retirement planning. what is retirement planning it is preparing financially for when you are too...

RETIREMENT PLANNING

What is Retirement Planning• It is preparing financially for when you are too old to work

when you are too young to quit• Involves making decisions about how well you want to live

when you still have the means to craft how well you will live

• Requires you to defer some degree of current enjoyment in favor of future survival

Who should be concerned about your Retirement?

The Government is concerned

You family is concerned

You should be too!

Population Statistics

• By 2030, almost 20% or 1-in-5 of Singaporeans will be aged 65 and above

Singapore Department of Statistics, 2005

Population Statistics

Source of Chart: Role of the Government in Healthcare Provision and Financing in Singapore, presented by Mr Edward Reiche

3 Phases of Retirement

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Passive

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Retiree may still be working albeit at a slower pace. Also lives an active lifestyle and have various hobbies. Extra income from work seen as a supplement

Retiree stops work entirely. Less physically demanding hobbies will be preferred. Retiree may be more careful with expenses, but is still capable for caring for themselves

Retiree is no longer able to take care of themselves, and may require special nursing care and other support services.

4 Pillars of Singapore Social Security

Based on paper by M Ramesh entitled “Singapore’s Multi-Pillar System of Social Security”

Pillar Description Program

1 Targets working poor who can’t or don’t save

Workfare

2 Compulsory Savings Central Provident Fund (CPF)

3 Voluntary Savings Supplementary Retirement Scheme

4 Informal Mechanisms, like Home Ownership and Healthcare, as a vital source of income protection

High Level of Home Ownership and Healthcare

Successful Ageing for Singapore

To ensure that all levels of society are well prepared for the challenges as well as opportunities of an ageing Singapore:

Source: Inter-Ministerial Committee on the Ageing Population, 1999

Family

Community

National

• Family Level – strong, extended and caring families

• Community Level – strong network of community services, as well as with opportunities for engagement and the integration of the communities

• National level – high level of national preparedness with a competitive and vibrant economy, as well as social cohesion and rootedness

Workfare

Aims to provide support for low-wage workers so that they have the best chance to progress• Workfare Income Supplement (WIS) scheme was introduced in

2007 to encourage older low-wage workers:• to work regularly• To build up their CPF savings

More details on Workfare from http://www.mom.gov.sg/employment-practices/employment-rights-conditions/workfare/Pages/workfare-income-supplement.aspx

• Workfare Training Support Scheme (WTS)• Complements WIS by encouraging employers to

send their older lower-wage workers for training, as well as encourage workers to go for and to complete their training

• Workfare Special Bonus• This bonus is announced from time-to-time to

ensure that low-wage workers benefit from economic growth

Central Provident Fund (CPF)• CPF savings are meant to provide for housing and medical

needs and for basic living needs after retirement*• Consists of 4 main funds

1) CPF Ordinary Account• Savings can be used to buy a home, CPF Insurance, Investment and Education

2) CPF Special Account• For old age and investment in retirement-related financial products

3) Medisave Account• Savings can be used for hospitalisation expenses and approved medical insurance

4) Retirement Account (created at age 55)

• Administered by CPF Board• Mandatory contributions by:

• Employers• Employees• Self-Employed

*Source: SRS Booklet (Ministry of Finance) 18 Feb 2011Source: http://mycpf.cpf.gov.sg

http://mycpf.cpf.gov.sg/


Central Provident Fund (CPF)

Main milestones include• 1955, the British colonial authority in Singapore established

the CPF as a compulsory savings scheme to allow workers to save for their retirement

• 1984, Medisave was introduced as a savings for Hospitalisation expenses for contributors and their family members

• 1987, Singaporeans were required to set aside a minimum sum in their CPF when they reached age 55. This amount would provide them with a monthly income when they retiree.

