Many Singaporeans turn to freelancing to avoid the pitfalls of getting a “normal” job. Not working for one single boss means retrenchment isn’t an issue for you, and being able to choose whether or not to make CPF contributions gives you a bit of flexibility over your cashflow. And of course, not having to show up at an office at 9am every day has its advantages, let’s leave it at that.
But no matter how different your career might seem from those of your salaryman friends, that doesn’t exempt you from having to plan for retirement.
In fact, retirement planning is even more pressing if you don’t make CPF contributions, because you could be left with absolutely nothing in old age. Here are three things you must do to ensure you get to retire in peace.
Don’t assume you can work forever
Being an older worker in Singapore can be fraught with difficulties. Losing your job after the age of forty is horrible, terrible news for many, especially if you’re a highly paid PMET.
Freelancers are less vulnerable to being unexpectedly forced into retirement, and if you like your work it can be tempting to assume you can just work for as long as you can and continue to make money.
But you’re neither Peter Pan nor a god. Just because your spirit is willing doesn’t mean your body will let you work that long.
Unexpected illnesses, family responsibilities like caring for an aged parent or spouse or a loss of assignments to younger and more adaptable competitors can happen.
So always have a realistic retirement age in mind when you’re doing the sums and trying to figure out how much you have to save and by when.
Seriously consider whether you want to make CPF contributions or not
As a self-employed person, it’s totally up to you whether you want to make contributions to your CPF Ordinary Account and Special Account. The only account you don’t have an option to not contribute to is your Medisave Account, since those contributions are compulsory.
In my experience, most freelancers do not make CPF contributions when they first start out. The early days are often rough, as you try to get your footing, find clients and learn the tools of the trade, so it is possible you will be barely making enough to survive on. There’s no way you’re going to want to lock away 20% of your savings in CPF if you’re worried about your bank balance hitting zero.
But when you get to the point where you’ve got a decent income, there are some reasons you might want to consider making CPF contributions—and not just because you think it’s a way to “force” yourself to save.
The biggest reason to consider CPF is the fact that the Special Account gives you a risk-free 4% interest rate on your contributions, as opposed to the 2.5% your Ordinary Account offers.
If you diligently sock away money in your Special Account each month, you could be left with a very decent nest egg when you retire thanks to compounding interest.
If you’re above 55, you can add an extra 1% interest on the combined balance of all your accounts.
The drawback is that once your money goes into your Special Account, you can no longer use it for other things like buying property and education. You will only be able to draw upon your Special Account funds for retirement purposes, ie. withdrawing a lump sum if you have enough at age 55, and then starting to receive payouts at 65.
Many Singaporeans are hesitant to transfer their CPF savings from their Ordinary Account into their Special Account mainly because they think they will not be able to afford to buy a home if they do so. If that is not a concern for you you might want to seriously consider building up your savings through your SA.
Make sure you save and invest proactively
Whether or not you decide to make CPF contributions, you absolutely need a separate retirement plan that involves saving and investing strategically.
Those who are not making CPF contributions are particularly vulnerable. Fail to save up, or have risky investments tank, and you are left with nothing.
Even those who do make CPF contributions aren’t spared. CPF is usually not enough to finance most Singaporeans’ retirement, especially since so many drain their accounts to pay for a home.
Because your income is likely to be more unstable than those of your salary-earning peers, keeping a certain amount of cash savings on hand is also advisable in case you encounter slow months.
Just as you are not working in a traditional job, you also cannot take the typically passive approach many take to retirement planning.
As a freelancer, how are you planning for retirement? Tell us in the comments!