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Welcome to Part 3 –the final part of the three-part series “Are You Ready for Retirement?”. If this is your first time reading this series, you may wish to read Part 1 and Part 2 first.

Part 2 “Funding your Retirement” explored the CPF funding model as well as the personal funding model. The CPF model is the primary vehicle driving our retirement funding but it is a flawed model in some sense because its purpose of being a retirement account has been subverted by other social purposes of promoting home ownership that has resulted in the “asset rich, cash poor” syndrome that afflicts many of us who aspire to retire well and to live happily after 62 or 65.

The future is not scary if we know the worst case scenario. I don’t know about you but for Panzer, NOT KNOWING what is the worst-case scenario in my future retirement funding IS SCARY to me.

Part 3: Can I truly Retire

It’s a simple question. Yes or no?

Do or do not. There is no ‘try’.

– Yoda, the Jedi Master, “The Empire Strikes Back.”

The “brutal truth” that faces many of us is, “NO”.

You and I would probably NEED to work until 62 or 65 not so much because MONEY is not enough but rather CASHFLOW is not enough.

Why You and I (most likely) cannot retire at 55

The CPF funding model works only if you have amassed CPF monies way exceeding minimum sum (MS) of $120,000. Under existing rules, you can withdraw monies from your special and ordinary accounts if you have more than the MS. In addition, you can withdraw your medisave monies exceeding the medisave MS of $29,500.

If you have already reached MS for both amounts and continue to amass more from now until 55, then congratulations! Potentially you may be able to retire at 55 if your excess over MS can last your living costs from age 55 to 62/65 (7 to 10 years) when the drawdown age kicks in because MS income (for 20 years after 62 or 65) + CPF Life scheme provides you with income for life. No worries.

So if you can live off, say $2,000 a month for next 10 years from age 55 to 65, you would need $240,000 excess over CPF MS. The exact amounts depends on your desired or actual lifestyle expenses and of course the prevailing interest rates, investment opportunities, etc.

This assumes that:

[1] You have paid off your home mortgage and have a roof over head

[2] You have no other debt i.e. car loans etc.

[3] You can live within CPF minimum sum payouts for life

[4] You are healthy and have no major costs

[5] Your children can support themselves

However, one major factor affects our ability to accumulate monies in our CPF accounts beyond minimum sum. That is our residential home. Most people buy instead of rent their own homes in Singapore. This is because property values tend to go up over time (subject to cycles) and it provides one with a hedge against inflation (through saving on paying rental expense for rented housing).  Most of our CPF monies is locked up in CPF as you can use your CPF ordinary account monies to fund your residential home purchase (subject to certain caps).

You will realise by the time you hit 55 years of age that you actually DO have more money than CPF MS and can withdraw it ONLY IF YOU SELL YOUR RESIDENTIAL HOME. Thus, the “asset rich, cash poor” syndrome is due to our personal net worth being locked up in home equity. We can only monetise this to fund our retirement living expenses if we rent out our homes or sell it and downgrade to a smaller home.

Thus, one of the critical factor depending your retirement at 55 or 62/65 is whether you can unlock this home equity. If you are prepared to do it, you actually can retire at 55 or semi-retire, i.e. work a part-time job and downgrade your lifestyle. It is a possibility that can be considered because if your children have grown up or have moved out, this could be possible.

You and I can retire at 55 (or earlier) if…

We discussed personal funded retirement planning in part 2. Let’s say you find that at your current lifestyle, you can live off $2,000 a month (taking the assumptions above, i.e. no mortgage, no debt, no dependents etc), then retirement really is about saving and investing your capital to an amount that generates $2,000 income for life. If you can get a return of 5%, you would need capital of $480,000, about half a million. That’s half-a-million excluding your residential home.

If you get creative and find a place to stay (say move in with parents/children) then, this amount may not be so daunting. If you are in your 40s and intend to retire at 55, you have about 15 years to get your investible capital from whatever it is now to $480,000 in 15 years’ time. If you can get a return of say 5% now, then you would need to save $1,796 monthly for the next 15 years. The amount you have to save and invest now changes depending on interest rate, period and of course the capital you need. Lengthen the period for 5 years to 20 years, you need only $1,168 per month. Shorten it by 5 years and you need to save and invest $2,898 per month.

Life’s uncertainties

The above discussion basically illustrates how it is both POSSIBLE but CHALLENGING to retire at any age earlier than 62 or 65 even if you consider yourself middle-class. I’d like to take a more philosophical look at the whole retirement paradigm by introducing the life’s uncertainties into the mix.

I talked about the assumptions. In reality, there will be aged parents to take care of. We may have had our children later in life and even in our 50s have to support them through school. We may be hit by health issues or career derailment. You and I can plan and plan and plan but life can be full of unexpected events.

