Growing up, my idea of retirement looked something like this: “I will study hard, get a good job, and then work hard until I can retire”.
I also noticed that some people, despite having only an average salary, were able to reach retirement even earlier than their peers who earned the same amount or more.
However, there was something amiss in my naïve, over-simplified notion of retirement.
If you have not spent time sitting down to take a real hard look at your finances and to work out a well thought-out financial plan, do not worry as you are not alone.
It is estimated that 45% of Singaporeans have not started planning for their retirement and that some eight in 10 Singaporeans still underestimate the amount they need for retirement by 31%.
The question is, how much do we need before we are ready to retire in Singapore?
In fact, street surveys have reached no consensus on this amount.
Instead of targeting a magic number that we need to attain before we can retire, a better method is to ensure that your monthly income exceeds your monthly expenses.
This is done for one simple reason.
The amount we need to sustain ourselves through retirement depends greatly on how long we will live.
There is a problem, though.
Estimating how long we will live is close to impossible.
Therefore, we may exhaust our financial resources should we end up living longer than we initially planned for.
And after doing some research on retirement planning, I learnt that we should map out financial targets we want to hit.
At the same time, we should also map out the exact steps we need to take to get there.
By doing so, we can then accelerate our journey towards retirement.
But, you may ask yourself, how can I receive income when I am not working?
Here are the six possible income sources you can have when you retire.
CPF Life
To ensure we have enough to tide us through our retirement, all Singaporeans are automatically enrolled into a life annuity scheme known as CPF Life.
This is how it works.
By contributing a lump sum at the age of 55, you will enjoy a stream of passive income every month from the age of 65.
Depending on the amount you contribute at age 55, the payouts you receive will vary accordingly.
As of 2023, the maximum payout you can receive under CPF Life is S$2,370 every month.
And that is provided you top up your Retirement Account till it hits the Enhanced Retirement Sum of S$298,200.
The Retirement Account is formed when you hit 55 and comprises the total of your Ordinary and Special Accounts.
In addition, you will be given three plans to choose from – Basic Plan, Standard Plan & Escalating Plan.
Each of these plans structures the CPF Life payouts differently.
Therefore, you should choose the appropriate plan based on your needs and preferences.
However, S$2,280 per month may seem too little to live on, especially if you want to treat yourselves when you retire.
Therefore, to complement your CPF Life payouts, you may consider getting a private annuity plan.
Annuities
Essentially, an annuity plan works the same way as CPF Life – you contribute a lump sum at the beginning and receive payouts after a waiting period.
However, unlike CPF Life, there are several features that you can customise.
For example, you can choose the age you want your annuity payouts to start, as opposed to CPF Life where the earliest payout age is 65.
Therefore, getting an annuity may be useful in generating monthly income if you plan to retire earlier than 65 years old.
There are also annuity plans that allow you to reinvest the monthly annuity payouts if you don’t immediately need the money.
Doing so will allow the payouts to compound so you can receive a higher payout when you eventually retire.
There are many different annuity plans available, each having their own customisable features.
Some of the companies that provide annuity plans include AIA, Aviva, Manulife & NTUC Income.
Fixed income securities
Fixed income securities are debt instruments that pay a fixed amount of interest (called a “coupon”) to investors.
These include government and retail bonds and treasury bills.
The most popular investment among fixed income investors are the Singapore Savings Bonds (SSBs).
The issuer of SSBs is the Singapore Government, which is accorded a strong “AAA” credit rating.
At the bond’s maturity date, there is a legal obligation for the bond issuer to repay the principal amount.
That means to say that it is almost impossible for investors to incur capital losses, making it a suitable investment tool for investors with low risk tolerance.
Furthermore, in the current high interest rate environment, the coupon rates of the recent SSB tranches are higher than the historical average.
That is another reason why SSBs have become a very popular investment recently.
SSBs are useful instruments for preserving capital while generating a stream of regular income.
Dividend stocks
Next, we move on to the fourth income source – dividend stocks and real estate investment trusts (REITs).
Dividend investing is especially popular among Singaporeans and a commonly used passive income strategy.
This also comes with good reason – Singapore does not impose any income tax on dividends, whereas if we were to invest in US stocks or ETFs, we will incur a 30% withholding tax.
Some dividend stocks and REITs that have been paying consistent dividends to its shareholders include DBS Group (SGX: D05), OCBC Ltd (SGX: O39), Mapletree Industrial Trust (SGX:ME8U) and CapitaLand Ascendas REIT (SGX: A17U).
Unit trusts
If you invest in a unit trust or fund, your money is pooled with money from other investors and invested in a portfolio of assets according to the fund’s stated investment objective and investment approach.
Before buying a unit trust, you should ensure that the fund’s investment strategies and risk-return profile are in line with your own financial objectives.
You should also look at the unit trust’s expense ratio to find out the level of fees you are paying the fund manager.
Investing in an income-generating unit trust such as AIA’s Global Dynamic Income Fund can be another way to generate passive income.
This is because the fund pays out regular dividends.
The greatest advantage of this method is that it allows you to effectively outsource your portfolio management to institutional investors.
This benefit is attractive for those who prefer to spend time on other things, especially during retirement.
Rental income
Last but not least, rental income is yet another income source we can enjoy during retirement.
Indeed, property is an effective retirement tool as it churns out a consistent stream of rental income every month.
However, there are some drawbacks when it comes to renting out property as a retirement income source.
For instance, if you intend to rely on rental income for your retirement, you must be prepared to put up with problematic tenants.
You also need to regularly maintain the property and address any issues that tenants raise.
When the property market is down, there may also be periods when you are unable to sub-let your unit, resulting in barren stretches without income.
Final Thoughts
Rather than procrastinating, all of us should start planning and taking action for our retirement today.
This is so that when we retire, we can have a peace of mind that our finances are well-taken care of.
Disclosure: Ryan Yap does not own any of the shares mentioned.
