Wednesday, 13 May 2015

How to plan for your retirement

Step One: Decide how much you need on an annual basis.

This will be easier when you are closer to retirement. However, you need a figure to work with when you are younger, cos retirement planning should start as early as possible.

So this is the first problem.

The second problem is that you can only think in terms of today's dollar. Today, Chicken Rice costs $3.50. In yesteryears, it was $1.00 or $1.50. By the time you retire there may be no chicken rice. Or it will cost $8. Or $10. So whatever you estimate you need would be in today's dollar. Factor in 30 - 40 years of inflation, and you have no way of knowing how much inflation would have affected the amount you need.

So you should just give up trying to plan your retirement. With your luck, there may be no retirement in your lifetime anyway.

The End.

Still here?

OK. ignore what you cannot control and control what you cannot ignore.

In terms of today's dollar, how much do you need for

a) Food
b) Utilities
c) Transport
d) Entertainment
e) Medical/Healthcare
f) Social Commitments

Food: $10 a day, $300 a month, $3650 a year. Mix of eating out and cooking at home. Got more expensive tastes? $3650 not enough for Buddha Jumps Over the Wall everyday? like you are accustomed to? Fill in your own number.

Utilities. This include Water, Power, Gas, Mobile Phone, Property tax, SC&C, and Internet Access. $200 a month, $2400 a year. (Assuming you are living in a HDB flat with a Annual Value up to $13,000 and paying concessionary, owner-occupied 4% property tax which would be about $200 (or less) a year. If you live in a property with an annual value higher than $13,000 you may have to provide for property tax separately. If you have private property, you definitely have to. I do not know how much your tax is.) Enough? Too little? Think you need a high-speed broadband? Maybe if you are retired, you don't need a premium connection? A basic internet connection might be sufficient for your needs (porn)? Same for your mobile plan? When you're old, nobody will call you. Trust me. Maybe switch to pre-paid?

Transport. Walk. Everywhere. You're retired. You have time. And it's good for your heart. $0.
Ok, depends on where you need to go, how often, whether you have a car, whether you take cab (for medical reasons) or take the bus and train. Base assumption for public transport - $5 a day, $150 a month, $1,900 a year (rounded up). Get the senior citizen concession for public transport (I don't know how much that is). If you have a car, sell it. You're retired and can't afford it. If you can afford a car in retirement, you are probably very rich and do not need to plan your retirement and so you do not need to read the rest of this post. If you are NOT rich, but deluded and think you can afford a car when you are retired, you should not read the rest of this post either.

Entertainment. Another item subject to personal circumstances. If you spend $20 a week to watch movies - $1040 a year. If you need to visit a prostitute once a month... work it out yourself. I am out of touch with current rates. And the premium for your specific kink. If entertainment for you is going to the casinos, I don't know what is your betting and lost limits so you have to work that out yourself. I'm using the $20/week movie watching as a baseline for estimates because that's what I know. Maybe you like prawn fishing and go regularly. Maybe you spend $20 a week prawn fishing. Or maybe you would spend more, but because you have no income, you limit yourself to $20 a week.

Medical/Healthcare. This includes vitamin/herbal supplements, toiletries & cosmetics, personal hygiene stuff. Basically, anything you can get from Watsons or Guardian. If you have long-term medication for diabetes, hypertension, high cholesterol, asthma, chronic pain, etc, you will know how much you need to spend. If you need Viagra/Cialis/Levitra, you can either list it here, or under Entertainment. If you have a family history of one or more chronic illness but you currently do not have it, you can either hope you never get it, plan your lifestyle to try to avoid it, or just provide for $30 to $60 per month per chronic illness. Say you plan for 1 chronic illness (your grandma has diabetes, though you and your parents currently don't), and $20 per month for oral hygiene, hair products, and toiletries. Too little? Top up with whatever you're paying for that premium hair restoration product (minoxidil? Rogaine?). So call that a basic $80 per month, or about $1000 a year. You will also need to pay for your Medishield Life premiums, but I will assume that you have enough in your Medisave to cover that. I will also assume that for minor medical emergencies, your medisave can cover the co-payment.

Social Commitments. This can be time and money spent with your mahjong kakis, or your foodie group, or your beer buddies, or your go-up-to-segamat-for-durians-every-year group, or your LAN gaming group, or your "old footballers never die, they just sit around and tell stories of the good old days while drinking Tiger" gang, or if you're Chinese, the ang pows you have to give to the little parasites, I mean children, of your relatives. Or your adult unmarried relatives (parasites!). Of course, being retired and having NO income, you are fully justified in giving $2 ang pows. If this means that they won't visit you next CNY, all the better, no? Again, hard to estimate. Say $100 a month or $1200 a year. (But will depend on how many para..., children your relatives have. Or you can just budget $1200 and give less if there are more children. $0.20 ang pow!)

So $3650 + $2400 + $1900 + $1040 + $1000 + $1200 = $11,190.

