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The Kueh Lapis Theory of Retirement

Congratulations on becoming a full-fledged adult. Your career is in full swing, and children’s laughter – and bickers – fill your house. The songs that define your youth are now playing on Gold 90.5 fm, and parties end before midnight. You worry more about your parents’ health. And soon, your ElderShield letter arrives.

Each day is a step closer to retirement, and you may have started thinking about it.

Perhaps retirement looks like a never-ending road trip, or riding a Harley Davidson into the sunset. Or perhaps you plan to live simply. Cheap hawker centre meals, the occasional movie date, utilities and telco bills, and birthday gifts for the grandchildren.

It sounds like S$3,500 would be enough for each month. Manageable.

Inflation can lower your returns

But here’s the kicker: even with that modest lifestyle, we will still need to save S$1.05 million if we retire at 65 and live till 90. Not so small after all.

At this point, you may be wondering if S$2,500 is possible instead. No fancy meals, no movies, and if your grandchildren get Happy Meal toys.

Unfortunately, it is still no match for inflation, which shrinks the number of things that you can buy. For instance, S$10 can now buy you 2 Cheeseburger Happy Meals, which means two happy grandchildren. However, that same S$10 can only buy you 1.5 Happy Meals in 20 years’ time, assuming an inflation rate of about 2% each year.

Another aspect to consider is your current lifestyle. If you are used to weekend brunches and expensive holidays, you may need more time to switch to a no-frills mode. The longer transition means you need to set aside even more money.

But it doesn’t have to be daunting.

Use the kueh lapis theory

Think of your retirement needs as a kueh lapis cake, a quintessential local snack that is made up of layers. Each slice represents your monthly needs, and each layer represents the amount that comes from the different retirement savings tools. Your cake will be richer with more layers.

And as you spend more time on the cake, the layers will be thicker from the compounding interest that you earn. As Albert Einstein once said, compounding is the eighth wonder of the world because it helps things grow faster than they originally could.

Now, taking the monthly S$3,500 as an example, your kueh lapis could be made up of these layers:

Base layer: CPF

If you are a Singapore Citizen or Permanent Resident, the CPF Lifelong Income For The Elderly (CPF LIFE) Scheme provides lifelong monthly payouts if you meet certain criteria. You can even choose the type of payout from three plans. Those who qualify turned 55 after 1 May 2016, and have at least S$60,000 in their retirement accounts.

2nd layer: Insurance

Insurance coverage is important because our healthcare costs will rise significantly with age. Some plans provide pure protection, and some provide income on top of protection.

There are plans that are bundled with regular investments, which allows you to invest in a wide range of funds while getting life coverage. Others promise a regular income stream, but with lesser life coverage.

3rd layer: Investments

The first rule of investing is: diversify. The second rule: diversify. The third? Diversify.

Invest in different types of things to spread your risks. For instance, invest some money in equities, and some in safe bonds with near-guaranteed returns.

Invest in different types of companies to get a variety of risks and returns. For instance, buy some blue chip equities, and some penny stocks. Buy some in Singapore, and some from another major developed country.

Invest in expertise, to get a good mix between DIY and professional advice. For instance, you could buy Exchange Traded Funds (ETFs) on the stock exchange, and some professionally-managed unit trusts.

Top layer: Cash / SRS

Always have some money in your savings account. While this money is not going to beat inflation, you will need it for the rainy days, and if your investments need more time to be liquidated. Having spare cash also allows you to invest at opportune moments.

You can also consider participating in the Supplementary Retirement Scheme (SRS). It helps to reduce your current tax bill, and can be used to purchase various types of investments.

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