Singapore retirement 101
Lifestyles and the cost of maintaining them into retirement, vary widely from household to household. Nevertheless, it is said that in order to retire comfortably, most people will probably need an income equivalent to between 70% ~ 80% of what they earned while in employment. In addition to the basics of food and utilities, income will need to cover other expenses including transportation, medical, and entertainment. A lot of the time, a mortgage or home loan will have been paid off prior to, or around, retirement.
The average Singaporean starts to save for his or her retirement at the age of 38, and the age of retirement is set at 62. All employed Singapore citizens and permanent residents, pay into the mandatory Central Provident Fund (CPF), which is one of the oldest government pension schemes in the Asia. The Fund covers medical care and savings as well as retirement funding, and the retirement account enjoys the highest fixed rate of interest of 4%. Contributions range between 5 ~ 20% of employee salary. This year, the government implemented enhancements to the CPF system so that rather than the previous "Minimum Sum", there are now three retirement sums to choose from – Basic, Full and Enhanced Retirement Sum. This clearly gives Singapore citizens and permanent residents more flexibility in retirement planning.
As with many governments operating pension schemes around the world, the Singapore government encourages further savings for retirement using a separate voluntary scheme with attractive tax incentives. The Supplementary Retirement Scheme (SRS), which is run by the Ministry of Manpower, works alongside the CPF. It allows the members to contribute a varying amount (subject to a cap) at their own discretion. The contributions may be used to purchase various investment instruments. Not only are contributions to SRS eligible for tax relief, but investment returns are accumulated tax-free, and only 50% of the withdrawals from SRS are taxable at retirement (referred to as a “50% tax concession”). It is always recommended to save as much as possible using tax-efficient vehicles, and the SRS is one such.
So let us assume that you have diligently contributed the maximum to your CPF, and have fully utilized your SRS cap, and are looking for an additional savings vehicle for retirement. One simple and low-cost option would be to via the purchase of an STI exchange traded fund (ETF), and thereby up your exposure to the stock market. This choice of an ETF would be best suited to someone who is not unduly bothered by the vagaries of the stock market, and is happy to take the long term view. A regular monthly savings plan would give the added benefit of dollar-cost-averaging. In the not so far-off past, the majority of financial advisors would have advocated a switch out of all stock exposure when getting closer to retirement. These days, however, the ageing of the Singapore population means keeping savings in stocks for a longer period of time, is probably quite prudent! Moreover, while foreign residents are not able to participate in the CPF despite making up over one third of Singapore’s population, they and anyone else can buy an ETF.
If you prefer a professional money manager to manage a retirement portfolio on your behalf, then purchasing an insurance product for retirement is an alternative approach. The advantage of an insurance product is that having someone else do the management will save your time. The disadvantage is that there will be associated fees, which means projected returns will need to be higher. Insurance products that can be taken out by foreign residents of Singapore are available.
Of course there is no guarantee that the returns of any retirement product will keep up with inflation, let alone exceed it. But at least an ETF, which is a basket of equity assets, is more likely than not to achieve minimum returns in line with inflation. So what are you waiting for? Start calculating how much you need to retire, and take those first steps.