Personal savings for your retirement

Many Singaporeans rely on the Central Provident Fund as their main source of savings for retirement.

Many have found it to be inadequate. In 1999, only one-third of people reaching age 55 had sufficient savings to meet the Minimum Sum of $60,000. The Minimum Sum has now been raised to $99,600. This is only sufficient to meet the very basic cost of living in Singapore.

For a more comfortable standard of living, you need at least two times of this Minimum Sum.

Let me share eight tips with you on how you can get adequate savings for your retirement.

Tip 1: Do not over-invest in a property using your CPF savings. As a rule of thumb, you should buy a property based on five to seven years of your total family income.

Tip 2: Set aside at least 10% of your earnings as personal savings for the future, to supplement the CPF savings. If possible, increase the saving rate to 15%.

I estimate that a saving rate of 15% over a working career of 40 years can provide you with an income of about 40% of what you earn prior to your retirement, with annual adjustment to compensate for inflation. This will be sufficient to give a comfortable standard of living to the retiree.

Tip 3: Get an attractive rate of return for your personal savings. Do not buy the wrong insurance or investment products that give a poor return.

Invest your personal savings in a large, well diversified, equity fund with low management expenses.

Look for a fund that has an expense ratio of 1% or less. There are some indexed or passively managed funds that meet this criterion. One example is the STI Exchange Traded Fund that is available from the Singapore Exchange. Some unit trusts have low expense ratio.

Invest in an equity fund, as it will give the highest return over the long term. Over the past 20 years, the average return from equity is about 7% compared to a return of 5% from bonds (see table below).

Do not worry about the risk of investing in equity. If they are investing for the long term, say ten years or longer, they will get some good years and some bad years. This will average out and give the long term average of about 7%.

Invest in a large, well diversified fund, as it average out the good and bad investments and give the average that reflects the broad market. You reduce your risk through diversification.

If you choose a fund with an expense ratio that is 1% lower, you can get 30% more at the end of 40 years.

Some people think that a fund with a high expense ratio is likely to perform better. Studies have shown that, over the long term, most actively managed funds were not able to outperform the market.

Tip 4: Buy a decreasing term insurance plan to cover you up to age 65 years. The sum assured should be between 5 to 10 years of your annual income. The cost of this insurance should be less than 1% of your monthly earnings.

If you buy a decreasing term insurance of $350,000 for 35 years, you will be covered for $350,000 during the first year. The cover will reduce by $10,000 a year over 35 years. This will be compensated by the increase in your savings.

The term insurance will cease completely at 65. At that time, your total savings will be more than adequate to cover your future needs and you will not need any life insurance any more.

Tip 5: If your employer provides medical benefit, there is really no need for you to buy your personal medical insurance. If you want to have personal insurance to provide continuing coverage after your retirement, you can buy the basic Medishield plan, as the cost is lowest.

Do not spend more than 2% of your earnings on medical insurance, including the insurance for your family. If possible, keep it down to 1%

Tip 6: Have a budget for your monthly expenses. Set aside the required amounts for your mandatory expenses, such as taxes, mortgage repayment, transport, food, utilities and telephone. Be frugal with the discretionary items.

Set aside not more than 3% on your insurance and 10% to 15% as savings for the future. If you still have money left, you can use it for entertainment, holidays, car and splurging.

Tip 7: Look for an honest adviser to help you to make the financial and insurance decisions. Be aware that some advisers are likely to offer you the more expensive products where they can earn a higher commission. They may also get you to insure more than necessary.

Tip 8: Be educated about the fundamentals, so that you can make the right decision.

You can visit my blog (www.tankinlian.blogspot.com) and read the educational materials. Be clear about what you need before you see the adviser.

You can also call the financial institutions directly and ask for a quote on the insurance product or investment funds. You will be able to make your decision, based on the quotes that can be easily compared.

If you follow my eight tips, you are likely to have sufficient savings to give you a financially secure retirement.

Tan Kin Lian

1. The writer qualified as an actuary in 1975. He served as chief executive of NTUC Income for 30 years, prior to his retirement on 31 March 2007.

Return up to 31/12/2006
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