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Insurance 101: Take Charge of Your Retirement


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(Second in a series)

Imagine a life where you are free from all your responsibilities, where you never have to work again for a living, and you can do what you have always wanted. This life is called retirement. It is a time to be free and live your ideal life. And it is possible but the most important question is: have you planned ahead?

Financial security is the key to a worry-free retirement. To be financially independent, you need to plan carefully and start saving early so your money works harder for you through compounding interest.

With advancements in medicine and improvements in living standards, the life expectancy of Singaporeans is increasing. On average a Singaporean male can live up to 79.6 years while a female can live up to 84.3 years, according to Department of Statistics Singapore. This means we can expect a longer retirement period and we need a steady stream of income for approximately 20 years if you retire at age 62.

But do you really want to work till you are 62? If you do not have a proper retirement plan, who will provide for you in your old age? You may think you can rely on your children. However your children may not be able to render such financial support and even if they can, would you want to give them this additional burden?

As you pass through various phases in life, different needs take priority at different stages. Retirement may seem too far away for young singles. There are immediate needs such as building your career and buying a car. By your thirties, you might have bought a house, gotten married and started your own family. As you approach 40, commitments like caring for parents, children and paying off mortgage loans further delay your retirement planning.

Whatever your life’s concerns, retirement will be upon us one day. Rather than meet it unprepared, take the first step now to ensure a financially secure retirement.

How much do you need for retirement?                                                              

The amount of retirement funds you need depends on the kind of lifestyle you want to maintain. Do you plan to do a lot of travelling? Are there some hobbies that you would like to pursue? Typically you would need at least 70 per cent of your pre-retirement income to maintain your current lifestyle.

A conservative example of your retirement needs based on S$2,500 a month for 20 years from age 62 shows you will need more than S$1 million!

 

Current Age

35

45

Years to retirement

27

17

Retirement funds needed

S$1,105,658

S$822,732

Savings required per month

S$1,618

S$2,567

Assumption: Inflation 3% p.a., Investment returns 5% p.a. & Savings at the end of the month

Funding your retirement

There are many sources to fund your retirement. The Central Provident Fund (CPF) is the primary source of retirement income. Some think that CPF funds are sufficient to see them through retirement.
However, this may not be the case as most Singaporeans utilise their CPF savings to pay their mortgage.

Under the CPF Minimum Sum Scheme, you are required to set aside the CPF Minimum Sum in your newly set-up Retirement Account when you reach 55 years old. You should be aware that this amount
is just sufficient to meet a basic standard of living. When you reach your draw down age, you will begin to draw down from the Minimum Sum that you have set aside through a monthly income paid to you in cash. This will last you about 20 years or until your Minimum Sum is depleted.

At a recent Retirement conference, Mr Tan Chuan-Jin, Minister of State (Manpower and National Development) said: “Only 45 per cent of active CPF members who turned 55 in 2011 met the Minimum Sum requirement to receive the S$1,100 payout for life from age 65 under the CPF Life annuity scheme. This amount might only provide a basic standard of living for households in the lower income percentiles.” If you were to defer your withdrawal at 55, after setting aside your Minimum Sum, you can choose to leave your remaining CPF balances with the Board or withdraw it. If you intend to work beyond 62 or have sufficient cash savings to see you through the initial years of your retirement, you could consider deferring your monthly payouts at 62. This way, you can stretch your Minimum Sum to last you through retirement.

The Supplementary Retirement Scheme (SRS) is a voluntary scheme that allows you to contribute a varying amount to SRS (subject to a cap) which may be used to purchase various investment instruments. While your contributions to SRS help to grow your retirement nest egg, you will also get to enjoy a tax relief for your contribution. Funding your retirement can also come from other sources. If you were to stay with your children, you can generate an income by renting out your home. You could also downgrade to a smaller home. However, property prices may be low and it may take a long time to sell.

To help the low-income elderly living in 3-room or smaller flats, the Housing Development Board launched the Lease Buyback Scheme (LBS). LBS, a 30-year lease term, is a monetisation option that
unlocks part of their housing equity while the elderly still continue living in their homes and receive a lifelong income stream. LBS is intended for those who wish to age-in-place. Hence, the flat owner
cannot sell the flat in the open market or sublet the whole flat. Besides these, you could also dabble with shares. However, this comes with limitations depending on the economic situation.

Health insurance is vital

You have worked so hard to build your retirement fund and are looking forward to your golden years. However, unexpected events like a major illness can wipe out your retirement nest egg. Besides being a
wealth accumulation vehicle, insurance can also be used as a risk management tool.

Critical illness insurance allows you to transfer the risk and financial burden to an insurer. The plan will pay out a lump sum upon a diagnosis with a major illness. It covers 30 critical illnesses, total and permanent disability and loss of life. It is important for retirees to have critical illness coverage. Health costs increase with age, so it is wise to get covered when you are still young and healthy.
You will also need a hospitalisation and surgical plan to take care of your healthcare costs. You may want to consider the “as-charged shield plan” to hedge against rising healthcare costs.

 

(Next week, we will tell you how to enhance your retirement portfolio as we feature Manulife’s retirement products that offer regular stream of income) 

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