BT: How much is enough for retirement?

Business Times - 14 Nov 2007

How much is enough for retirement?

By TOI SEE JONG

LIFE insurance is the cornerstone of sound financial planning to enable us and our loved ones to continue to enjoy a preferred standard of living through protection for longevity (living benefits), mortality (death benefits) and morbidity (sick or disability benefits). With the right supplement of riders to these insurance policies, other likely risks and protection needs can also be fully covered.

Retirement planning

In Singapore, those in the 30s often face conflicting and insatiable demands on their hard-earned income. The foremost priority is putting aside enough money in preparation for marriage, children and condominium (or HDB housing), a car, and club membership.

Singaporeans are among the most conscientious among Asians in purchasing protection coverage in the form of whole life or endowment plans. However, there remains a sizeable number who believe that they can sustain their living and lifestyle needs through the golden years of retirement solely on their Central Provident Fund (CPF) savings or at the appropriate time in the future in downgrading their HDB apartment to generate the necessary cashflow.

CPF causing lethargy?

Why do many Singaporeans not realise the necessity for retirement planning? That it is something to be planned proactively and provided for from a young age? It could be because many hang on to a 'make-d' attitude until the later part of their life since retirement is a long way away, or they are happy to face the situation when the time arrives.

Do Singaporeans between 55 and 60 have sufficient CPF balance? The right answer is more likely to be that many are (rightly or falsely) lulled into the belief that there is always the CPF to rely on. However, among the lower and middle classes it may be that there is insufficient CPF to tide through the entire retirement period.

Financial planning

So exactly how much is sufficient planning for retirement for an individual currently in his 30s?
The best way to ensure one has the right balance of protection and savings is to speak to a qualified financial planner to assess your financial needs. The aim is to identify the right proportion that needs to be regularly invested. For example, this could be a percentage of one's income, varying from 10 per cent to 20 per cent, depending on the individual's intended outcome and on the right combination of insurance, savings and investment plans. The aim also would be to result in retirement savings enough to afford monthly payouts after retirement equal to about two-thirds of the last drawn salary before retirement.

Why two-thirds and not the full sum? At retirement age, it is likely that the individual has paid off all mortgages, the children have completed their education and 'flown the coop'; there are no more dependent elderly parents to take care of, etc. Thus he/she may no longer need the full sum of his/her last drawn salary to enjoy the same lifestyle standards. The exact sum that an individual needs to put aside for a targeted cashflow in the future may vary from individual to individual and all depends on the financial goals.

In a 2006 Research on Protection Policies conducted by Saffron Hill Research for the Life Insurance Association of Singapore, some startling facts were laid bare:

Two-thirds of Singaporeans have some form of insurance.

Conversely, three in 10 do not have any. A lot of room for growth still.

Half of those who own insurance think they do not have enough of it
Between 15 to 30 per cent of all respondents indicated interest to buy insurance.
So how much insurance is sufficient insurance for an individual? Most who took part in the survey felt unsure about how much insurance protection is sufficient for their family. There were no clear 'formulas' to determine the right amount that is sufficient. Most take household expenses as a gauge but are unsure if this is the right measure. They also felt that their family will likely adjust their lifestyle depending on the household income.

It also seems that among those who feel they have 'sufficient' insurance cover, they estimate that between 4 to 7 times of their annual income in savings and protection is sufficient; while those who are 'well-covered' point to an insurance coverage between eight to 10 times annual income.

As a rule of thumb, when considering financial planning for the first time in your early thirties (when your commitments are still relatively low) you may want to look minimally at five to 10 times your annual income as a target to put aside in protection and savings.

Periodic review

In any financial planning, it is vital to take into account attendant and expected inflation; and cost of living increases so that there is no erosion of value on expected future benefits. A regular annual review with your financial planner is recommended. The review should take into account the most current scenario, including your current income, changes in personal or family situation and changes in planning needs.

Popular instruments

We highlight some of the key products and instruments in insurance, savings and investments available in Singapore.

Annuity

Deferred annuity offers a forced discipline to put aside a fixed lump sum now in order to receive a guaranteed monthly sum (some policies are inflation adjusted) starting from the vesting age (eg retirement age of 62 or 65) and through the rest of one's life or for a fixed period (eg 20 years) as stated in the policy purchased.

Immediate annuity on the other hand involves a fixed sum investment made immediately prior (usually a year) to retirement age, where a monthly sum is paid over the rest of the lifetime or for a fixed period (eg 20 years).

Deposits

Deposits are savings or funds placed with a financial institution over time that earns interest (simple or compounded), and is a source of preparedness for future use or in the event of emergency or periodic spending needs.

Unit trust

Unit trust allows you to invest in various funds. These funds could be invested in various financial instruments such as bonds, equities etc or a combination of them. The underlying value of the investment assets depends on the fund's objectives and the performance of those assets. For instance, a fund invested in equities may be more volatile compared to one invested in government bonds.

Investment-linked products

Following close on the heals of unit trusts are ILPs, these are similar to unit trusts, and thus allow you to invest in various funds, but they have the added feature of a life insurance cover. ILPs also allow for regular premium on top of single premium.

Insurance plans

Other common life insurance plans are term, whole life and endowment plans. Term insurance plan offers relatively high life protection (sum assured) at the lowest possible premium for a fix period. Whole life plans provide insurance coverage for the entire life. These plans would accumulate a cash value after several years (depending on the plan) and can also be a source of cash if one lives past a certain age and is prepared to draw on the cash value. Premium payments are usually for limited period or whole of life.

Endowment plans, on the other hand, offer a combination of savings and life cover. Basically it provides you cover for the duration of the plan and at the end of the term there is a savings amount payable in a lump sum. The premiums are payable for a limited period only.

Risk appetite

There are many possible combinations of protection, savings and investment plans available when looking at financial planning. There is no single one-plan-fits-all solution. Individual needs will change over the life span depending on your priorities and affordability. You should start financial planning early in life and conduct periodic reviews (perhaps as regularly as annually) to ensure optimal coverage and savings throughout your life span. Needs and expectations of lifestyle do change over time.

There is a need to proactively plan ahead for retirement, and more so to start this planning from as early as the age of 30. The best way to do this is with the help of a professional financial planner. This way you will not only have adequate protection and savings, but also the right mix of investment that would prepare you for the retirement at the age of your choice and the retirement lifestyle of your dream.

There is a sizeable proportion of the population that does not see the need for insurance and financial planning. All of us must ask ourselves the question: Do I fall into this category?

Statistics indicate that the trend is for people to continue to enjoy longer lifespan (both males and females) in Singapore. To state an example, any retirement payout plans that restrict the period to 20 years (or up to the age of 85) may not be providing for the chance that you may outlive this time horizon. If that happens you may become dependent on your loved ones.

Therefore, presently life annuities are one of the best options when planning for retirement income. One way to achieve the lifestyle of one's choice is to plan early and contribute towards a deferred annuity from an early age (say 30 years), and get a regular income of the desired amount each month after retirement.

Toi See Jong is managing director, UOB Life Assurance Limited