Source: http://mycpf.cpf.gov.sg



CPFOA Contribution

EmployeeAge (Years)

Contribution Rate(for monthly wages ≥ $1,500) Credited into

Contribution by Employer

(% ofwage)

Contribution by Employee

(% ofwage)

Total Contribution(% of wage)

Ordinary Account

(% of wage)

Special Account

(% of wage)

Medisave Account

(% of wage)35 & below 16 20 36 23 6 7

Above 35-45 16 20 36 21 7 8

Above 45-50 16 20 36 19 8 9

Above 50-55 14(12) 18.5(18) 32.5(30) 13.5(13) 9.5(8) 9.5(9)

Above 55-60 10.5(9) 13(12) 23.5(21.5) 12(11.5) 2(1) 9.5(9)

Above 60-65 7(6.5) 7.5 14.5(14) 3.5 1.5(1) 9.5

Above 65 6.5 5 11.5 1 1 9.5

Contribution and allocation rates from 1 September 2012

*Source: http://mycpf.cpf.gov.sg. Contribution Rate based on an Ordinary Wage of $5,000

Rates bracketed and in red show Contribution and Allocation Rates for the period 1 September 2011 to 31 August 2012)



CPFOA Investment


CPFIS-OA

Fixed Deposits

Singapore Government Bonds

Singapore Government Treasury Bills

Statutory Board Bonds

Bonds Guaranteed by the Singapore Government

Annuities

Endowment Insurance Policies

Investment-Linked Insurance Products

Unit Trusts

ETFs

Up to 35% of investible savings can be invested in:

Shares

Property Funds (or REITs)

Corporate Bonds

Up to 10% of investible savings can be invested in:

Gold, through the following:

• Gold ETFs

• Other Gold Products (offered through UOB)

The OA is invested under the CPF Investment Scheme – Ordinary Account (CPFIS-OA)

“Investible Savings” is the sum of your OA balance and the amount of CPF withdrawn for investment and education



CPF Special Account (CPFSA)


• Special Account (SA) is a saving account specifically for old age use, and can be invested in retirement-related financial products

• Can be used to pay for monthly housing installments under very strict conditions, and only for properties bought before 1 October 2003

• OA savings can be transferred into the SA, but not the other way around



CPFSA Investment


CPFIS-SA

Fixed Deposits

Singapore Government Bonds

Singapore Government Treasury Bills

Statutory Board Bonds (Secondary Market Only)

Bonds Guaranteed by the Singapore Government

Annuities

Endowment Insurance Policies

Selected Investment-Linked Insurance Products*

Selected Unit Trusts*

Selected ETFs*

*For more information:ILP - http://mycpf.cpf.gov.sg/NR/rdonlyres/79349EA5-798A-4CA8-A1DE-ACE44FE7720E/0/RCSILP1.PDFUnit Trust - http://mycpf.cpf.gov.sg/NR/rdonlyres/83FD2278-D807-445B-B063-F301B30CDE09/0/RCSUT.pdfETF - http://mycpf.cpf.gov.sg/NR/rdonlyres/171497E5-99C7-4517-9F59-0C96890D57F4/0/etf.pdf

The SA is invested under the CPF Investment Scheme – Special Account (CPFIS-SA)



http://mycpf.cpf.gov.sg/NR/rdonlyres/83FD2278-D807-445B-B063-F301B30CDE09/0/RCSUT.pdf



CPF Medisave Account (CPFMA)


• A national savings scheme to meet the healthcare expenses of members and their dependants, including grandparents who must be Singaporeans or Singapore PRs.



Use of CPF MA


• Hospitalisation Expenses• Certain costly Outpatient treatments and treatment for a

number of chronic diseases• Premiums of approved medical insurance schemes and

certain enhancements under the Integrated Shield Plans for members and their dependants• Medishield is run by CPF Board• Medisave approved Integrated Shield is offered by private insurers

• Premiums for approved long-term care insurance• Eldershield and Eldershield supplements are offered by private insurers• Available once members and their dependents reach 40 years of age



Use of Medisave Funds

Since 2010, Medisave is allowed for use for medical treatment in certain hospitals Malaysia*

*Terms and Conditions apply. See http://www.moh.gov.sg/content/moh_web/home/pressRoom/pressRoomItemRelease

• Medishield• A catastrophic medical insurance programme to meet cost of medical treatment

for serious illnesses or prolonged hospitalisations• Most programmes available today come with “as-charged” features with high

yearly (up to $650,000) and lifetime limits• Has deductible and co-insurance features, which can be done away with by

purchasing an enhancement

• Eldershield• A national long-term care insurance programme initially launched in 2002, and

enhanced in 2007• With Eldershield Supplement, monthly benefits can be

as high as $3,500 for life• Available to persons above 40 years of age

• Hospitalisation Expenses

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Medisave Minimum Sum (MMS)

• The Medisave Minimum Sum (MMS) is the amount that a member turning 55 needs to set aside for future hospitalisation expenses

• Regular MMS adjustments are necessary to help Singaporeans plan for their long-term healthcare needs• From 1 July 2012, MMS will be increased from $36,000 to $38,500.

