If you regularly read the MoneySmart blog, you’ve probably already put some thought into your retirement plans. After all, it’s a topic in inevitably comes up when you think about money.
Yet we’ve all got family and friends who seem to be in complete denial about retirement. You know the kind… Those who have never once looked at their CPF balance, and expect to stay employed until they die.
Unfortunately, if your parents happen to be like that, then it might actually turn into your problem in the future. So, even though your folks might hate to talk about the “R” word, you should sit them down and plan for retirement together, as soon as you can.
In an attempt to make this less painful for everyone, I’ve put together a simple 7-step guide so you can tackle retirement planning bit by bit.
Step 1: Start thinking about retirement
Even in this day and age, there are people whose jaws drop on the floor when asked by their company to take a “golden handshake” package. It’s like the thought of losing their job simply never occurred to them.
It’s hard to plan for retirement unless without seriously thinking about it. And I don’t mean just having a vague idea of retirement (akin to the afterlife). The more detailed your visual picture of retirement, the better.
But instead of asking your parents “When do you want to retire?” the better question is: “What would you do if you lose your job next week?”
That’s because, like it or not, most of us would not be able to control when we retire. Sure, some of us may not mind working until age 80, but that doesn’t mean our employers are obliged to keep us on.
Even if your parents work in an “iron rice bowl” kind of field, MOM’s official retirement age is currently 62 years old. After that, many senior workers are expected to work on contract basis with a reduced job scope, which may not be quite as rosy compared to the old job. And by age 65, they’ll most likely have to go.
So, the key thing is to visualise life after employment. Other discussion questions are: “What kind of lifestyle would you lead?” “What part-time gigs or hobbies would you pursue?” and perhaps most importantly, “What expenses might come up?”
Step 2: Review their CPF
Now that you’ve put the thought of retirement in your parents’ heads, the next step is to perform the “basic health screening” of retirement readiness: Checking their CPF account.
If your folks have put off the dreaded task of logging into MyCPF for decades, this might not be a bad thing. You might find that, thanks to the power of compounding high interest, their CPF balances aren’t too shabby after all.
To tell if someone’s CPF balance is healthy or not, benchmark it against the CPF retirement sums (middle column) below:
|CPF retirement sum||CPF balance (at age 55)||Monthly payout (from age 65)*|
|Basic Retirement Sum (BRS)||$88,000||$570 to $790|
|Full Retirement Sum (FRS)||$176,000||$1,040 to $1,450|
|Enhanced Retirement Sum (ERS)||$264,000||$1,510 to $2,110|
*There are 3 types of monthly payouts for CPF LIFE; I’ve taken the complete range from smallest to largest amount.
These sums are valid as of 2019. They change every year, so if your parents are far from age 55, use the CPF LIFE calculator instead.
Personally, I would say that someone is in a decent position for retirement if her total CPF balance (OA + SA) hits or is on track for the Full Retirement Sum. However, that really depends on one’s retirement expenses, which is why it’s important to do the retirement visualisation exercise earlier.
If your parent’s account balance goes up to only the Basic Retirement Sum (or below), you may want to consider topping it up with your own cash or CPF. Spouse-to-spouse transfers can also be done (e.g. if your working dad has a lot of savings but your stay-at-home mom doesn’t).
Also, check if your parents are auto-enrolled in CPF LIFE. Everyone born in 1958 and after is auto-enrolled, but if your parents are in their 60s or older, they can opt in at any point with sufficient CPF savings.
CPF LIFE is the new retirement scheme which guarantees payouts for life, while the older scheme had payouts would ultimately be depleted. It doesn’t take an expert to know that the former is a more sensible option, especially if your parents are still in decent health.
Step 3: Review health insurance
One major cost of getting old is healthcare, yet no one ever budgets for stuff like strokes or major falls when they think about retirement. In fact, it’s pretty damn hard to budget for these. Not only is it impossible to know what might happen, the cost of healthcare can vary so much too.
So after CPF is done and dusted, the next step is to look at your parents’ health insurance coverage.
All Singaporeans are covered by the government’s basic health insurance, MediShield Life. While it’s better than nothing, MediShield Life is actually quite limited in coverage. You’ll have to pay a significant amount out of pocket for costly surgeries and post-hospitalisation treatment, for example.
