Young, raring to go - and time to start prepping for retirement

Singapore

FOR many young Singaporeans, retirement planning is hardly at the top of their to-do list, and understandably so.

Retirement feels like a lifetime away when there are other more immediate, exciting financial goals such as vacations, wedding planning and buying a house.

The path to retirement also appears complex, lengthy and involves seemingly large sums of money, which paralyses many to inaction, says Lorna Tan, DBS head of financial planning literacy.

But as life expectancy increases, inflation looms and Covid-19 impact lingers, wealth accumulation needs to start from your first paycheck before the years slip by.

About 80 per cent of millennials underestimate how much they need for retirement and on average underestimated the amount by 39 per cent, an OCBC survey showed last year.

Many did not know that a more basic retirement lifestyle still requires about S$2,300 a month, while a higher-end lifestyle requires S$5,200 a month in today's value.

This is why as many as three in four Singaporeans are falling behind on their retirement plans, says Vasu Menon, OCBC executive director of investment strategy.

Awareness on how much money is needed is the first step to retirement planning. What follows?

To start, it would be prudent to do a realistic projection of one's income flows and expenses to close any gaps early, which can be easily simulated on financial planning apps offered by most major banks here.

"Retirement planning is not rocket science. There are calculators available that can help you to figure out how much you need to retire comfortably and what your shortfall is," Mr Menon notes.

To gain more clarity on when financial freedom can be achieved, one should divide projected expenses into needs and wants, and review them regularly with assets and liabilities, says DBS' Ms Tan.

"Ask yourself what will be the projected income flows that fund these needs and wants? When will they begin and the duration? For example, if you have been contributing to your Supplementary Retirement Scheme (SRS), the penalty-free withdrawals from your SRS account will start from age 62 and can be spread out over 10 years," she notes.

Ms Tan further recommends building up guaranteed and non-guaranteed income flows.

Guaranteed income includes Central Provident Fund (CPF) payouts, withdrawals from CPF accounts, SRS savings, annuity or retirement income insurance, cash and near-cash assets like Singapore Savings Bonds, among others.

It's much easier to start saving for retirement at a younger age, with arguably fewer responsibilities.

At up to 6 per cent per annum earned on retirement savings, CPF accounts offer attractive and risk-free interest for one's savings, much higher than fixed deposits and some investments.

More Singaporeans have realised that accumulating CPF savings is a low-hanging fruit in their retirement plan; those who topped up their own or their loved ones' CPF savings were nearly 40 per cent higher in 2020, compared with 2019.

"For those with spare cash and the ability to keep their funds in the CPF until they turn 55, it makes sense to use the various CPF top-up schemes as the risk-free returns from CPF savings are significantly higher than deposit rates, allowing your idle cash to grow at a faster rate through the power of compounding," OCBC's Mr Menon points out.

Compounding is a process where a sum of money grows exponentially due to interest building upon itself over time, which is one of the most valuable assets to capitalise on in your 20s; it's easier to grow money over 50 years than, say, just over 10.

That said, bank savings and CPF monies alone are far from adequate to fund retirement.

Equally important is non-guaranteed income, which includes riskier assets skewed toward variable returns like equities, certain bonds, alternative assets, venture capital funds and private equity funds, among others.

It pays to have some level of risk when it comes to investing for retirement amid inflation risks and "virtually zero" interest on savings, says DBS' Ms Tan. "Not taking any investment risk poses a risk, because your purchasing power with the same dollar shrinks with time. So, no risk may be the biggest risk."

Investing over a longer horizon allows one to benefit from the power of compounding over time and ride out market volatility.

For instance, a monthly investment of S$100 today, compounded over 10 years at an average rate of 5 per cent per annum, can grow to more than S$15,000.

Investors will need to weigh if it's worth using their CPF funds to invest too. Data from Refinitiv Lipper showed that CPFIS-included funds (unit trusts and investment-linked insurance plans) posted positive returns of 3.98 per cent on average in Q1 this year.

Younger Singaporeans are increasingly counting on investment returns to fund their retirement. Nearly 60 per cent of those aged 21 to 30, and 64 per cent of those aged 31 to 40, are prepared to give up guaranteed capital in exchange for high potential returns, a recent survey by Fullerton Fund Management showed.

Over half of respondents aged 21 to 40 expect to get most of their retirement income from investment returns, compared to 68 per cent of those aged 51 to 60 who cite CPF as a top source of retirement income.

There are ample investment opportunities for retail investors, from robo-advisers and unit trusts (from as little as S$100) to income insurance plans and government schemes like CPF and SRS.

"Consider a regular investment plan where you invest small amounts each month into pre-selected investments. It is better to take smaller steps than to do nothing at all," says OCBC's Mr Menon.

It's also worth noting that SRS contributions are eligible for tax relief. Investment returns are tax-free before withdrawal and only 50 per cent of the withdrawals from SRS are taxable at retirement.

Mr Menon cautions that retail investors should avoid concentration risk by diversifying their investments to be less dependent on the outcome of a few. It is also not advisable to jump into speculative assets.

About 39 per cent of millennials surveyed by OCBC last year said they speculate excessively for quick gains - definitely not a good way to build a retirement nest egg.

"Making poor investment decisions, resulting in significant financial loss, will derail your retirement plans. It is imperative to invest carefully and only in things that you are comfortable with and fully understand," says Mr Menon.

• The Money Playbook is a personal finance column that discusses how to take charge of your financial well-being.