Medisave Contribution Ceiling (MCC)

• The MCC is the maximum a member may have in his Medisave Account

• The MSS value is set at $5,000 above the MMS value• From 1 July 2012, MCC is increased from $41,000 to $43,500

• Excess of the prevailing MCC will be transferred to• Special Account if the member is below 55 years old• Retirement Account if the member is above 55 years old and has a

Minimum Sum shortfall

Medisave Required Amount (MRA)

• The Medisave Required Amount is the amount that you are required to have in your Medisave Account before you can withdraw the savings in your Ordinary or Special Accounts.

• If you do not have at least the prevailing Medisave Required Amount, you are required to make a top-up to your Medisave Account with part of the balances from your Ordinary or Special Accounts

• Since 1 Jan 2012. the MRA has been set at $32,000. This value will be adjusted for inflation every January until it reaches $25,000 (in 2003 dollars) on 1 Jan 2013

Medisave Summary

MCC • $43,500

MMS • $38,500

MRA • $32,000

CPF Interest Rates• Savings in the Ordinary Account earn an interest rate of

2.5%• The interest is computed every quarter, and is based on the weightage of

• 80% of the average 12-month fixed deposit rate, and• 20% of the average savings rate published by major local banks

• Savings in the Special and Medisave Accounts earn an interest of the higher of:• 4%, or• 12-month average yield of the Singapore Government Securities (10YSGS) plus 1%

Interested is adjusted quarterly

• An additional 1% is paid on the first $60,000 of a member’s combined balances:• Limited to $20,000 from the OA• Additional 1% interest received on the OA will be deposited into the member’s SA or

RA to enhance the retirement savings

*Source: http://mycpf.cpf.gov.sg



CPF Interest Rates

• RA savings earn an interest of of either:• 4% (the floor rate), or• 12-month average yield of the Singapore Government Securities

(10YSGS) plus 1%Interested is adjusted annually

Announced 30 September 2011, the minimum of 4% pa will be earned for all Special, Medisave and Retirement Account monies until 31 December 2012. After that, interest rates on ALL CPF Account monies will be subject to a minimum rate of 2.5% pa




CPF Minimum Sum (MS) Scheme

• Intended to finance the increase life expectancy of retirees.

• Provides members with a monthly income to support a modest standard of living during retirement

Q: Will CPF Savingsbe enough

for Retirement?

CPF Minimum Sum (MS) Scheme• First began in 1 July 1995 with the initial amount of $40,000

• to reach an amount of $80,000 by 2003• $40,000 annual increments

• Since 2004, MS has been increased from $80,000 to $120,000, in incremental steps of $4,000 (all values in 2003 dollars)

• The 2003 MS value (with increment) is then adjusted for inflation each year.

• The $4,000 increment in 2012 (adjusted for inflation) would have amounted to a $12,000 increase of the MS.• To mitigate the large increase in MS due to inflation, CPF Board has

decided to spread out increase in MS to reach $120,000 (in 2003 value) by 2015 instead of 2013

• From 1 July 2012 to 30 June 2013, CPF members will need to set aside $139,000 (up from $131,000)




CPF Minimum Sum (MS) SchemeYear

2003value Actual

1 July 2003 $80,000 $80,000

1 July 2004 $84,000 $84,500

1 July 2005 $88,000 $90,000

1 July 2006 $92,000 $94,600

1 July 2007 $96,000 $99,600

1 July 2008 $100,000 $106,000

1 July 2009 $104,000 $117,000

1 July 2010 $108,000 $123,000

1 July 2011 $112,000 $131,000

1 July 2012 $113,000 $139,000

1 July 2013 To beAnnounced To be

Announced1 July 2014

1 July 2015 $120,000


• The initial MSS 2003 value for 2012 was $116,000. Adjusted for 2011 inflation, this would have resulted in a MS of $143,000 This is a large jump of $12,000 or 9% from the previous MS of $131,000

• Instead of the target of reaching $120,000 MS in 2003 value by 2013, CPF Board has decided to reach the target $120,000 over 4 years.

