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Plan to Retire with Adequate Savings

~By: Tan Kin Lian~

This is in response to the article "Retire on CPF savings? Think again," which was run on the print edition of Straits Times on Wednesday 21 March 2012. In that article Prof Hui Weng Tat of LKY School of Public Policy warned Singaporeans that there will be little money left for retirement after paying for a flat. Mr. Tan Kin Lian offers simple retirement tips for those starting out.    

In recent years, many Singaporeans do not have adequate savings to meet their expenses during retirement. They cannot afford to retire and are forced to continue working, often for low pay.

Here are some of the key factors that have contributed to their predicament:

  1. They spent too much of their savings in the Central Provident Fund on an expensive HDB flat or private property and upgraded their property a few times
  2. They invested their savings on bad investments and made a capital loss
  3.  They lost their jobs unexpectedly.

I wish to share these tips for young people to avoid facing this unfortunate outcome.

Tip 1: Save 15% of your earnings, on top of the contribution to CPF

Tip 2: Invest the savings in a low cost investment fund, such as the Straits Times Index Exchange Traded Fund (STI ETF) available in the Singapore Exchange.

Tip 3:  Do not spend more than 50 times of your gross monthly income on your property and upgrade only once during your lifetime. If your family income is $6,000, you can invest up to $300,000 on your property and not more.

Tip 4: Spend 1% of your income to buy a term insurance or accident insurance for a term of 25 years or shorter. You can get cover for at least 5 years of your income.

Tip 5:  Do not worry about critical illness insurance. The incidence is likely to be low for young people and the expenses are likely to be covered by your employer. You have other more urgent things to worry about. Do not spend your savings on risks that are more remote.

Most people invest their savings in a life insurance policy which now gives a yield of less than 3% per annum - hardly matches inflation. If they have to terminate the policy due to unemployment, they may lose more than half of your accumulated savings.

They can get all the insurance protection through a term insurance or accident insurance at a modest cost of 1% of your earnings. This allows them to invest the remaining savings to earn a higher yield elsewhere.  

The STI ETF is professionally managed and is well diversified in 30 blue chip shares in Singapore. During the past 20 years, the fund earned an average yield of 9%.  In the future, the yield is likely to be lower, but is likely to be higher than 5%.

I used to manage an insurance cooperative for the past 30 years prior to my retirement. During those days, the cooperative was able to give a yield of more than 5% on the life insurance savings, due to higher bonuses and low expenses.  Today, the yield on most life insurance policy is much lower.