR” an abbreviation for “Cashflow at Retirement”. A good “ CaR” would ensure that they are cruising at good speed to achieve at least 80% of their retirement needs. The“CaR”would detail their projected incomes from the various sources of retirement assets they have set aside or are in the process of setting aside.
In the process of discovering their “CaR” performance, we would then be able to advise them on the appropriate strategy to adopt to achieve their retirement income needs. For many of our clients whose interests are not in the financial markets, our approach to retirement planning is to provide for a systematic, fuss-free accumulation and liquidation of their retirement fund. This ties in with our vision of empowering our affluent clients in their finances so that they can focus their time and energy on building meaningful relationships with their loved ones.
At retirement, we recommend that the client hold higher levels of liquid assets as emergency cash and as short -term cash reserves that can be liquidated quickly to pay for the bills. Even though the assets have to be liquid, it does not mean that they should be sitting idle in the current account. Instead, they can consider parking some of these funds into the Singapore Savings Bonds (SSB) or Fixed Deposits for potentially higher returns before they liquidate the funds in an emergency. If they had done proper planning, insurance policies could also act as another avenue for their buffer funds. This should represent at least 6 months and up to 36 months of their expenses at retirement.
Our method of developing a retirement income plan is the bucket strategy where we segment retirement assets by different categories depending on the source of funds and the risk levels of the assets.
As the average retiree in Singapore would have various retirement assets to draw down from (ranging from CPF Life to CPF balances to SRS), we take into consideration the various drawdown ages of the accounts to formulate a roadmap for them to liquidate from their various accounts. We also assign each bucket to a defined time horizon in retirement, based on the client’s risk tolerance and time horizon. We will strategize to draw down from lower risk, lower volatility buckets first and over time reduce the volatility of the other buckets. This also results in accounts that are lower yielding to be drawn down first, increasing the effective returns on the portfolio over the lifetime of the retirement assets.
For those clients who are in the privileged position of having sufficient retirement resources, they could consider scaling down the volatility of their portfolios, by de-risking it to provide for more certainty in these incomes. This could be achieved by investing in primarily lower risk instruments such as in their CPF, bonds, endowment policies and other capital guaranteed solutions. This strategy would also be suitable for those clients whose risk profiles are already lower to begin with, as this would assure them of a steady income stream at retirement rather than having to worry about market gyrations.
For other clients who are still in the process of building up their retirement portfolios, they might need to consider a diversified portfolio with higher allocations to equities. This will potentially help them to build up their retirement assets so that they can enjoy higher incomes at retirement. There are no hard and fast rules when it comes to structuring a steady source of income at retirement, as the needs and resources of each client differs. Hence, it is best that you work with your financial planner who can best assess your needs and can communicate with you clearly to ensure that your retirement income needs are properly structured.
CPF Basics To Know
CPF Retirement Sum Scheme (F.K.A Minimum Sum Scheme)
This is the amount of retirement savings which you have chosen to set aside in your Retirement Account to receive monthly payouts from your payout eligibility age, which is currently at age 65.
There are 3 levels of retirement account savings you can set aside. The amounts will be raised by 3% per annum from 2017.
For clients who are able to set aside more savings in their CPF, our suggestion is that they can look at maximizing the savings in the CPF Retirement Sum. This is due to the higher risk free interest rate that is currently provided by the CPF board, which is pretty hard to beat in this era of lower investment rate of returns. Similar retirement solutions in the market are not able to guarantee this high risk free rate of returns and even if they are projected to beat the rate, the risk reward ratio might make it more beneficial to have the funds remain in the CPF Retirement Sum Scheme.
CPF Life Basic or Standard ?
The default option for CPF members who did not opt for either scheme is for the Life Standard scheme which provides a higher payout monthly and lower bequest.
However, as can be seen from the table, the difference in monthly payout under the basic or standard plans is only about $100/mth for males and $50/mth for females. However, the bequest for the family at age 65, even before the payouts have started is up to $40,000 lower for those male members and $36,000 for those female members under the standard plan. This gap worsens to about $125,000 for male members and $112,000 for female members at age 75. This even though they would have only collected an additional $12,000 and $6,000 in
total from their monthly payouts respectively. At age 85, there is no more bequest for those under the standard plans and between $70,000- $80,000 for those under the basic plan. Only if the CPF member is assured that he/she is going to survive beyond the age of 90 would the standard plan be able to pay more than the basic plan in totality. Hence, our preference is for clients to choose the basic plan even though the monthly payouts are slightly lower.
The difference in payouts is due to the higher interest the CPF members can enjoy under the CPF Life Basic plan. Under the CPF Life Standard plan, 50% of the retirement sum is deducted and paid into the Lifelong Income Fund for the CPF Life payouts. The balance with accrued interests is then deducted at age 65. For CPF Life Basic plan, only 10% of the retirement sum are deducted as premiums to be paid into the Lifelong Income Fund. The balance of the funds enjoy the up to 6% interest in the CPF accounts which is also the bequests that will be payable to the family members. Whilst both CPF Life Basic and Standard Plans payouts are non-guaranteed, the incomes payable from the CPF Life Basic could be gradually reduced when the balance falls below $60,000 as the extra interests reduce7.
APEX Private Wealth Management (A group of advisers representing PIAS)
Waterloo Street #01-18 & #02-08/09/11 Waterloo Centre Singapore 180261
Contact: +65 6417 4455 Fax: +65 338 6506
Email: admin.apexwealth@proinvest.com.sg www.apexpwm.com
