What Is A Retirement Plan (And What Can Derail Them)?

What is a retirement plan and what are the risks

Retirement – you hear it often and everywhere. In short, retirement is a period in your life where you stop working and withdraw from the workforce. In Singapore, that minimum retirement age is 62. You also want to maintain the same standards of living as you did while you’re working. To achieve this, you’d have to save up a sum of money during your working years, following a thing called a retirement plan.

According to a survey conducted by NTUC Income, slightly over half of young adults aged between 25-35 have started working towards retirement, and 84% are worried about their retirement. What exactly is a retirement plan and what does it entail? In this article, fundMyLife describes what a retirement plan is, and lists the various risks that threaten to derail it.

What is a retirement plan?

In Singapore, chances are that you have your CPF as your most basic safety net during your retirement years. Political discussions aside, it is a nifty instrument that provides you a monthly amount upon reaching retirement age. This money comes from deductions from your salary in addition to employer contributions during your working years. On a related note, we wrote an article about CPF not too long ago. However, there is only so much that CPF can provide, especially if you have been leading a particular lifestyle and would not want a change. You still need a proper retirement plan to last from your retirement age till your death. And not before, of course.

The anatomy of a retirement plan

When you engage a financial adviser, one of the first things he or she will run through with you is a retirement plan. At the risk of sounding like a Captain Obvious, a retirement plan is a plan you make to prepare for retirement and the years beyond. While it sounds simple at first, it answers a few deep questions:

  1. How much do I want to have by retirement age?
  2. How much do I want to live on during retirement?
  3. Will the money last me enough to do what I want, e.g., travel, start a retirement business, etc?
  4. How long do I want the money to last?
  5. How flexible can I be in the face of unexpected events?

Once you answer those questions, your financial adviser can then draft a plan for you to achieve those goals.

Retirement planning methods

#1 Savings/endowment plan

Endowment plans is a plan that has both savings and insurance components. Insurance companies promote them as forced savings, typically requiring you to pay a monthly sum over a period of time, usually between 20-30 years or so. During that period, the insurance company invests your money in a fund. At the end of the fixed period, you get your money back in a lump sum. This payout typically has a guaranteed and non-guaranteed sum. The former is the minimum amount that you will get. The non-guaranteed sum depends on how well the fund performed over the period of time.

Bear in mind, a retirement plan is different from a retirement policy, one of the many ways you can build your existing wealth. As such, make sure you clarify with whoever financial adviser you’re speaking to. He or she might think you’re interested in the latter but you should be more concerned about the former.

#2 CPF

Surprise surprise, there are several things you can do with your CPF. Channeling the money from your Ordinary Account (OA) to your Special Account (SA) is one such way. While OA is typically used for non-retirement uses such as housing, insurance, and investments, SA is used for retirement and retirement-related investments. As of the time of writing, OA has a lower interest rate compared to SA, up to 3.5% for the former and up to 5.0% for the latter. Generally, both accounts’ interest rates are higher than the average inflation rate in Singapore. The interest rates are reviewed quarterly so be sure to check regularly.

A second way you can use your CPF to prepare for retirement is using CPF Investment Scheme (CPFIS). This scheme gives you an option to invest the money in your OA and SA accounts in a variety of investments, such as unit trusts, bonds, shares, and even insurance products. If you’re interested, you must take the CPFIS Investment Scheme self-awareness questionnaire just to gauge your knowledge of investing. It’s compulsory to take if you want to give CPFIS a try. You can still invest if you fail the questionnaire, no problem.

#3 Investments

There are several ways you can invest your money, such as stocks, managed funds, and most of the time – index funds. Picking your own stocks will take time and knowledge. Managed funds involve fund managers who try to beat the market who active reallocate the assets in a fund to get you returns that are higher than the market average. An index fund buys shares in companies in proportions that match a market index such as the Straits Times Index (STI). Index funds are cheaper since they are passively managed unlike managed funds.

Great thing about investing is that you can go in or pull out at any moment, providing great liquidity.

If you want to invest in the stock market, here’s a great step-by-step guide from DollarsAndSense on stock investing in Singapore.

#4 Selling your place

There is the option of selling your place when you’re older. Besides, with an empty nest, you don’t need that much space eventually anyways. While the assumption is that your place will appreciate in value over time, there’s no 100% guarantee that it will happen.

Tread with caution with this one.

#5 Fixed deposit/Savings account

If you are truly risk averse, and do not want to park your money elsewhere, you can consider putting it in a bank. Fixed deposits, as its name suggests, is an account that holds a sum of money over a fixed period of time. Fixed deposits are good to have if you have a sum of money (above $10,000) and want to grow it a bit. The downside is that your money is locked up for a period of time, usually with a minimum of 12 months. You’ll be penalized with lower interest rates for withdrawing money from the account.