Even as the future is uncertain, NOT PLANNING for your retirement is to guarantee that you HAVE TO WORK UNTIL 62 or 65. Even if we assume that your are employed because you have not adequately saved and invested enough for retirement. This would be made worse should there be bouts of unemployment due to restructuring, down-sizing, health-issues, family issues etc. One may literally have to eat rice and salt during that time if MONEY IS NOT ENOUGH.

My take has been to work towards financial freedom and buy insurance to mitigate SOME but not all of the risks. So I buy some whole life insurance and hospitalisation insurance and had some mortgage insurance a while back when my home belonged to the bank instead of me. I take things one day at a time but work daily to move my investible net worth closer to my target towards financial independence. Every day in every way I move that much closer to my target of retiring when I want, how I want.

When there is a target I am working towards, it makes me less anxious about the future and more in control because at least if the worst-case scenarios happen, I am better prepared to SURVIVE it.

Retirement is yours to plan.

Do or do not. There is no ‘try’.

– Yoda, the Jedi Master, “The Empire Strikes Back.”

Be well and prosper.

Related Posts:

Are You Ready for Retirement [Part 1 of 3] - What is Retirement?

Are You Ready for Retirement [Part 2 of 3] - Funding Your Retirement

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• Target Retirement Funds for Short-Term Goals

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Part 2: Funding Your Retirement

Welcome to Part 2 of the three-part series “Are You Ready for Retirement?”. If this is your first time reading this series, you may wish to read Part 1 first.

We talked about what retirement means to us and realise it is different for each of us. What retirement means to you affects how you go about funding it. Part 2 explores how you can fund your own retirement based on your goals and aspirations. Be warned! There will be some tough questions you have to ask yourself about how much you earn, how much you spend and how much you can save and invest. It is not fluffy-lovey-dovey I “think” I can retire but some cool calculations based on your own lifestyle and living standard.

Retirement Funding 101: Weighing Your Options

To retire means to set aside sums of money to provide for your projected living expenses when your paid employment stops. The reality of today’s world of rising inflation coupled with the inherent insecurity of jobs mean that this becomes even more challenging as we look forward to our own retirements. In simple language, “it’s gonna be tough, baby!”

You can tackle retirement funding two ways. The holistic approach would be to examine your lifestyle expenditure needs and project it into the future and then see how much you need.

I will first tackle it by looking at how much you can take out from the system taking the example of an employee who is earning a salary and has Central Provident Fund (CPF) contributions by his employer and his own which is typical for many of us salary-men and women in the Lion City.

CPF-funded Retirement

What is CPF

Your retirement funding through the CPF is actually your own money. Under the CPF system, the employer contributes a portion (currently about 14.5%) of an employee’s wage (subject to montly cap of $4,500) into his CPF account. The employee also contributes 20% of his monthly wage as a form of compulsory savings (subject to cap. of $4,500). The monies are distributed across three types of accounts with your CPF accounts, the ordinary account, special account and medisave account. The ordinary account monies can be used to purchase property as well as for investments subject to caps. The special account cannot be used for property but can be used for approved investments while the medisave account can only be used for hospitalisation expenses, purchasing approved medical insurance or for specified chronic disease management outpatient costs.

Your CPF is your main retirement vehicle since the employer “matches” your contributions into your retirement account. Under the CPF rules, you can withdraw your CPF when you reach 55 years of age. But there’s a catch. By the time you hit 55 by 2013, you need to set aside $120,000 minimum sum (from ordinary and special accounts) and $29,500 medisave minimum sum (from your medisave account) before you can withdraw your monies. The table below illustrates how much you can withdraw when you reach 55. You can also try out CPF’s tool to estimate how much can you withdraw.

CPF Minimum Sum and its impact on you

Now here’s the interesting part, if you DO NOT HAVE the minimum sum of $120,000, you can only withdraw $5,000. This applies for many of us because those who have bought their residential homes would have most of their CPF ordinary account monies inside our home equity. That’s right, you will have $5,000 out of your retirement account at age 55.

The CPF Board does not allow you to withdraw (except for $5,000) your minimum sum below $120,000 (by 2013) but you can invest this minimum sum, i.e. $120,000 or lesser in:

a. A life annuity from a participating insurance company;
b. A participating bank; or
c. the CPF Board.

But wait, here’s the more…

Previously, the CPF Board allowed you to use your property purchased with CPF monies to be pledged to make up for the minimum sum so you can withdraw more. If you have CPF balances (ordinary and special accounts, excluding medisave) from $10,001 to $212,000, you can withdraw up to 50% of the balances with the remainder using your property as a pledge. But come 2013, you cannot pledge your property and would likely be able to only withdraw $5,000 unless you have more than $120,000 in your CPF ordinary and special accounts and more than $29,500 in your medisave accounts.

