6 retirement planning mistakes to avoid

With the many financial obligations that we have, many of us put off planning for retirement, thinking that it is very far away in the future. Yet, retirement planning is crucial to a healthy retirement, especially considering that the rising average life expectancy of Singaporeans will mean that the vast majority of us will have a longer retirement period than previous generations.

Before you get started on your retirement planning journey, here are six mistakes to be aware of so that you can set yourself up to be in the best position to enjoy the lifestyle you desire in your golden years.

Mistake 1: Underestimating the amount you will need for retirement

One big mistake a lot of people make when planning for their retirement is underestimating how much money they are going to need to comfortably retire.

Many Singaporeans have grown accustomed to a more luxurious lifestyle and do not wish to compromise on this in our retirement years.

A recent survey done by OCBC showed that 25 per cent of respondents wanted to be able to live in private housing, drive a high-end car, employ a domestic helper, receive private healthcare and travel internationally after we're retired, which the survey estimated would cost about $6,000 a month to finance.

But how much do we need saved up to sustain this lifestyle? One useful estimation tool is the four per cent rule.

This model works under the assumption that your retirement money is invested at a ratio of 50 per cent stocks and 50 per cent bonds, and that you withdraw four per cent of your retirement fund in the first year of your retirement. You will then be able to withdraw the same amount, adjusted for inflation, for the next 30 years.

Using the four per cent rule, in order to retire and have a monthly spend of $6,000, you would need to have a monumental $1.8 million saved up by the time you retire. This is unfortunately not realistic for the average earner.

Even a more modest retirement monthly spend of $3,000, which the OCBC survey estimates would be required to sustain a mid-range retirement lifestyle, would require you to have $900,000 saved up by the time you retire.

Note that this is before we adjust for higher-than-expected inflation given the current high global inflation environment we are experiencing, so the nominal figure could very well be even larger.

Furthermore, this four per cent rule assumes that stocks and bonds will give an average rate of return that has been consistent over the past few decades.

There is currently speculation that we are entering a third "lost decade" where markets will give flat or negative returns.

As these factors are hard to predict, the four per cent rule should only serve as a rough guide as to how much money you should have saved and invested by the time you retire in order to sustain yourself comfortably.

Mistake 2: Not starting early

The best thing you can do for your retirement planning is to start early. You are likely already familiar with the magic of compound interest when it comes to saving and investing for retirement.

The earlier you start growing your retirement nest egg, the more time you will have for your money to grow through compound interest.

Let us illustrate just how powerful compounding interest is with an example. Assuming, given your current income and expenses, you can only afford to put aside $100 a month towards your retirement.

This amount could be invested in a relatively safe exchange-traded fund that gives a modest average rate of returns of four per cent per year. By investing your $100 monthly, you would have accumulated $88,382.67 towards your retirement after 35 years.

Now if you have started your retirement savings journey 10 years earlier, you would have amassed a whopping $145,235.27 by saving the same amount monthly at the same rate of returns.

By starting earlier, you would only have had to save an additional $12,000 but would be able to retire with 1.5 times the amount compared to starting 10 years later.

While $100 a month seems insignificant, the power of consistent savings over a long period of time, coupled with compound interest, will allow your money to grow in the background.

This shows that starting earlier is a far better option than waiting until you can save a more significant amount to start, even if it's just a small amount.

Oftentimes, we will find ourselves moving the goalpost of what is "enough" to start saving for retirement.

Cultivating the discipline of putting money aside for your retirement will benefit you much more in the long run. As your income grows, you can always increase the amount you save monthly towards your retirement.

Mistake 3: Relying solely on your CPF for retirement planning

Luckily for Singaporeans, we have CPF that can help provide some monthly income in retirement.

How this works is, on your 55th birthday, the amount you have in your Ordinary Account (OA) and Special Account (SA) will be transferred to your newly created Retirement Account (RA) up to the Full Retirement Sum (FRS). As of 2023, the FRS is $198,800.

There is some flexibility to the amount you have to set aside in your RA. You are able to pledge a property that you own and only contribute the Basic Retirement Sum (BRS) — half the amount of the FRS, or contribute an Enhanced Retirement Sum (ERS), which is 1.5 times the FRS.

This retirement sum would be used to enroll you into CPF life, which provides you with monthly payouts for the rest of your life. Typically these monthly payouts will start when you are 65 years old but you can choose to delay them until you are 70 years old if you wish to let your CPF monies accrue interest for longer.

