http://deluxeforums.hardwarezone.com/showthread.php?t=1278994Dream or nightmare?
Find out how much you need to stash away now to live comfortably when you retire
By Lorna Tan
YOU have been working hard and dutifully putting aside what you hope will be sufficient savings to build a nest egg to ensure a worry-free retirement.
But the grim reality is this: It simply may not be enough unless you take a serious look at your current lifestyle and finances, and have realistic expectations of how much you need to retire comfortably and how long you think you may live.
You may not realise it, but you make choices about your retirement every day. If you buy a fancy car and take an Alaskan cruise instead of settling for cheaper means of transport and a vacation nearby, you will have less to pad your nest egg with.
Last year, a Singapore Management University (SMU) and OCBC Bank study on money management behaviour found that 74 per cent of Singaporeans want to retire before 62, the current mandatory retirement age. Yet, most are ill-prepared for their golden years. For many, there seems to be a significant gap between the level of retirement funds they dream of and their ability to achieve that sum.
This 'retirement gap' was highlighted by the Life Insurance Association (LIA) at a recent luncheon. Based on a life expectancy of 82 - that is, another 20 years after retiring at 62 - LIA president Jason Sadler said savings of at least $250,000 per person would be needed to maintain a 'reasonable' living standard.
This figure was based on the median earnings of Singaporeans of about $2,500 per month. If a person needs 60 per cent of pre-retirement earnings when he retires, this would work out to $18,000 a year or $1,500 monthly.
'Many Singaporeans have the misconception that the money in their CFP accounts will be adequate to meet their needs after retirement. The reality is that many Singaporeans will not be able to have as comfortable a lifestyle as they would like to enjoy in their retirement years if they were depending only on their CPF savings,' Mr Sadler told The Straits Times.
According to a report recently released by the Committee on Ageing Issues, more than half of Singaporeans might not have enough funds in their CPF savings to last through their retirement years. This reinforced the findings of the SMU-OCBC survey, which indicated Singaporeans aged 55 have only about $120,000 on average in liquid assets, including CPF monies.
And even if you are able to satisfy the CPF minimum sum requirement of $120,000, which will be in force by 2013, it will provide retirees with only $950 a month for 20 years - enough only for subsistence living here.
Mr Patrick Lim, an associate director of financial advisory firm PromiseLand Independent, said the modest lump sum requirement of $250,000 is already formidable for many.
And inflation - the rate at which the prices of goods and services rise over time - will affect hard-earned savings, regardless of the kind of retirement lifestyle that a person wants.
Put simply, the value of money does not stay static. Almost without exception, a pile of dollars will represent less spending power later.
Assuming an investment return of 4.5 per cent and a 2 per cent inflation rate for the different age groups, Mr Lim drew up a table setting out how much you need to set aside each month to accumulate the required retirement fund, based on the sum of $250,000 at today's value, when you reach 62. See Table 1.
Based on his calculations, a 40-year-old person would need a lump sum of $146,989 now, or to put aside $850 monthly, to arrive at $387,117 in retirement savings at age 62.
How much do you need to retire?
FINANCIAL planning outfit ipac's director of wealth management, Mr Ben Fok, said even that minimum lump sum of $250,000 cited by the LIA is insufficient for a comfortable lifestyle.
'This may be enough to meet the most basic needs, but it won't be enough if you want to take holidays, dine out or buy gifts for your grandchildren. Furthermore, if $250,000 is all you have and nothing else, then a huge medical expense would wipe off a large portion of your savings,' he said.
Assuming the lump sum of $250,000 is invested for 20 years with projected annual returns of 3 per cent a year, total compounded returns would be $16,809 or $1,400 a month for the 20 years, he said.
To determine how much you will need during retirement, financial advisers say it is important to know what you want to do in your golden years.
Said Ms Anne Tay, OCBC's vice president of group wealth management: 'As a general rule of thumb, you will need about 70 per cent of your last drawn salary at the time of retirement. The 70 per cent figure is recommended to maintain your current lifestyle. If you are willing to downgrade or change your lifestyle, you may need less than 70 per cent.'
Financial planners also highlighted that it is prudent to plan for at least 25 years of retirement instead of 20, after age 62. After all, actuarial statistics indicate that more than 40 per cent of Singapore males are likely to live beyond age 82. As for Singapore females, more than 50 per cent will live beyond 82, said insurer NTUC Income.
The earlier we start saving, the less we will need to save, says Mr Fok.
By working out the different amounts of monthly savings required to achieve $100,000, he said that if you have 30 years before reaching retirement, you will need to save $172 a month with a return of 3 per cent a year over the next 30 years to achieve $100,000.
Of course, this level of savings is simply multiplied by two for $200,000, or three for $300,000, and so forth.
See Table 2, which highlights the importance of saving early.
However, if you have left things rather late and have just five years before retirement, you need to save $1,547 a month, and grow that sum at 3 per cent a year to attain $100,000.
How to bridge the retirement gap?
MR FOK proposes four ways to tackle the gap. First, you can spend less during your working years and save more. The money saved can be invested. Second, you can retire later, at age 65 instead of 62.
Third, you can revise your expectations for retirement and reduce your retirement income, so the capital sum required is not so huge as to be unattainable.
Last but not least: Put your money in more aggressive investments, but bear in mind that investment returns may be volatile, he said.
Mr Lim said one rock-solid way to fund retirement expenses is to buy a participating annuity as it offers a lifetime of guaranteed monthly or annual income, no matter how long you live.
This ensures you will never outlive your stream of guaranteed income.
For instance, a 61-year-old retiree with a single lump sum of $250,000 stands to receive annual payouts of $14,253 annually (for males) and $13,334 (for females) by purchasing an Income annuity plan.
Retirement tips
TO GET you started, here are some tips from DBS Bank and OCBC:
Start retirement planning and saving now, regardless of your age.
Assess the kind of lifestyle you would like during retirement.
Establish a retirement plan. The plan should include your goals, your desired retirement age, the amount of income you will need during your retirement years, and the level of risk in your investment portfolio and strategy to meet your goals.
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