Every year, a larger proportion of the Singaporean population goes into retirement.
Most Singaporeans have some rough plans to prepare for this next stage of their lives. Some have cash stashed aside over the years and/or endowments maturing while others have an investment portfolio to add on to their soon-to-be-available CPF funds.
Many decisions need to be made. However, there is no real guidebook that retirees can refer to when they actually reach retirement. What does one do with all this money that has been saved up?
In the wealth management world, insurance products are most often associated with retirement solutions. Annuity plans are a common choice for anyone planning for the golden years.
Annuities make sense, paying out cash monthly for your expenses when you no longer draw a salary. The Central Provident Fund (CPF) Life scheme is an example of such a plan.
While insurance products are a great way of meeting your retirement needs, they tend to be less flexible.
There are different annuity plans in the market. Some plans, known as regular premium plans, require a consistent contribution over multiple years, while others are paid in a lump sum called a single premium. The contribution generates a return, and is paid out to you periodically on a fixed schedule, usually monthly.
Typically, the payments end upon death and the remaining "value" of the plan, if any, would be passed on to your estate. There is usually limited flexibility for you to alter the plan should you decide to stop receiving payouts and leave the money as part of your legacy, or if you need to have a larger payout to fund an emergency.
A growing number of retirees are turning to investments to generate income with traditional bonds which offer consistent coupons as well as dividend-yielding stocks.
Flexibility is a big reason why some retirees have turned to investment portfolios. A growing number of retirees are turning to investments to generate income with traditional bonds which offer consistent coupons as well as dividend-yielding stocks.
Besides the possibility of generating a stable income, investments also offer the flexibility to modify your plans to your changing needs (and wants) in retirement.
Are you willing to take more risks for a higher income? Change your allocation to higher yielding assets.
Need a large sum of cash to help your child with the down payment for his first home? This could be done by liquidating a portion of your investment holdings.
Nevertheless, do note that investing requires you to make investment decisions which can sometimes be difficult. And occasionally, making bad decisions can lead to substantial losses that an investor is not prepared for.
Before you think that this article is a discussion about annuity plans versus building your own retirement fund, I would like to clarify that it is not.
Annuity plans work on the certainty of the payout that has been structured by the insurance company to deliver to you, while an investment portfolio offers you a return based on the performance of the assets. This difference means that diversifying across the two solutions does have benefits.
Using a combination of the two can give you both the flexibility of meeting your changing needs from your investment portfolio, and a base level of income from your annuity plan.
For example, a retiree could use the CPF Life and set aside the Full Retirement Sum of $166,000 to receive around $1,300 a month. This could be supplemented with an annuity plan from an insurance provider for, say, another $1,000, bringing the income to $2,300 a month to cover your basic expenses.
In addition, you could invest in a portfolio that offers you returns of between $1,000 and $2,000 a month for variable expenses. (The numbers are purely to display how you can consider splitting income sources and they do not consider the amount to be set aside or any other income, like rental, and so on, that you may be receiving.)
While part of the solution might be simply choosing an option, like in the case of CPF Life, the more complicated part is how to set up an investment portfolio.
Here are some tips on starting such a portfolio.
ASSET ALLOCATION - CONSIDER SOME BONDS
What kind of asset allocation should you consider for a retirement portfolio?
Typically, a retiree's investment portfolio should be more conservative, looking for income and more focused on preservation of assets, rather than growing assets. Traditional retirement portfolios would be largely invested in fixed income assets (bonds), with a much smaller allocation to stocks.
But many Singaporean investors have been more active in the stock market than in the bond market. This is understandable as, historically, bonds have been less retail-friendly due to high minimum ticket sizes. Furthermore, many investors have also made a decent return on the stock market in the last few years. Hence, the inertia to move away from the stock market can be very high.
It's important to note that the global stock market has been in a bull market over the last eight years and it might be a good time for a soon-to-be retiree to review his portfolio.
While I am not predicting a stock market crash tomorrow or even in the next few years, it is likely that you will experience at least one market downturn in your years of retirement. Since most people would be retired for 20 years or so, history tells us that it is pretty likely that you will experience a market downturn in a 20-year period.
So if you are still a stock-heavy investor in retirement, you may want to review your portfolio and consider adding some fixed income assets to diversify. For those who are finding trouble with the minimum investment amounts of single bonds issues, there is an array of funds in the market that invest in a basket of bonds.
PLAN FOR AN UNEXPECTEDLY LONG LIFE
The average life expectancy of a Singaporean male and female is 81 and 84 respectively. Using 65 as the retirement age, you will need to have a retirement plan for 16 to 21 years.
As these are average numbers, I would suggest that you plan for an unexpectedly long life and also unexpected changes to your health.
The CPF Life ensures that you have some income for as long as you live. For other private annuity plans, many of them help to ensure that there is some contingency payout if you outlive the specified payout period. However, annuity plans may not take into account other cash needs such as healthcare.
As we grow older, it is likely that we will need to spend more on healthcare and we should plan for that as well. Many of us tend to take our health for granted and react only when we fall ill.
Factoring healthcare costs can be a tricky thing as well since the costs usually are for ailments that we would not be familiar with. Therefore, as we cannot predict what ailments we might contract as we grow older, having additional savings and a plan for such changes should be catered for. That's where having sufficient health insurance coverage and some additional savings or liquid investments on the side becomes crucial.
Retirement can be a scary stage of your life. Many of us would have been working for years with a regular salary before retiring, so moving from an earned income to living on your assets is something that most will need time to adjust to. However, with a well-planned retirement, this change can be managed and a great time awaits you in your golden years.
• The writer is Standard Chartered Bank's head of investment advisory, strategy and managed investments.