Financial independence - managing retirement's uncertainties
One of the biggest fears people face is running out of money during their old age. Research shows that people are living longer in most developed countries1, and it is no different in Singapore, where the average life expectancy is 79.9 years for men and 84.5 years for women1. The elderly in Singapore have the CPF LIFE scheme, but that is only enough to provide a basic standard of living.
Many Singaporeans also struggle to meet even half of the prevailing CPF Minimum Sum – the amount calculated to provide a basic standard of living in Singapore. Furthermore, many divert a large portion of their CPF savings to mortgage repayments.
Fortunately, many Singaporeans have realised that they need to be more pro-active with retirement planning, and not solely rely on their CPF. Many have begun planning and setting aside additional funds for this.
So how can we preserve the value of our retirement savings and ensure that unforeseen events do not wipe out our financial independence, while having a fulfilling retirement along the way?
In this article, we look at potential unforeseen events and the methods of managing them. Uncertainty management should definitely be part of a retirement plan, and this should include:
- Guaranteed income regardless of how long you live
- The ability to protect your savings and retirement goals
- The ability of your spouse to have a secured retirement even when you are no longer around
- The assurance and peace of mind knowing that the worst cannot destroy your dreams and goals
SCENARIO 1: You live very long
Potential Uncertainties: Your savings are depleted and you are too old to work. Who can you depend on?
Consequences: Loss of dignity. Emotional and financial stress, Will you become a burden to your loved ones?
Recommendation: Consider adding an annuity plan to your retirement portfolio to provide a lifetime of income even when your savings run out
SCENARIO 2: You lose your job
Potential Uncertainties: Economic slowdown, retrenchment, etc. Without income, you cannot continue funding your retirement plan
Consequences: You may not be able to meet your desired retirement income level. You may be forced to withdraw your retirement funds prematurely to meet your spending needs
Recommendation: Create a contingency plan - either accept a lower income at retirement, or delay your retirement, or continue working in semi-retired manner. Set aside emergency funds to provide for 3 to 6 months of expenses so you can find another job and avoid being emotionally and financially stressed
SCENARIO 3: You invest too conservatively
Potential Uncertainties: Retirement portfolio cannot beat inflation. Purchasing power at retirement could be affected, compromising your retirement expectations
Consequences: You end up not having enough money due to the loss of purchasing power
Recommendation: Do not put all your money in deposits. Structure a portfolio to hedge inflation, according to your risk appetite. Diversify part of your portfolio into endowment policies - these provide a form of guaranteed maturity value at retirement
SCENARIO 4: You invest too aggressively
Potential Uncertainties: Unforeseen macroeconomic events wipe out a big portion of your retirement portfolio.
Consequences: You may not have the time horizon necessary to recoup the losses, and end up with unfunded retirement needs
Recommendation: Structure a portfolio using portfolio allocation principles. Diversify your portfolio between guaranteed and leveraged instruments, endowment and investment instruments, and direct and collective investments
SCENARIO 5: Property market crashed when you retire
Potential Uncertainties: You planned to downgrade your property to generate retirement income, but the property market crashed and you are stuck.
Consequences: Your entire retirement plan is jeopardised; how are you going to fund your retirement?
Recommendation: Do not rely on just one asset class; diversify using portfolio principles
SCENARIO 6: You are hospitalised
Potential Uncertainties: You don't survive - what happens to your loved ones?
Consequences: How do you intend to pass on your cumulative wealth to them?
Recommendation: Ensure you have the following thought out: Write a proper Will with consideration of key personnel (e.g. guardian, trustee, etc)
You survive but are left mentally incapacitated Who decides how you want to be treated? Cost of treatment and burden on loved ones? You survive but cannot work How long will you be down? Do your loved ones depend on your income? Can you go on without income? Will your retirement savings be depleted and expose you to liquidity risk?
Loved ones may argue over how best to treat you, if you did not specify the level of care beforehand. They may then be stressed out emotionally and financially.
Loved ones may be affected (e.g. children's education and living expenses), you may be forced to liquidate your retirement savings too soon, resulting in liquidity risk
How would you rather your medical bills be paid? You own savings or other people's money?
Ensure you have the following thought out:
You survive and go back to work; Are you prepared for this event? If not, what do you need to do to ensure you won't leave it to chance?
Your loved ones will be very worried, and you might have spent some of your savings on medical treatment. How do you ensure that it does not repeat?
Call your Relationship Manager for a complete review.