What happens to Minimum Sum

Your minimum sum can be used to buy a life annuity from a participating insurance company, leave the money with a participating bank or the CPF Board.  These monies will be kept by the respective organisations who will start paying you from the drawdown age - 62 currently but 65 in 2018. Hence, you would need to fund your retirement living expenses from age 55 to 65 (10 years).

This means that you cannot retire at 55 unless you have sufficient money to last you for the next 10 years when the minimum sum payout starts. Current minimum sum of $106,000 if left with NTUC Income Classic Annuity at age 55 will pay you a monthly amount of $634.95 (projected at 2% per annum interest) for life starting age 65. If your CPF monies is the only source of income, can you survive on $634.95 a month? That is the question you need to answer to determine if you need to have MORE or just sufficient at minimum sum. Remember, you still have to fund your lifestyle from age 55 to 65 so it’s likely most of us can only afford to retire at 65 when the annuity kicks in.

If you leave the money with CPF (based on current minimum sum), they will pay you about $910 for the next 20 years, i.e. from age 65-85 before your minimum sum runs out. If you think you will not outlast the average life expectancy, that’s also a plan.

CPF Life (aka Lifelong Income Scheme, aka Compulsory Annuity, aka zhenghu chope your money)

To complicate issues, the Government announced CPF Life Scheme which is a compulsory (i.e. NO CHOICE LAH!) annuity for all intents and purposes. Under the minimum sum, if you opt to leave your monies with the CPF, after 20 years, the payouts will cease and you will be a burden to the rest of tax paying residents if you cannot support yourself. Such a fiscally imprudent situation will prevent the gahmen from buying another batch of F-15 Eagles or develop more high-tech SAF so you must not develop a “crutch” mentality by relying on gahmen (who incidentally did nothing much to put $$$ into your CPF accounts except for occasional top-ups since CPF is YOUR OWN MONEY!)

You are automatically included in CPF Life if you are aged 50 and below in 2008 and have at least $40,000 in your CPF minimum sum at age 55. You need to chose which Refundable Premium (RP) plan which makes a difference to payout and how much you will leave your beneficiary. Generally speaking, if you are live for now and no need to give ah-boy/ah-girl a cent, just go for RP65 where payout will start at age 65. This means you get more payouts but “lugi” or lose if you kick the bucket early as a higher portion of your minimum sum is deducted for the RP and is NOT GIVEN BACK to your estate when you pass away. But if you wish to give as much to your beneficiary, you may consider opting for RP90, i.e. the smallest portion of your minimum sum is locked and your estate benefits from the higher bequest should be pass away. You need to weigh the pros and cons between your lifestyle needs and the thought of letting your own CPF monies go back to the raykat (people) should you be unable to make outlast the CPF Life Scheme.

In summary, the CPF-funded retirement basically requires you to continue working until the drawdown age of 62 or 65 unless you have more than minimum sum and medisave minimum sum in your CPF. The economic reality for many of us working employees is that our properties suck out most of our CPF ordinary accounts and hence, we would have to do our sums to see if the excess over minimum sum can sustain us until the drawdown age occurs. If it cannot, you have to be resigned to work until 62 or 65.

Self-Funded Retirement

If CPF not enough, what is enough?

The discussion about the CPF-funded retirement possibly makes some of you realise, CPF is “Money Not Enough”. So to truly retire, you have to build up retirement monies OUTSIDE of CPF. In order to do that, you have to live within your means, i.e. spend less than you earn monthly, and invest the savings in investments that grow to fund your retirement.

My ideal retirement planning without taking into consideration CPF is this - I would like to retire at around $30,000 per annum. To generate $30,000 per annum, at a realistic 5% returns, I would need to have a capital sum of $600,000. It’s that simple. Of course, the mechanics are more complicated but the concept is simple. Plough back savings, interest, dividends, yields, capital gains into investible capital. Grow that capital to $600,000 and invest in portfolio that yields 5% per annum. There you go, instant retirement!

You can also consider converting insurance plans into annuities as you approach your 50s to 60s as by then your children should have grown up or you would be less concerned about protection. My own take is to start developing my blog monetisation as well as to grow my means in order to semi-retire way before age 65.

Having just finished reading and reviewing my thoughts to “Your Money or Your Life” by Joe Dominguez and Vicki Robin, I realise that the more I simplfy my life and live a frugal AND fulfilling life, I may not need that $30,000 a year. This is because my mortgage has been paid up and thus my CPF is now fully building up as a true retirement vehicle without the encumbrance of having the deductions for mortgage instalments. In addition, as I learn how to cook and live simply, I realise now my small luxuries in life can get smaller with me feeling just as happy knowing I am healthy and my family is happy.

Retirement as an age is increasingly an out-moded concept because it traps us into this time-money trade-off we call the rat-race. It presumes working and working and working until 62 or 65 and then being at the mercy of your payouts from CPF or CPF Life. It’s all right if your working life is challenging, exciting and fulfilling. But not many of us live to work. We work to live.