The amount you contribute to your RA will determine your monthly payouts during retirement.

	RA savings required at 55 years old	Estimated Monthly Payouts from 65 years old
Basic Retirement Sum (0.5 x FRS)	$99,400	$750 — $810
Full Retirement Sum (FRS)	$198,800	$,390 — $1,490
Enhanced Full Retirement Sum (1.5 x FRS)	$298,200	$2,030 — $2,180

It is important to note that under the BRS, if your RA account balance falls below S$60,000, your monthly payouts will decrease. Under the FRS, your monthly payouts are constant and do not adjust for inflation.

As you can see, while the CPF Life payouts offer a sizable and stable source of income during your retirement, S$1,040 is sufficient to cover just your basic expenses but not enough if you would like to splurge on yourself or travel during your retirement years.

Relying solely on your monthly CPF payouts is unlikely to be enough to support your desired lifestyle.

Your CPF should be complementary to your other retirement planning strategies and should not be your sole retirement fallback plan.

That being said, the more you set aside for your RA, the greater your monthly payouts will be. One good way to maximise the CPF portion of your retirement planning could be to invest your CPF money.

If you are able to beat the 2.5 per cent guaranteed interest that your OA gives you, you would be able to set aside more money when it's time to contribute to your RA and enjoy a larger monthly payout in retirement.

Mistake 4: Not planning for medical costs

Another big mistake people make when planning for retirement is not considering how much they should put aside to use for medical expenses.

As we get older, it is inevitable that we will incur more medical costs as we develop more long-term and complicated ailments.

In 2019, the average stay in hospital for Singaporeans aged 65 and above was 6.9 days, compared to the average stay of 3.9 days for those below the age of 65.

It is reasonable to assume you will need more medical attention as you get older and these medical costs can add up very quickly.

The best way to plan ahead for your future medical costs is to get protected through health insurance while you are still young and able-bodied. The most important reason as to why is that many insurers do not cover pre-existing conditions.

As you get older, you are more likely to develop more illnesses or ailments. It will get increasingly hard to get coverage for these conditions after they arise.

The best course of action is to get coverage while you are still healthy. While insurance premiums always rise with age, regardless of when you bought the policy, this ensures that you are able to get the most comprehensive coverage possible to help defer medical costs.

This will benefit you not only in your retirement but throughout your entire life, as you never know when you will be met with a medical emergency and you do not want to be met with a situation where you have to choose between your finances and your health.

Mistake 5: Not paying down your debt early

Another important thing to consider when you are planning for retirement is your level of debt.

Most of us over our lifetime will incur some debt, be it for education, housing or even credit card debt.

You do not want to be in a position where you do not have an income but still have large outstanding debt obligations.

Paying off your debt will not only give you great peace of mind, but also frees up a lot of your savings during your retirement to finance your lifestyle instead of having to use it to make interest payments to lenders.

When paying down your debt, you should focus on the debt that has the highest interest first. For most people, this would be their credit card debt.

Paying off your high-interest debt first will save you hundreds, if not thousands, of dollars in the long run that you can then put towards growing your retirement nest egg to achieve financial freedom quicker.

Mistake 6: Only holding high-risk investments

Many younger people like to invest in high-risk investments, be it stocks, crypto or otherwise, due to the idea that it will give them outsized gains. Do not forget that these higher returns undoubtedly come with higher risk.

You do not want to be in a position where your entire retirement fund is invested into high-risk assets and you end up losing your hard-earned money.

A recent example of this is the Terra Luna crypto crash. Many eager investors believed that Terra Luna was a "relatively safe" crypto backed by sophisticated algorithms and had a fixed value of US$1 (S$1.35), and many lost their life savings when it eventually unravelled. A total of US$60 million was erased from the digital currency space in a matter of a few days.

While there is no harm in wanting to invest in riskier assets, it is advisable to only invest amounts that you can afford to lose and still keep the majority of your retirement in a safer workhorse investment that will generate a steady return for you for years.

This will form the foundation of your retirement nest egg and allow you to invest smaller portions of your savings into high-risk investments with more peace of mind. Consider investment tools like fixed deposits, treasury bills and even endowment plans for safe and guaranteed returns on your retirement savings.

Conclusion

The longer you delay planning for retirement, the harder you will have to work to become financially free in your twilight years. The best thing you can do for your retirement planning is to start today! The earlier you start, the smaller portion of your income you have to save, and the longer time horizon you have to reach your financial goals by the time you are ready to retire.

This article was first published in ValueChampion.

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