Recently, banks are getting competitive with novel kinds of savings account. Savings accounts such as DBS Multiplier Account and OCBC 360 Account nowadays have tiered interest rates, with the maximum rates quite comparable to other investment products. These interest rates are added on top of the base rates if you credit your salary to the account, purchase investment and insurance products, etc. The whole idea of these accounts is to influence you to stick to that one account for all financial matters. That’s the downside. The upside is that you can draw as much as you want/need without penalty unlike fixed deposit accounts.

Non-exhaustive list of risks to your retirement plan

A common misconception about retirement plan is that it’s a one-stop destination. While the figures on the retirement calculator looks sensible and solid, retirement is  not an exact science. It requires a lot of assumptions as well, which may However, along the way there are stumbling blocks that slow you down. This section highlights several risks that are very real and will happen to us at some point in our lives.

#1 Loss of a job

Contribution to your retirement plan requires constant flow of funds. This sustained contribution assumes continuous employment as well. A common stumbling block to your retirement plan is when you lose a job, be it due to retrenchment or health issues. In addition, as you age, you will face less employment options. This is an unfortunate fact in the workforce. To mitigate this risk, you may want to consider part time jobs to increase your savings while you are still able to work. Plus, better to work towards retirement than spending hours binging on TV shows.

#2 Living longer than before

This is one of the rare disadvantages of living longer than the previous generation. Advances in medical healthcare means people are living increasingly longer than ever. Longevity, while desired in general, is a risk for retirement planning. Living longer means you might run out of money past your retirement age. On top of that, there is an increased chance of contracting more diseases as you age.

#3 Healthcare costs

On top of increasing longevity, healthcare costs rise every year and are expected to increase indefinitely. With increased longevity, it also means you’ll be spending more on yourself over time.

#4 Market risks

There’s a risk that a market downturn can wreck havoc on your investments, be it stocks or an endowment fund. Market risks also affect you more drastically after retirement, when you’re utilizing money from your retirement fund.

To illustrate this in a simple manner, imagine if you had $100 in your investment portfolio one day, consisting only of one stock. Consider these two separate scenarios:

  1. The next day there was a 50% market drop, causing you to have only $50. You’re still working, so you don’t have to depend on money from this portfolio. The next day, the market bounced back by 50%, which means you now have $75.
  2. The next day there was a 50% market drop, causing you to have only $50. You’re retired, and you need the money so you draw $10 which leaves you with $40. The next day, the market bounced back by 50%, which means you know have $60.

Such a big difference, if you needed the money from your portfolio. As such, it’s important to account for market risks by diversifying your portfolio and not keep all your eggs in a single basket.

#5 Relationship risks

When you set a retirement plan, your financial adviser takes your partner and his/her into financial information in account. However, relationships sometimes go awry, necessitating separation and/or divorce. Under such situations, you two might have to divide your assets and other things like maintenance and child support comes into the picture. These unexpected things will throw a wrench into your plans.

#6 Financial adviser risks

This is a risk not many people discuss about – the financial adviser him/herself being a risk factor. If the financial adviser is bad at what he/she does, you’re stuck with an equally sub-par retirement plan. Imagine when you’re reaching retirement age, and you realize the plan that you purchased did not serve its need and was meant to be a high-commission product for the adviser.

How to discern whether the adviser is good or otherwise? Make sure you get strong referrals from your friends and family, or browse through a site that contains amazing advisers – coughfundMyLifecough.

Connect with fundMyLife financial advisers today!

Oh boy, that is a lot of different risks. It is not as depressing as it sounds. We hope this article did not scare you, but rather inspire you to plan for your future retirement plan ahead. You should have started saving towards your retirement 5 years ago, but the next best time is today.

Who to consult on such matters though? Worry not – fundMyLife has your back. We can’t help you mitigate all the risks above, but we can make sure that the last risk – financial adviser risk – is eliminated. You can connect with our panel of experienced and awesome financial advisers, curated by us. If you want to engage more financial advisers, or if you haven’t found the right one, why not consider advisers of fundMyLife? You can head on over to fundMyLife and ask our awesome financial advisers questions. Alternatively, you can check out our curated pool of individual advisers and ask them questions directly.

Been doing lots of research, but not sure who to engage to take the final step? Look no further! fundMyLife connects you to credible and incredible financial advisers privately and anonymously, based on the financial planning questions that you ask. We aim to empower Singaporeans to make financial decisions confidently.

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