RetireSmart

Growing your retirement fund Give yourself a better retirement

Stay ahead by planning earlier

Retirement considerations

You could live as long as 20 years post retirement, and will likely experience age-related ailments. In addition, the cost of healthcare in Singapore is rising rapidly due to inflation.

Expected lifespan post retirement*

Male: +18.9 years
Female: +22.1 year

Healthcare inflation

Global average: +10%
Singapore: +15%
*Retirement age of 65

Protect your accumulated wealth by:

  1. Assessing your financial readiness to determine if you are on track to meet retirement expectations.
  2. Continuing to contribute as much as possible to your CPF.
  3. Taking a longer-term view on investments to help maximise growth.
  4. Be flexible in adapting retirement plans when personal circumstances change.

How to plan and grow your retirement fund

Before any decision is made, it’s a good idea for workers nearing retirement to do a quick stock check. To do this, start by answering these two questions:

  1. How much has been accumulated in CPF and cash savings plans?
  2. What income is needed in retirement?

Work out your ideal retirement income

How much additional cash savings will you need at retirement, on top of your CPF Minimum Sum?

$0
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Standard CPF contributions and savings may not get you your ideal retirement income

This year the Government made two enhancements to CPF to benefit those aged 50 and over. First, CPF contribution rates were increased for those aged 55 and over. Second, an additional 1% interest can be earned on the first S$30,000 of CPF balances.

While these incentives are positive, they are unlikely to substantially improve prospects for the median earner. The key reason for this is that the mandatory contributions fall at age 55 from 11.5% to 3.5%, a considerable drop.

Mandatory contributions significantly drop from age 55

You can get closer to reaching the target of S$354,315 by maintaining your contribution rate at the level set at age 50. This would mean dedicating 11.5% of wages (an increase from 3.5%) into your Ordinary Account (OA) or Special Account (SA).

Figure 2: Mandatory contributions significantly drop from age 55
SA contributions Maintaining higher contributions
SA contribution rate based on standard allocation rates specified by CPF. Source: CPF, October 2016

Maintaining the 11.5% contribution rate adds more than 10% to the value of your savings

One way to contribute more is to cut back or cap spending. Alternatively, downsizing property may provide an opportunity to release some assets and divert this into retirement savings.

  • Cutting back/capping spending
  • Downsizing property
Figure 3: Maintaining the 11.5% contribution rate adds more than 10% to the value of your savings
Standard contributions
15,428
20,287
205,149
Contribute additional 8% pa to OA 55-65
49,966
20,687
205,149
Contribute additional 8% pa to SA 55-65
15,428
59,553
205,149
0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000
Ordinary Account Special Account Retirement Account Target
Based on the CPF guaranteed rates, bonuses and contribution rates defined by the CPF. For the OA we assumed that 10% of each year’s contribution is saved for retirement. Based on receiving the median salary of S$3,949 p.m. Results are discounted at 2% inflation to show them in today’s S$ value
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Invest in growth

Older workers may think they should transition to more conservative investments as they approach retirement. But being too conservative could mean running out of money.

Invest in funds that offer inflation-beating growth

If retirement assets are only invested in CPF or ‘guaranteed’ products, older workers will miss out on stock market gains when the market rallies. These gains could provide a substantial boost to future retirement income.

In Figure 4, we illustrate the benefit to older workers of a 1% increase in investment returns relative to a 1% increase in discretionary contributions. As can be seen, better returns applied to a larger account size can make a significant difference to the overall account size.

Figure 4: For older workers, a 1% increase in return makes more difference than a 1% increase in contributions
+S$4,600
+S$18,500
0% 2.0% 4.0% 6.0% 8.0% 10.0%
1% increase in cotributions p.a. 1% increase in returns p.a.
The increases are in absolute, not relative, terms, i.e., a 1% increase in returns would be 4% p.a. to 5% p.a. for the SA. Based on the guaranteed rates, bonuses and contribution rates defined by the CPF. Based on receiving the median salary of S$3,949 p.m. Results are discounted at 2% inflation to show them in today’s S$ value

Diversification builds greater stability

To optimise the benefits of these money-weighted returns, it is important to invest in funds that offer inflation-beating growth. The answer is to have a balance. One way of achieving this is to diversify, and spread investments over a wide variety of asset classes.

Think about two accounts, not one

Income from CPF accounts offer guaranteed returns but these alone would unlikely be sufficient to meet the retirement needs of a median earner. You need to supplement your CPF savings to attain your targeted total retirement savings.

One of the ways to achieve this is to think about the total retirement savings as two pools of funds: one pool consisting of ‘safe’ investments with some form of guaranteed return, and a second pool which seeks higher returns by taking on some risk.

‘Safe’ investments focus on Wealth Preservation (WP) and provide a useful buffer against market volatility. In contrast, a return-seeking pool of investments focuses on Wealth Accumulation (WA).

Wealth preservation Wealth preservation and accumulation

Example

At 55, Mr Lim has S$100,000 in his CPF account. He wants to understand how much it might grow to by the time he retires at 65. Instead of keeping this fully in CPF, he could invest a proportion into a multi-asset fund. Depending on the split between these two, his S$100,000 will grow at different rates.

Figure 5: Adding a diversified portfolio to savings can significantly increase median outcomes
CPF Ordinary Account
CPF Special Account
80% CPF SA + 20% Multi asset
60% CPF SA + 40% Multi asset
40% CPF SA + 60% Multi asset
20% CPF SA + 80% Multi asset
100% Multi asset
0 25,000 50,000 75,000 100,000 125,000 150,000 175,000 200,000 225,000
Top 25% Median Bottom 25% Bottom 5% Original Investment
Based on the CPF guaranteed rates of 2.5% in the OA and 4% in the SA. Multi-asset fund assumes a return of 6% p.a. and a volatility of 10% p.a. Results shown in nominal terms based on a S$100,000 initial investment at age 55. Source: Schroders. For illustrative purposes only and does not constitute any recommendations to invest in the above.
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Making the most of retirement

In the next and final paper of this series we focus on those people who have retired. We explore what people are looking for, for example, certainty, flexibility, simplicity, and how these may be achieved.

Schroders RetireSmart 60 seconds series

Our in-house experts share their insights on retirement planning.