https://www.straitstimes.com/business/invest/plan-for-a-good-retirement-this-new-year
2023-01-01
Many of us are very diligent about furthering our careers, but when it comes to managing our money, procrastination is often the order of the day.
Yes, it can be quite a chore to come up with ways to make your money work harder and most people usually give up after a while. Let’s be honest – everyone wants more money, but it can be incredibly tiresome to search for suitable financial options.
Since it’s the start of a new year, here are a few practical money resolutions for you to consider. These tips won’t make you rich, but they can help to ensure that you always have enough money. After all, financial planning is really about reaping what you sow.
A tip for those in their 20s and 30s
I wish someone had told me about this when I was at this age and since I missed this particular boat, I want to share this tip with young adults: Make better use of the Special Account (SA) in the Central Provident Fund (CPF).
Contrary to popular belief, many young people don’t mind stashing away money for retirement; it’s just that they have been looking at the wrong product. An entrepreneur in his early 30s recently noted how he dutifully contributed to his Supplementary Retirement Scheme (SRS) account to save on tax, but made no contribution to his own CPF accounts.
Like many of his peers, he didn’t think of CPF in his planning because of the wrong perception that he wouldn’t have ready access to his funds. Yet he has no qualms locking up his funds in the SRS, which he then uses to invest in 30-year bonds, earning just 1 per cent to 3 per cent a year.
As the name suggests, the SRS is meant to serve folks who have maxed out their CPF contributions so that they have another avenue to save and get tax relief. It was never meant to replace CPF, which is a far superior retirement planning scheme.
For instance, you can get the maximum $8,000 tax relief by contributing to your SA every year, and another $8,000 if you contribute to a loved one’s SA. Unlike money in the SRS, which earns only 0.05 per cent, every dollar in the SA earns 4 per cent annually, on a compound basis; so even the accumulated interest earns 4 per cent.
The only catch is that you can’t do this forever – if the amount in the SA hits the full retirement sum, which is $198,800 in 2023, you can’t do any more top-ups.
So it pays for all young workers to try to hit the maximum ceiling as soon as possible. For instance, if you do so by 35, you will have at least $435,000 in your SA at age 55, while those who hit this by 40 will have at least $358,000.
Such amounts are uncommon today. If you have the foresight to top up your SA to the maximum early, you stand to have about $1 million or more in CPF by 55, because the monthly contribution from your employment income will also add significantly to this retirement saving.
This is not a pipe dream but a sure-fire plan to accumulate cash with zero risk as the CPF is backed by the Government, unlike the SRS, which is operated by the private sector.
Two tips for those in their 40s and 50s
With interest rates shooting up, making lump-sum payments to reduce your mortgage with spare cash or excess CPF funds should be something to consider.
The sooner you clear your mortgage, the faster your retirement savings can grow.
Some people think that a housing loan is a “good debt” as you can invest spare cash to earn more. This may not be prudent when higher interest rates are eating into your monthly expenses and the market outlook is uncertain.
So reducing your exposure is still a safer bet, and you can make adjustments based on your affordability.
There is a reason why it is better to put the mortgage behind you by your 50s, because there is another $300,000 that you need to raise, or about $600,000 for a couple, so that you can take part in a special retirement scheme that pays decent lifelong monthly income.
The full retirement sum – $198,800 in 2023 – will be deducted from your CPF at age 55 so that you can join the national annuity scheme, CPF Life. This sum will allow you to get about $1,600 a month from age 65, but you can choose to receive $2,400 monthly if you join the higher tier by topping up to the enhanced retirement sum, which is $298,200 for 2023.
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You don’t have to do everything by 55 if you do not have sufficient funds; you can make gradual top-ups, either with your CPF or cash, at your own pace as the scheme is an inclusive one.
It pays to be able to retire with a stable income of up to $28,000 annually, or $56,000 as a couple. This goes on for as long as you live – by age 85, you would have received $560,000 in total, or over $1.1 million as a couple.
As a comparison, private annuities may charge you $1 million each, if not more for similar payouts that may not even be for life. So make sure you don’t miss out on the good deal that CPF Life offers for citizens and permanent residents only.
Three tips for seniors
A reader in the United States related a tragic tale involving her father, who is in his 70s. He lost over $1 million when the US stock market plummeted in 2022 and out of desperation to recover, he lost another $700,000 – comprising $500,000 of his remaining life savings and a $200,000 loan – when he unwittingly invested in a foreign exchange trading scam.
All of us should know that we invest to have a good life, and not risk the good life to invest. Once you have retired, you should preserve wealth and avoid risky investments at all costs.
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Some banks offer fixed deposits of up to 4 per cent interest now and this is not something to scoff at because your money there can only grow and will not disappear.
You should also take a close look at all your insurance policies – now that you have retired, you may not want to continue paying premiums for some life policies that can be cashed out.
If you want to leave something for your beneficiaries but are hard-pressed to keep up, you should consider transferring the policies to them.
Finally, all seniors should not delay in appointing trusted people to act for them before losing their mental capacity due to old age or illness.
You can use the Office of the Public Guardian online system to create a lasting power of attorney, or a legal document for your representatives to act for you. You should also see a lawyer if you do not have a will or if you have specific instructions.
Ultimately, this is what meaningful new year resolutions should be – make your plans early so that your journey through life will be smooth and pleasant year after year.
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