Who’s 28, has just started building a career, but has yet to start saving for retirement? If this is you, you’re not the only one who’s prioritising that designer purse or new car. But here’s why you shouldn’t procrastinate: Retirement will only get more expensive the longer you delay saving for it.
That’s what actress Rebecca Lim, 29, realised. At a recent live dialogue session on the NTUC Income Facebook page, she shared: “I had many good friends who were settling down… And this got me to sit down for a good two, three hours with a financial planner and start planning. She asked me simple –simple but important questions – like what lifestyle I wants to have when I retire.”
Buying an insurance plan is her way of building her nest egg and it has given her peace of mind, she added.
For those of you who were one of those who jumped out of their seat when Rebecca Lim posted on Instagram in February this year that she was retiring, you might be relieved to know that she loves her job and doesn’t really intend to stop working at a certain age. “Maybe I’ll try my hand at directing?” she said with a laugh. In fact, this is the modern concept of “retirement” – one no longer abruptly stops working, but enters a phase where one ventures to experience new things.
Does this appeal to you?
To start planning for retirement, you should think about your objectives first, said Assistant Professor of Finance (Education) Aurobindo Ghosh, from the Singapore Management University.
These three things, to be specific:
– When you would like to get financial freedom, or independence.
– Whether you want to continue with the lifestyle you currently lead.
– What you want to do when you attain this financial freedom.
“The way to get to your objectives is to target, budget, save and get professional advice on an insurance plan you might need and the investment plan that is suitable for you,” he told Alvinology.com in an e-mail interview after the dialogue session.
Speaking to a financial adviser is one of the first steps you can take towards planning your financial freedom. To make sure that you make the most out of your time with your financial planner, do your research before meeting up and ask the correct questions during the session, advised Mr Mark Cheng, editor of MoneySmart.sg and Prof Ghosh’s fellow panellist.
These are the fundamental questions he suggested asking:
– What does a policy cover?
– How much insurance coverage do you really need?
– With endowment plans, what the guaranteed and non-guaranteed portions of the policy? The answer will help you get a better gauge of how they contribute to your retirement goals, and how much needs to be invested and saved.
Thankfully, experts like Prof Ghosh reassure us that preparing for retirement is perfectly manageable. Only 75% of your current income (including both active and passive income) is needed to sustain yourself in the same lifestyle during your retirement, as you would no longer need to save for retirement by that stage. If you are in the habit of saving 40% of your current salary, then you need only 60% of your current income to lead the same lifestyle.
A passive income stream is highly useful for helping to generate some, if not all of that 75%, recommends Prof Ghosh. You can channel your disposable cash into savvy investments – something which we will expand on later.
First, to help you decide how best to start saving, we’ve asked Prof Ghosh and Mr Cheng to tell us the pros and cons of 1) an insurance plan 2) a savings plan 3) or starting an investment portfolio. Here you go:
|Whole life insurance plan||Gives you reliable healthcare coverage, especially if you purchase early on.||End up overspending for policies you don’t need or are sold products that aren’t relevant to your goals.
|Savings plan||Helps you set aside money in a disciplined manner every month, great for amassing emergency funds.
|You might not be able to earn as much as you would by investing that money.|
|Investment portfolio||The best way out of the three to beat the loss of wealth due to inflation or price rise, provided that you have done your research and understood your own appetite for risk and reward.
|You will need to be disciplined and invest over a longer horizon to weather the volatilities of the market.|
As you can see, a combination of the above three would give you a very good start on preparing for retirement.
For someone who has only just started pursuing a career, thinking of retirement can be quite daunting. But not if you know what kind of saver you are. Some of us are better spenders than we are savers. No matter your risk or spending profile, there’s always a way you can make retirement planning work for you.
|What kind of saver are you?||Suggestion|
|A person who saves consistently, but wants to indulge occasionally||Take up an endowment plan in your younger years, which gives you a lump sum payout when your policy matures. When you hit middle age, you can boost your portfolio with a savings plan that gives you the flexibility of receiving yearly cash benefits or accumulating the cash benefits for a lump sum when the policy matures.
|A person who wants to start saving now, but haven’t decided how he/she wants to receive payouts||Consider an endowment plan for your younger years. When you reach middle age, you can either choose a plan which pays out a monthly income when you retire or continue to accumulate for a lump sum when the policy matures.
|A person who wants to enjoy life to the fullest for as long as possible||Get a plan which allows you the option of receiving lifetime yearly cash payouts. This way, you can get a regular yearly income or let your money grow with interest.
|A person who wants to have the freedom of choice||Get an investment-linked insurance product which gives you insurance coverage at the same time. When you hit middle age, boost with an endowment plan.
You are not alone if you haven’t started on anything. But don’t wait too long! Mr Cheng, 32, admits that he “was doing absolutely nothing at the age of 28 to prepare for my retirement… When I turned 30 I realised that if I didn’t get things sorted out soon, it would get progressively way more expensive to prepare adequately for retirement… So I decided to start investing a basic percentage of my salary, as well as buying my own insurance policies as well.”
He also invests some of his disposable income, by buying the Straits Times Index (STI) Exchange Traded Fund (ETF). “It’s a stable long-term investment product,” he said about his decision. It has been two years into his investment timeline.
For those who are interested in investing their money, it is important to note that the value of such long-term investment will only appreciate with a longer timeline.
When asked whether he has seen gains yet, Mr Cheng said, “There isn’t much point talking about percentage gains at this point in time as it’s way too early in my investment timeline, and that being said, given that the market is down right now, the overall value of my holdings is still lower than when I originally started. That being said, I believe that dollar cost averaging is good for average investors who want to invest consistently over a long period of time.”
Investment could be of different types and comes with different risk and complexity, said Prof Ghosh.
“For products based on equity like unit trusts or mutual funds, ETF and common stocks, longer horizon is better as there is more risk involved traditionally. Products that are based on fixed income like bonds the risk is slightly lower as it is high grade corporate or government bonds that are determined by their rating.
“For slightly more sophisticated investors, there are REITs and structured products are available. However, professional advice is often desirable before jumping into more complex products. Markets are driven by sentiments and fundamentals, while sentiments can wax and wane, so does the economic fundamentals.
“However, overall investing is the best way to beat the loss of wealth due to inflation or price rise. The rule of thumb is historically inflation is 3% annualized, so if you can beat that by 1-2% annually (after fees) you have done a good job. Very few investments will guarantee returns, however, chance of losing money when you investment for longer horizon is much lower than for shorter horizons.”
Your portfolio will change with your lifestyle and age, he added. As a rule of thumb, follow the adage “100 minus age” on asset allocation on stocks and the rest would be on bonds or fixed income and cash.
E.g. If you’re 28, you should invest 100 minus 28 = 72% of your portfolio on stocks, and the rest on bonds, in a fixed income deposit scheme or stashed away as emergency cash.
Are you ready to start planning for your retirement, like Rebecca? www.retiring.com.sg is a good place to start reading up bite-sized, useful information that you’ll need to grow your assets.