Plan for your golden years

13 June 2012
Mah Ching Cheng

Asians are living in an evolving socio-economic landscape. We are generally getting wealthier, healthier and enjoying better lifestyles. This means when we retire, we would also demand a better lifestyle compared to previous generations.

What is also getting increasingly apparent is that we will be seeing some major demographic changes in the next one to two decades.

Changes such as longer life expectancy, declining birth rates and a greying population are becoming more pressing issues. Many of us work diligently in our younger years aiming to earn a decent income and provide a better life for our families. As the saying goes, "money is a means to an end" - working hard may be more meaningful if it means a comfortable and fulfilling retirement life. It is important to know if you have saved sufficiently to enjoy the golden years.

How much is enough? The short answer is - it depends on your lifestyle choices during retirement.
Using your current lifestyle as a starting point, you can make use of either your current monthly spending or income to gauge how much you require. However, with inflation eroding your real purchasing power, this is not the amount that you should work with for future retirement needs.

You will also need to account for inflation and calculate the actual dollar amount required to purchase the same basket of goods and services (that you are enjoying now) just before you retire.
The last variable factor is the number of years you expect to live after retirement and before passing on. Understandably, this is the most difficult to gauge. But one thing for certain is that expected average life expectancy has been rising as medical sciences grow more advanced.

Consider a 36-year-old who intends to retire at 65 and who has indicated that he would like to continue spending S$2,500 monthly until 80.

With an inflation rate of 2 per cent (the monthly average for the past 10 years), he would need about S$940,000, assuming that inflation remains at 2 per cent after he retires and he does not invest these funds in the next 15 years. And, the amount required grows with an increase in monthly expenditure. Refer to Table 1.

Options to consider

An early head-start in saving or investing for retirement is important. If you start earlier, there is a greater probability of meeting your lifestyle needs when you retire. Table 2 shows that an individual who starts with S$100,000 and invests S$500 on a monthly basis would be able to save about S$680,000 in 30 years assuming a real rate of return of 4 per cent.

With the myriad of investment options in the market, it may be difficult to choose the right investment or to save for retirement. It is always important to maintain a diversified portfolio of investments, which can be calibrated according to your risk profile, as you move through your life cycle.

A suitable exposure to risky assets such as equities will allow you to enjoy potential market upside and possibly yield higher returns, while an allocation to safer assets such as bonds or cash provides diversification to lower volatility.

As you move towards retirement, it may be worthwhile to consider a move into income-paying assets, such as constant coupon paying fixed income. This works to provide a constant revenue stream that will contribute towards your eventual retirement goals.

Another option would be to take on insurance plans that allow you to make premium payments towards the plan while you are working and able to afford it. At retirement age, there are plans that offer several options of receiving the retirement funds, for example either through a monthly guaranteed retirement income, full withdrawal of the total accumulated cash value or a combination of both.

Mah Ching Cheng is Head of Investment Communications at DBS Bank