Right now, I work to live but at the same time with an eye on working to retire because every cent that does not go into current lifestyle funds my future retirement regardless of the retirement age.

What type of retirement funding model would you choose?

Be sure to check out part 3 - Can I Truly Retire where Panzer examines the reality facing many of us by complicating the entire retirement issue by the assumptions we hold from now until the retirement age/amount/time.

Be well and prosper.

Related Posts:

Are You Ready for Retirement [Part 1 of 3] - What is Retirement?

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Part 1: What is Retirement?

Retirement means many things to many people. If you make reference to Wikipedia, they describe “retirement” as:

Retirement is the point where a person stops employment completely. A person may also semi-retire and keep some sort of retirement job, out of choice rather than necessity. This usually happens upon reaching a determined age, when physical conditions don’t allow the person to work any more (by illness or accident), or even for personal choice (usually in the presence of an adequate pension or personal savings)…

Some see retirement as an age. “When I reach 55, 65, 67…”

Some see retirement as a place. “When I reach retirement…”

Some see retirement as an amount. “When I make enough to retire…”

So what, really, is retirement about? You can see from the above examples that retirement means many things to many people and is dependent on the circumstances that varies from person to person. Those who are on government pensions see retirement as an age when they qualify. If you are on the Central Provident Fund (CPF) system where your employer contributes along with deductions from your salary into your retirement account, then it is an amount as well as age as these two determines when and how much you can draw when you stop working. Those who are able to self-fund their retirement from personal savings and investment and who are truly financially free can retire when they hit their targets for having sufficient passive income purely from investments.

This is important because retirement is NOT THE SAME for everyone. Your subsequent decisions on how you are going to fund your retirement would vary based on what is your situation.

1. Retirement as an Age

This is the most common reference you use when talking about retirement. When you are in your teens, retirement is an alien concept and does not register on your conscious mind. When you are in your 20s and have just started working, retirement is when you see the older staff in your organisation being given a send-off (or not) when they hit 60, 62 or 67 as the case may be. When you hit your 30s and are coming to 40s, retirement becomes more serious as it’s likely your parents would have retired or semi-retired and you would have to juggle career, providing for your family and planning for your own retirement needs.

Age seems to be the predominant factor in deciding when we retire because firstly, many of us are on the CPF system where you can only withdraw some of your retirement savings after age 55. According to the CPF, you can withdraw your CPF monies if you have met the minimum sum requirement AND the Medisave minimum sum. These amounts will be $120,000 by 2013 (Currently $106,000 from 1 July 2008) for minimum sum AND $29,500 (currently $14,000 from 1 Jan 2008) by 1 Jan 2013 for Medisave minimum sum. Hence, you effectively have to have $149,500 (in 2013) being locked up by the CPF at age 55 unless you emigrate (leave Singapore or West Malaysia permanently) or are permanently incapacitated.

The other age is 62 (or 67 by 2013) as the draw-down age. That is the age which you can actually start getting monies from your own retirement funds. I will discuss more on this in part 2 on funding your retirement.

2. Retirement as Place (in your mind)

It is a place in our minds. Retirement conjures up images of sitting relaxed near a beach, watching the waves and taking in a tan while sipping your martini (shaken, not stirred). It is anything BUT your day-to-day grind in your workplace or office. It is about doing what you want with the time that you have without worrying about providing for day-to-day living expenses.

3. Retirement as an Amount

If you intend to self-fund your retirement outside of the CPF system, then you may be working towards retirement as an amount. The concept in theory is simple. Earn and save enough investible capital so that investment returns (%) x investible capital (amount) >= (more than or equal to) your living expenses. Then you are truly free. The beauty of this definition of retirement is that it is not time dependent. If you buy a lottery ticket and hit the $1 million dollar jackpot, then a 5-6% return gives you a cool $50,000 to $60,000 in passive income that is decent by most standards.

What is retirement to you?

For many of us, we realise that retirement is a bit of all of the above three concepts. We know it is about an age because we trade time (in working our jobs/careers/business) for the money we save in our retirement accounts to fund it. It is also an amount because the more you earn now and save and invest, the more you will have to retire on later.

My journey towards financial independence and to reach financial freedom makes me realise that retirement as an amount is a more powerful concept as it opens up your mind to the possibilities of earning more, saving more and investing more in order to accelerate the build-up of retirement income at an earlier age that the statutorily defined 55, 62 or 67. Given the dearth of company or state funded pension plans, the burden of providing on retirement in Singapore falls on the shoulders of you and I. We need to fund our retirements. As the oft-quoted saying goes, “There’s no free lunch”, especially in the Lion City.

Join me in Part 2 where I drill down to the nuts and bolts of getting at how you can fund your retirement.

Be well and prosper.

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