• The 2012 MS stands at $139,000.



CPF Minimum Sum (MS) Scheme

*Source: CPF Board – New CPF Changes in 2012. More details on the new LIFE plans will be made available in 3Q 2012

• To help increase CPF LIFE payouts, members who turn 55 from 2013 onwards and who have not met their MS will have their post-55 contributions to the OA and SA automatically transferred to their RA when they reach the draw-down age (DDA) or 65 years old*• This will translate into higher monthly payouts for members

• Amount a member can withdraw in cash under the existing withdrawal conditions remains the same.

CPF MS WithdrawalCash balances CPF

Accounts* Amount which you can withdraw

$5,000 or less All your cash balances

More than $5,000 but less than or equal to $50,000

$5,000. The remainder will be set aside in your Retirement Account (RA).

More than $50,000 but less than or equal to $154,445

10% of the cash balances. The remainder will be set aside in your RA.

More than $154,445 10% of $154,445 and any further cash balances after setting aside the CPF Minimum Sum** and the prevailing Medisave Required Amount ($32,000 for 2012)

*Refers to cash balances in OA and SA, and any balance above MMS (currently $38,500) in Medisave Account (MA) at age 55**The CPF Minimum Sum applicable for members turning 55 between 1 July 2012 and 30 June 2013 is $139,000.

From 1 January 2013, members who reach 55 can withdraw their cash balances only after setting aside the CPF Minimum Sum and Medisave Minimum Sum. However, members can still withdraw the first $5,000 from the CPF account at 55.

Draw Down Age (DDA)

The DDA may eventually be increased to age 67

Age as at31 Dec 2011

Applicable DDA

62 and above 6260-61 6358-59 64

57 and below 65




CPF Minimum Sum Plus Scheme

If you are aged 55 and above from 1 January 2001:• Can buy life annuities (currently only from NTUC) beyond

your Minimum Sum with your withdrawal CPF Savings• Monthly income from these annuities is tax exempt


Monthly income from life annuities

purchased with cash is not tax exempt



Retirement Account

• In the 10 years when the funds remain in the RA until the DDA, it earns interest* which• Cannot be withdrawn• Forms part of the RA savings

for monthly payments when you reach DDA

*Currently 4% pa until 31 December 2012Source: http://mycpf.cpf.gov.sg

From 1 January 2013, CPF members aged 55 with at least $40,000 in their RA or with at least

$60,000 at 65 will be placed on CPF LIFE. Members who are not placed on CPF LIFE

can choose to join CPF LIFE before reaching 80, or remain on the MS Scheme.

• The account is created at age 55. The Minimum Sum is then transferred into this account for disbursement of monthly income under CPF LIFE once the contributor reaches 65 years of age



CPF “Income” for Life?

CPF will not be able to adequately finance your retirement:1. monthly payouts are not indexed against inflation,

therefore subsequent payouts will depreciate in value and hence, purchasing power

2. CPF MS is able to provide monthly income to the member for 18-20 years. This may not be a long enough period of time for retirement income

3. Singaporeans are expected to live much longer• Better lifestyle• Better medical support and advancement




CPF LIFE

• Singapore has one of the highest life expectancies in the world

• For Singaporeans aged 65 today• 50% expected to live beyond 85• 33% expected to live beyond 90

• Singaporeans are expected to live longer, and a growing number expected to outlive their CPF savings if they were on the MSS

• CPF Life introduced to provide members with income for life




CPF LIFE - Eligibility

An Individual may apply to join LIFE between the age of 55 and 80, but must satisfy two conditions:1. Must be a Singapore Citizen or a Singapore Permanent

Resident2. Must have Retirement Account Savings


From 1 January 2013, CPF members aged 55 with at least $40,000 in their RA or with at least

$60,000 at 65 will be placed on CPF LIFE. Members who are not placed on CPF LIFE

can choose to join CPF LIFE before reaching 80, or remain on the MS Scheme.



