Feature Articles: Retirement - OCBC Wealth Management

Never Too Early to Build Your Nest Egg

18 August 2010

We all dream of having a golden retirement - to indulge in new hobbies, travel and spend time with family and friends.

Whether you want to retire in comfort or maintain a simple lifestyle, you should take retirement planning seriously.

You have to manage the transition from an employment income to an alternative stream of income - from savings or investments - to support your lifestyle. The time spent in retirement will rise with increasing life expectancy, so planning will also include managing longevity and inflation risks.

Plan early

There are times when retirement is forced upon individuals. By planning ahead, you ensure you are ready when it happens.

Ideally, the best time to start planning is the moment you start work. When you have time to build your nest egg, you do not have to play catch-up. You do not have to take a higher investment risk to meet your retirement goal.

Points to remember

Getting started early (regardless of the amount) is a means of forcing you to be disciplined. If you are 40, you are 264 pay cheques away from retirement, assuming you work till 62.

If you put aside $1,000 per pay cheque, you will have a nest egg of $264,000. If you were to invest it at 4 per cent per annum, this amount will grow to $423,620. Key factors that you should keep in mind include aiming to pay off your loans, such as mortgages, before you stop work. Also, educate yourself and be familiar with the financial world to help you get started.

Ensure also that you have sufficient protection plans as medical costs are likely to increase as you age.

Buy health protection plans, such as hospitalisation and surgical plans, critical illness and long-term care, when you are young and healthy to keep costs low.

Government schemes

First, you can start with your Central Provident Fund (CPF) savings to build your retirement portfolio.

CPF members aged 55 from year 2013 (with at least $40,000 savings in their retirement account with the CPF Board) will automatically be enrolled in the national annuity scheme, CPF Life.

They can look forward to a stream of annuity income from age 65 for life.

Most are familiar with CPF savings but overlook another critical source of funds - the Supplementary Retirement Scheme (SRS).

For those who pay income taxes, SRS can be an excellent tax-deferral scheme.

Each dollar of contribution to the scheme will reduce your taxable income by the same amount.

Individuals can leverage on this scheme to build a stream of retirement income.

You can plan it such that your SRS drawdown starts at age 62 before your CPF Life Plan payment begins.

You must complete your withdrawals in 10 years.

Alternative income streams

Using cash savings and investments to build your retirement nest egg is another way.

A well-diversified retirement portfolio, consisting of investments in equities, bonds and commodities as well as fixed deposit savings, will provide staggered income streams.

The proportion you place in each asset class will depend on the investment risk you are willing to take.

Having an annuity in your retirement portfolio is prudent because it would pay you an income as long as you live. You may want to supplement CPF Life payouts with annuity products to hedge against inflation.

With this, you do not have to worry about how long you live. The annuity products can be structured in your portfolio to cover your basic lifestyle expenses from age 65.

Guard your nest egg

Don't be complacent about monitoring your retirement plan. Ensure that you monitor it - once a year, at least - as your investment risk appetite may fall or change over time.

If you have not started on your retirement plan, it is never too late to start. However, make up for lost time by being a good saver and cut down on unnecessary expenditure. Prolong your working career as long as possible, working part-time if necessary.

Alternatively, you can get your children to provide a regular allowance to fund some of your basic living expenses.

There are programmes offered by banks for senior citizens that offer lifestyle benefits, besides roping in their caregivers to provide a monthly allowance via automatic transfers.

Important Information

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