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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 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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