CPF LIFE Today

4 plans are available:

LIFE Plan Payout Bequest Level

Bequest (Refundable Plans)

LIFE Plus Plan High Low

LIFE Balanced Plan Medium Medium

LIFE Basic Plan Low High

Non-Bequest (Non-Refundable Plans)

LIFE Income Plan Highest None




Improved and Simpler CPF LIFE

• From 1 Jan 2013, members can choose between 2 CPF LIFE plans*1. Standard Plan (default plan)o Is a combination of the Balanced and Plus PlansoHigher payouts while preserving flexibility in the use of Retirement

Account savings prior to age 65oMembers can also leave a bequest for their beneficiaries

2. Basic Plano For members who prefer to leave a higher bequest and lower monthly

payoutsoAllows members to use their RA savings for housing after 65 years old

Members who are currently on the 4 current LIFE plans can remain in those plans, or switch to the new Standard Plan before 31 Dec 2013

*Source: CPF Board – New CPF Changes in 2012. More details on the new plans will be made available in 3Q 2012

CPF in Summary

CPF

OA SA MA

RA(created at age 55)

MSS(age 55)

LIFE(age 65)

MA goes towards fundingmedical expenses

Amounts in excess of MS can be withdrawn in cash as long as MRA is met

Finances lifelong disbursement for retirement

Supplementary Retirement Scheme• Was introduced in 2001• Complements the CPF savings as part of the government’s multi-

pronged strategy to address the financial needs of its aging population. This is due to the recommendations of the Inter-Ministerial Committee’s Report on the Aging Population

• Contribution is voluntary, and can be in any amounts (subject to an annual cap)

• Contributions can be used to purchase various investment instruments• Contributions to SRS are eligible for tax relief, and investment returns

accumulated tax-free• When withdrawn at retirement1, only 50% withdrawal from SRS is

taxable

1Retirement refers to the Statutory Retirement Age, which is the retirement age at the point in time the contributor makes his first SRS contribution

*Source: Ministry of Finance

Supplementary Retirement Scheme• All Singaporeans, Singapore PRs (SPR) and foreigners can

open an SRS account• Must be at least 18 years old• Not undischarged bankrupts, and• Not mentally disordered and capable of managing themselves and their

affairs

• To participate in SRS, you must first open an account (only one) with any of the 3 SRS operators:• DBS Ltd• OCBC Ltd• UOB Ltd

You may, however, transfer your account from one operator to another


SRS Contribution• If you earn any form of income, including directors’ fees in the

current year, you are allowed to contribute to SRS• Employers are also allowed to contribute to your SRS account

on your behalf. Their contribution is treated as part of your remuneration, and thereby taxable in your hands.


Contribution Cap

You can contribute in a year any amount up to your contribution cap

The Contribution Cap is determined by the product of the Absolute Income Base and the SRS contribution rate


Absolute Income Base = $85,000

Contribution Rate Singaporean & SPR15%

Foreigner35%

Contribution Cap(Absolute Income Base) x (Contribution Rate)

= 85,000 x 15%= 12,750

= 85,000 x 35%= 29,750

SRS Contribution and Taxation• The contribution cap is calculated based on income

earned the year previous to the year of contribution• A contributor is entitled to tax relief on his contributions in

the year following the year of contribution provided he is assessed as a tax resident in that year where the contribution is to be allowed.

EXEMPT

Supplementary Retirement Scheme

25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 $-

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000 Closing

InvestmentBalance $1,245,112.35

Inflation AdjustedValue of

Investment $381,697.71

Growth of SRS Investments

Age

Assumptions: Starting Income $2,000pm, ROI 6%, General Inflation 3%, Income growth 5%

Contributions grow tax-free, and only 50% of the withdrawals is taxed at the then-prevailing income tax rate

SRS withdrawalsUnder certain circumstances, SRS savings can be withdrawn with penalty. However, 50% of savings withdrawn will be subject to income tax if you1. withdraw your savings after achieving the statutory retirement age prevailing at

the time you made your first SRS contribution2. withdraw your savings upon death3. withdraw your savings on medical grounds – physical or mental incapacitation4. full lump-sum withdrawals by Singapore Permanent Residents (PRs) who have

cancelled their PR status and• have been a non-Singaporean or a continuous period of 10 years preceding the

date of withdrawal• have maintained their SRS account for a period not less than 10 years from the

date of first contribution to the SRS account.5. full lump-sum withdrawal by foreigner who has maintained his SRS account for a

period not less than 10 years from the date of first contribution to his SRS account.

