FAQ: Financial Planning

1. Introduction

I wish to give my approach towards financial planning for young people in the Singapore environment.

2. Assumptions

I make the following assumptions:

a) You start work at 25 and work for 40 years before retirement (at 65 years)

b) The average yield on your savings can keep pace with increase in earnings

c) You save 15% of your earnings monthly (separate from CPF savings)

d) Your earnings will increase at an average of 2% higher than the inflation rate

3. Accumulated savings

After saving for 40 years at the rate of 15%, your accumulated savings will represent 600% of your earnings at retirement. The CPF savings (from the retirement account) will probably represent 200% of your earnings. This makes a total amount of 8 years of your earnings at retirement.

4. Drawdown

If you draw down the 8 years of earnings over an average of 20 years, you can draw down 40% each month. You will find this amount to be adequate, as you have fully paid for your home, your children have grown up and you are not required to make savings for the future.

This income will continue to grow with the investment yield, which is likely to be higher than inflation. You can opt for a higher payment upfront (say 45% to 50% of your earning at retirement) and a lower rate of future increase.

If you buy a life annuity, this amount is payable for your lifetime. Those annuitants who die younger will leave behind the balance of their savings to pay the annuity to those who live longer (and you hope to be the one who live the longest!)

If you do not spend the entire monthly draw-down, you can save the remainder in a savings account. This can be used for future emergencies or cash needs.

5. Medical expenses

Your medical expenses can, in most cases, be met from your Medisave savings and a catastrophic insurance plan (e.g. Medishield).

6. Flexible Retirement Goals

If you have not achieved accumulated savings of 8 years of earnings (including CPF minimum sum), you can delay your retirement (i.e. work a few years longer) or adjust your retirement lifestyle based on a lower monthly income (i.e. live within your means). You can also do part-time work to earn a supplementary income.