Unless your parents have a huge emergency fund, the better option is to opt in for one of the 7 Integrated Shield Plans available in Singapore. These are upgraded versions of MediShield Life offered by private insurers.
However, bear in mind that insurance premiums get higher as people age. Let’s look at NTUC Income’s IP (Basic plan) as an example. At age 31, you’d pay $381/year. At age 51, it’s $784/year. At age 71, it’s $1,610/year. Yikes!
While this kind of price tag may be hard to swallow, it’s nothing compared to what a major illness or accident might cost, so I do think it’s worth it. You can also use Medisave to pay for the premiums, provided there’s enough money in there, of course.
For more tips on how to pick health insurance for older people, read this article.
Step 4: Put cash savings to work
Okay, now that the boring government stuff is out of the way, it’s time to get creative. The next 4 steps are reasonably simple ways to diversify your parents’ income streams so that they’re not just relying on the kindness of their employers to put food on the table.
First up: Cash. If your folks are like most older Singaporeans, then their financial portfolio probably consists of 100% cash savings in a bank account.
Another easy thing you can do with those cash savings is to build what is called a “bond ladder”. This is when you purchase bonds with different maturity dates, so you get a small income from them each month.
For example, Singapore Savings Bonds pay out interest every 6 months, so you could purchase them every month for 6 months to get payments throughout the year.
The main drawback here is that the maximum return you can get with these no-risk products is only about 2% p.a., so even if your parents have $100,000 in cash, that’s only about $2,000 a year, or $167 a month. But it’s better than letting their cash rot in the bank.
Step 5: Monetise their property
Many Singaporeans are low on CPF savings because a lot of it is locked up in property. As they age, it’s wise to consider ways to turn that valuable property in liquid cash.
Regardless of what type of property they live in, renting out a spare room is probably the most straightforward way to do that. This should bring in maybe about $500 to $800 of rental income a month for a suburban HDB flat within range of an MRT station. For a condo, you can get $800 to $1,200 for a common room.
If your parents are at least 55 years old and are willing to move to a smaller HDB flat, you can look into HDB’s Silver Housing Bonus scheme. Seniors who “right-size” their homes will get their CPF balance topped up, plus up to $20,000 as a bonus from HDB.
For HDB flat owners who don’t want to move out, HDB also offers what’s known as the Lease Buyback Scheme, where you can sell part of the flat lease back to HDB.
The proceeds go straight into your CPF account to boost your CPF LIFE payouts in the future, and any leftover is given to you as a lump sum “bonus”. However, it’s only open to flat owners aged at least 65 years old.
Step 6: Buy dividend stocks
This isn’t for everyone, but if you have a bit of investing knowhow, you can help your parents diversify their income by putting some of their cash into dividend-yielding blue chip stocks.
Unlike stocks where you buy low and sell high (hoping to make a profit on its share price), dividend stocks are selected primarily for their dividend yield, which is the income they distribute to shareholders every quarter.
A good example are REITs (real estate investment trusts) such as CapitaLand Trust, which can offer as much as 5% to 8% annually in dividends. This is because they are required to redistribute their profits instead of hoarding them.
Alternatively, you can look at high-yield blue chip stocks such as Singtel, Keppel and DBS. None of these are immune to share price crashes, but they have performed quite consistently and can pay out 4% to 5% a year in dividends.
While these dividends are probably not enough to live on, for the regular retail investor at least, they do help supplement the main sources of retirement income, i.e. CPF and perhaps rental income.
Step 7: Continue to optimise
Retirement planning isn’t the kind of thing where you dump a lump sum in one place and forget all about it.
The economy can change, and what was once a luxurious retirement income can dwindle to peanuts in a matter of years. Considering the long life spans of Singaporeans, retirement can be as long as 30 years or even more.
So it’s necessary to be active in financing one’s retirement continuously — even when already retired!
One tip I got from HardwareZone is to make use of the fact that the CPF Retirement Sums increase each year. Even if you have hit the Enhanced Retirement Sum, it will go up again, so you can theoretically increase your retirement payouts by topping it up with any spare cash you have in the future.
Do schedule consistent reviews of your parents’ portfolios to make sure that everything is performing as expected and costs (of insurance premiums, for example) are kept low. Be prepared to make optimisations where necessary.
Are your parents ready for retirement? Share your thoughts in the comments.