Lifetime Retirement Income? It’s really not that hard to attain!
Mr and Mrs Goh, Civil Servants in their late 30s.
It has truly been a joy working with this couple. They are great savers and had the wisdom to start financial planning early, putting in place medical plans for their family’s risk management and endowment plans to save for their retirement planning.
During our annual review this year, I explained to them that it is a great opportunity to start building their retirement income since they are at the stage where careers are stable, incomes are peaking and lifestyle is more or less settled down. In financial planning terms, they are in the “golden period” where savings are growing and expenses managed.
I prompted them to use this “golden period” to begin the process of converting assets to income. Creating enough income for retirement is one of the most important steps in financial planning. There is a saying when it comes to planning for retirement that it is not at what age you want to retire but at what income.
When it comes to building retirement income, there are 2 phases.
1) To create an amount of guaranteed income to provide for basic needs
2) Building a second layer of “growth income” that will appreciate through time to provide for inflation and lifestyle.
We started by planning for “phase 1”, creating a low risk guaranteed income for life that will create the certainty that their basic needs will provided for when they stop work. As they are Singaporeans, I reviewed their existing CPF schemes which included CPF-Life, our national annuity scheme which can be used to provide for the first layer of guaranteed income.
From a projection of their balances and future contributions, they can expect a monthly income of $2,000 from their combined CPF-Life payouts if they continue working until the age of 55, their preferred retirement age.
While the amount of $2,000 monthly is expected to be enough for their basic expenses, the payout starts only at age 65. I prompted them to think about the following:
1. Are they willing to work until 65?
2. In their current industry, how common is it for people to work until age 65?
3. Do they need to work beyond age 55 due to financial obligations such as mortgage repayment or children dependency?
The reason I asked them to reflect on these questions is to find that balance between their preference to stop work at age 55 and the reality that their current retirement plan only provides from age 65 onwards. In the case of Mr and Mrs Goh, they decided that while they are prepared to work beyond age 55, it is not what they want.
From a review of their cash flow and monthly savings, they decided to commit a budget into a financial plan that will provide a monthly income of $2,000 for a 10 year period from age 55 to 65 to complement their existing CPF-Life program. The implementation of such a plan creates the effect of having a lifetime income from age 55 onwards when taken into consideration with the expected income from CPF-Life.
After reviewing the different retirement income plans available, I recommended a few options for them to consider and they decided on one that fits within their budget. Their initial worry that the premiums will be high were unfounded. In fact, they still have additional monthly savings which will be used for the second phase of building an investment portfolio for their growth income even after implementing the recommendation.
GEN Planner’s Thoughts:
Retirement planning can sometimes be seen as more complex than it should be. While not everyone can successfully plan to have that dream retirement of sandy beaches by the sea and round the world travel every day of the year, it is my belief that everyone can have enough lifetime income to provide for the basics.
It requires appreciating what is already available (i.e. existing CPF schemes) and making a commitment to saving regularly into a retirement plan especially during the ages of 40 to 50 which is usually the “golden period”.
Article by Lee Meng
The writer is an Executive Financial Services Consultant representing GEN Financial Advisory