• Under all other withdrawal scenarios, you will be taxed 100% of the withdrawn amount. This applies also for withdrawal upon bankruptcy and withdrawal before the statutory retirement age prevailing at the time of the first contribution.

SRS Withdrawal

A withdrawal from the SRS can be made at any time subject to the penalty imposed (where applicable) on the amount withdrawn

Withdrawal Event Penalty Portion TaxedDeath Nil 50%

Medical Grounds Nil 50%

Bankruptcy Nil 100%

Foreigner (10 year rule) Nil 50%

Before retirement 5% 100%

Upon first and subsequent withdrawal when retirement age is reached Nil 50%

Where no withdrawal is made even when you reach the then current retirement age. Nil 50%


SRS withdrawals• At Statutory Retirement Age, SRS balances can be

withdrawn in 10 yearly installments.• 50% of each annual withdrawal will be taxed at the

prevailing income tax rate

Supplementary Retirement Scheme

$-

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000 ClosingInvestment

Balance $1,245,112.35

Inflation AdjustedValue of

Investment $381,697.71

Growth of SRS Investments

Age

Assumptions: Starting Income $2,000pm, ROI 6%, General Inflation 3%, Income growth 5%

Based on the hypothetical closing values presented earlier:• An equal annual withdrawal

of $124,511 can be made for 10 years

• Of the $124,511 drawn down, only 50% (or $62,250) will be subject to income tax• Based on tax rates today, that would mean that about 90% of his annual withdrawal will remain intact• This equates to about $34,400 per annum in today’s value

Planning for Your Retirement

Goal Setting

Gathering Facts

Analysing Facts

Developing Solutions

Implementing

Solutions

Periodical Reviews

Planning for Your Retirement

Goal Setting

Gathering Facts

Analysing Facts

Developing Solutions

Implementing Solutions

Periodical Reviews

What, when and why you intend to achieve in your retirement

Cash Flow Statement and Net Worth, as well as other additional sources of income or expenses when you retire

Determine how much you need and whether you have a shortfall

Develop strategies that will help you reach your goals. This includes researching, comparing and shortlisting the various instruments available for this purpose. You will also have to put in place an implementation schedule

Putting your plan into action

Review your plan regularly, as well as track your progress.

Setting your Retirement Goals• What do you envisage

your retirement to be like?• What would you like to do?• How would you like to live?• With whom would you be

living with?

Common Misconceptions in Retirement

• There’s always time to prepare for retirement, I can do it when I’m in my 40s or 50s

• I will earn more, so be able to save more, when I am older• I voted for the government, so they must take care of me• CPF Life or the Minimum Sum will be sufficient for my

retirement• I do not need as much in retirement as

I do now when I am actively working.I will live simply

• My children will take care of me

How Much is EnoughThe more relevant question is “how much do you need?”

Your need is determined by:• The type of lifestyle you would like to have – everyone has a

different expectation and it determines the periodic amount you want• Dependent or Independent• Financial Freedom or Financial Austerity• Should it include a regular holiday or only focus on survival?

• The period you want to provide for• How long do you want to provide for. Better

safe (longer period) than sorry (shorter period)?

• All else being equal, does your family have a history of long life?

How Much is Enough• Consider your potential expense pattern:

• Which expenses will increase/decrease? Ongoing Mortgage repayments? Debt repayments?

• Which current expenses will disappear?• What possible new expenses will be needed? (Grand)Children Education?

• What other sources of funds will you have during retirement?• CPF/SRS?• Support from family (not usually considered due to its uncertainty)• Sale of home (future values are uncertain, and costs involved in selling/buying

of homes may be significant)

• Do you want to leave anything behind for your loved ones?• Legacy and Inheritance• Wills and Trust

• How far along are you towards building your retirement fund?• How much resources have you already set aside for this?• How much more do you need to commit?

Key to Successful Retirement• Increase Funding

• If possible, increase your sources of income, especially passive income

• Reducing impact of expenses• Expenses can only be estimated within certain margins• Use of risk management instruments to mitigate impact of

unexpected expenses – Medishield, Eldershield, Critical Illness and Personal Accident

Funding your Retirement Expenses• How much should you provide for expenses when you

retire?1. Rule-of-Thumb: 60% of your last drawn income just before

retirement, or

2. Expenses that you incur today, adjusted for expected increase in medical expenses and possible reduction in lifestyle expenses (the net amount adjusted for inflation)

• Consider also new expenses arising during old age as well as existing expenses which will no longer be necessary

• Bear in mind that your lifestyle during retirement may not change very much from that which you currently enjoy

Quantitative TechniquesWhen solving for problems involving retirement funding, the Present Value of Annuity Due is frequently used.

