Common Instruments To Build Up Retirement Nest Egg In Singaprore

In our previous article, we divided our retirement into 3 stages according to the life trajectory of most Singaporeans. That is:

Stage 1: age 55 to 64 ("Semi-Retirement")

Stage 2: age 65 to 74 ("Full Retirement")

Stage 3: beyond age 75 ("Post Retirement")

We briefly analysed the changing financial needs and some problems we could face at each stage, as well as the implications on our retirement planning.

This article continues the discussion by introducing 3 common financial instruments used to accumulate retirement savings in Singapore, their respective characteristics, and how they could help us to navigate and meet the financial needs as we come to the different retirement stages.

Instrument 1: CPF LIFE - Laying The Foundation

In Singapore, CPF is the cornerstone to most people's retirement savings. It is also often the basis for further planning.

When a Singapore citizen or permanent resident reaches the age of 55, the balance in his CPF Special Account and Ordinary Account are pooled together up to the Full Retirement sum into the newly created Retirement Account. In addition, you have the choice to further replenish your Retirement Account up to a maximum limit called the Enhanced Retirement Sum.

If you are born in 1958 or later and have at least $60,000 in your Retirement Account 6 months before reaching the age of 65, you will automatically be enrolled in the CPF LIFE Scheme and start to receive a lifetime stream of income from age 65 (or a later age at your choice). Hence, CPF LIFE addresses Singaporeans' financial needs mostly at Stage 2 and 3 of retirement.

The more money you have in your Retirement Account, the higher the monthly payout you can get, as illustrated below (assume choosing CPF LIFE Standard Plan):

Depending on your preference, you can choose from 3 options with different payout strategy, namely the Standard Plan, the Basic Plan, and the Escalating Plan. Among them, the Escalating Plan provides monthly incomes that increase by 2% year on year. This could be especially useful to offset some of the eroding effects of inflation. 

It is also worth noting that CPF is one of the very few instruments in Singapore that offers you a guaranteed interest at a decent rate. 

Instrument 2: Annuity Plan - Providing Additional Income Stream

An annuity plan is an insurance savings plan that gives pay-outs at regular intervals within a specified period. Similar to CPF LIFE, an annuity plan provides us with a stable stream of income.

An annuity plan differs from CPF LIFE in the following aspects:

1. You can start to receive income from CPF LIFE at age 65 earliest. However, there is flexibility for you to choose the pay-out age of your annuity plan.
2. CPF LIFE provides lifetime income, while an annuity plan can provide income for a specified number of years or for lifetime, depending on your preference.
3. Interest rates CPF deposits are fully guaranteed. While the return of an annuity plan has a guaranteed and non-guaranteed portion. The non-guaranteed depends on the participating fund performance of insurance company.

Because an annuity plan is more flexible than CPF LIFE, there are some who would draw funds out of their CPF when they reach age 55 and use the money to get an annuity plan that can supplement their retirement expenses as there may be a possible drop in our income level during the Stage of "Semi-Retirement).

An annuity plan can also be used to supplement the monthly income we receive from CPF LIFE in Stage 2 and 3 of retirement. Assuming you reach age 55 this year, the amount of monthly income you can receive under the Standard Plan, even if you have maximised your Retirement Account, is only $2,080. It clearly falls short of the amount that most Singaporeans would need for their ideal retirement lifestyle.

Some annuity plans also provides additional income in the case of severe disability. This is especially useful when you purchase a lifetime annuity as the chance of becoming severely disabled gets higher and higher as you age. Upon suffering from a severe disability, your monthly expenses may increase hence this may be a good feature to have in your plans that you are using to meet your retirement needs.

Instrument 3: Investment - Boosting Return And Flexibility

Compared to CPF LIFE and an annuity plan, investing could potentially boost our nest egg at a much faster rate. 

By investing in stocks or unit trusts, we are no longer subjected to the pre-determined interest rates or policy returns. Instead, the return now depends on the real market values of the assets we invest in, and is likely to be higher than what we can get from CPF or annuity insurance. As a reference, fixed income unit trusts that invest in high-grade bonds normally generates an average annual return of 3-5%, while more aggressive equity unit trusts could give us an average annual return of about 6-10% in the long term.

For younger people, they can afford to invest with a more aggressive portfolio to earn higher long-term returns, because of their very long investment horizon. For people approaching retirement age, however, it is advisable to switch to a more conservative strategy so as to preserve the retirement funds accumulated.

For people not well-versed in the financial market, or lack the time to constantly track market movements, unit trust is usually a friendlier and simpler option than stocks as your investment is managed by investment professionals. Unit trusts also require less capital to start with and are often less volatile than stocks. 

Investing in unit trusts or stocks also gives you much greater flexiblity than CPF LIFE or annuity plans, as the lock-in period is often much shorter or none at all. As a result, investment assets could be helpful in meeting unexpected needs during retirement. By investing in stocks or unit trusts that pays stable dividends, we also get an extra source of income stream on top of CPF LIFE and annuity plans.

Last words: Meeting Needs at Different Retirement Stages

In "The 3 Stages of Retirement" article, our financial needs at different stages of retirement can be summarized as follows:

• "Semi-Retirement": to compensate for possible drop in income
• "Full Retirement": to obtain a stream of monthly income that can sustain our desired retirement life
• "Post Retirement": to have more income in order to counter inflation and deal with a possible increase in medical expenses

As have discussed in this article, CPF LIFE is important in laying a foundation in preparing us for the "Full Retirement" to "Post Retirement" stage. On the other hand, annuity plans and investments can help us fill the gap during the "Semi-Retirement" stage, make up for the deficiency during the "Full Retirement" stage, and substantially increase our funding for the "Post Retirement" stage.

As we plan for retirement, we must take into account the current life stage one is in, the financial situation, desired retirement income as well as risk tolerance, so as to choose and match different financial tools to achieve our retirement goals.

If you are keen to explore, feel free to drop us a message on our blog or on our Facebook page. Our experienced consultant will get in touch with you soon :)