Total: Approx $11,000 or slightly less than $1000 a month for a rather basic standard of living. Without a car (if that is important to you). You should also have a few thousand dollars for emergencies - household emergencies like plumbing, electrical, or fire emergencies, or medical and health emergencies like surgery. If this is not spent by the time you die, it can be "coffin money". About $6,000.

What is your "must-have" expenses?

I have not included rental/mortgage or accommodation and assume that you own your own (and only) flat (HDB) and the property tax is $200 or less and is covered by the utilities. If your property tax bill is significant (say, more than $200) then you should provide for it separately. If you expect to have an outstanding mortgage at retirement, account for it separately.

Full CPF Life is intended to try to provide about $1200 a month. It should be sufficient, but you may have other expenses, or your expenses may be higher than the estimates above.

[Can you meet the minimum sum? Check here.]

How much would you need to have saved up to retire?

That's the next step.

Step Two: Decide how much you need to have saved up to provide for your retirement.

Actually, I skipped a step. You should also decide when you intend to die. But that's just morbid. So I'm skipping it.

Instead, let's assume that after you retire, you will live on for 20 years.

So having decided that you need about $11,000 a year, for 20 years, you will need to have $220,000 saved up before you retire. Then you can retire for 20 years.

If you plan well, you will drop dead exactly as you spend your last cent.

If you need about $1000 per month, then the minimum sum ($161k) and CPF Life will provide you with $1200+ per month for life. This is lower than the $220k you would need. The only hitch is that you put $161k into your RA at 55, but you only draw down on it at 65. so you can only retire then.

(If you put in $161k at 55, it would grow to around $240k to $250k when you are 65, based on the prevailing interest rates for CPF.)


If you only have basic needs for a basic retirement (i.e. $1200 or less per month), and you intend to count on CPF Life to cover you from age 65, you should be fine.

So what if you want a little more? Or you want to retire early?

Well, CPF may be offering 3 tiers of CPF Life - Basic (about $700), Full ($1200), and Enhanced ($1900) from the recommendation of the advisory panel. You can go with the Enhanced Life and that would mean having about $240k in your CPF at 55. Or topping up to $240k.

Optional Step A: Early retirement

What if you want to retire early, say at 55. That means you have 10 years of no CPF Life to cover you. As above, you need to cover 10 years of expenditure so 10 years X $11,000 = $110,000. Say $120,000 for contingencies.

That's a conservative estimate.

My view is that from 55 to 65, most people would still be quite active and not quite ready to slow down. You may still want to travel, still have active social lives, and still have expenses for "necessities" (a.k.a. "Luxuries") that you are accustomed to.

Now that you are retired, you may want to travel. A lot. You used to travel once a year. Now you go on 4 holidays at year. Each time costing about $5,000. Total $20k. $11k is not going to be enough.

You have an active social life in Singapore - dinners, drinks, clubbing - $2,000 a month, $24k a year.

Your hobbies are expensive - Scuba-Diving, Sky-diving/Body flights at iFly, sailing, rearing Arowanas, whatever. Say $10k a year? $30k?

Say you like to travel, and now that you are retired, you intend to double you annual travel to twice a year, and you budget for $6000 per trip or $12k a year. And this is your only luxury. Your annual expenses are now $24k so for every year of early retirement you wish to enjoy, you probably need $24k. So for a 10 year early retirement, you will need $240k.

So you think, "I don't have that!"

So you check and say you find that you have $50k (somewhere) - that's good for 2 years of pre-retirement. And you are 55. If you save another $24k by 62, you can have a not uncomfortable 3 year pre-retirement. That's saving less than $3k a year. Doable?

Which brings us to the next step.

Additional Step B: Crossing from 62 to 65.

This "option" is not really an option. More of a consideration or additional step. Today, the Retirement Age is 62. However CPF Life only kicks in at 65. What are you going to do for those 3 years?

[Real answer? Nothing. Certainly the government is aware of this "gap", this hole in their policy. They are "plugging" this gap with "re-employment" initiatives.]

Hopefully, you can be re-employed.

Better yet, you should have save enough so you can travel the world for 3 years.

Yeah, right.

This is the real problem. The official solution is "re-employment". The problem with this "solution" is, it's not for everybody. Not every job is suitable for a 62+ year old. Not everyone past 62 is still employable, or wants to be working. But if you are reading this, I believe you may be in a job that might be possible to be re-employed.

A "semi-official" answer is - draw down on your CPF. If you have $200k at 55, and $161k is for CPF Life, you have $39k to tide you over from 62 to 65.

Which means your 55 year target is at least $200k, not $161k.

For a basic standard of living. Probably quite comfortable, but not very secure - any minor crisis could derail your plans.

The coming MediShield Life should provide SOME security, but at this point it is hypothetical. I do not know if it would work the way it is intended. If it does, it would be a great relief.

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