Annuity Due is used because each “income” drawn from your retirement fund is required at the beginning of each year (assuming that you use an annual budget)

𝑃𝑉=𝑃𝑀𝑇 [( 1−(1+𝑖)−(𝑛−1)

𝑖 )+1]

Quantitative Techniques

Explanation of

• PV is the Present Value of Annuity Due for the cash flow• PMT (or payment) is the annual amount required at the start of your

retirement• n is the number of years you are providing for• i is the net return on investment after adjusting for inflation, or the Real

Rate of Return* given by

*Please refer to Text, p463

𝑃𝑉=𝑃𝑀𝑇 [( 1− (1+𝑖 )− (𝑛− 1)

𝑖 )+1]

Case Study 1

Gilbert, a manager aged 30, reckons that he will need $2,000 every month (in today's value) when he retires at age 65. Given his family history, he believes he will live to 90 years old. How much retirement funding would he have to accumulate when he reaches 65 years of age?(assume ROI and Long-Term General Inflation Rates to be 5% and 3.5% respectively)

Case Study 1 (con’t)

𝑖=( (1+𝑅𝑂𝐼)(1+𝑖𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛)

−1 )×100%¿ ( (1+0.05)

(1+0.035)−1 )×100%

Step 1 – Determine the Future Value at age 65 of Gilbert’s current estimated annual retirement amount

Step 2 – Determine the real rate of return (of inflation adjust return) for Gilbert’s retirement fund (between his age 65 to 90)

Case Study 1 (con’t)Step 3 – Calculate Gilberts Retirement Funding using the future value of his estimated annual retirement requirement as his annual income

Note that the FV of Gilbert’s requirement at age 65 (FV65) has become the annual income requirement for his retirement, PMT65,and the interest used is the real rate of return, i=1.45%

Case Study 2

Gilbert already has $150,000 invested in various instruments, and he estimates that his overall yield to be about 5%. Advise Gilbert if he will be able to reach his retirement target (previously determined), and if not how much more he must save annually to be able to do so.(assume ROI and Long-Term General Inflation Rates to be 5% and 3.5% respectively)

Case Study 2(con’t)Step 1 – Determine the Future Value at age 65 of Gilbert’s current investment portfolio

Given that Gilbert needs $1,691,907 to retire, and that his current portfolio will grow to only $827,402, Gilbert still has a shortfall of $864,502

Case Study 2(con’t)Step 2 – Determine how to make up the shortfall of $827,402One way to do this is by additional annual contributions to his savings which will be invested at his current (comfortable) yield to make up the difference.

To find the annual savings, we manipulate the Future Value of Ordinary Due* formula

*Please refer to Text, p59

This means that in order for Gilbert to make up his shortfall, he will need to save an additional $9,161 every year, and invest it instruments which will yield a minimum of 5%pa

Additional Reading

CPF Board Websitehttp://mycpf.cpf.gov.sg/Members/Gen-Info/mbr-Gen-info.htm

Report by the National Longevity Insurance Committee (NLIC)http://mycpf.cpf.gov.sg/Members/Gen-Info/CPF_LIFE/NLIC.htm

Ministry of Finance SRS Booklethttp://app.mof.gov.sg/supplementary_retirement_scheme.aspx

NLIC

SRS Main

CPF Member Main

http://mycpf.cpf.gov.sg/Members/Gen-Info/mbr-Gen-info.htm

http://mycpf.cpf.gov.sg/Members/Gen-Info/CPF_LIFE/NLIC.htm

http://mycpf.cpf.gov.sg/Members/Gen-Info/CPF_LIFE/NLIC.htm

http://app.mof.gov.sg/supplementary_retirement_scheme.aspx

Conclusion

How well you plan today,

and carry out what you plan,

determines how well you live

when you can no longer plan

Hey… you!You’ll never get there unless you stop looking at this poster and get back to work!

retirement planning. what is retirement planning it is preparing financially for when you are too...

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