finance
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topic_8_-_retirement_planning_41.pptx
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
Population Statistics
Source of Chart: Role of the Government in Healthcare Provision and Financing in Singapore, presented by Mr Edward Reiche
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
Decreasing Health and Independence
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.
Active
Passive
Support
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
CPF Ordinary Account
Savings can be used to buy a home, CPF Insurance, Investment and Education
CPF Special Account
For old age and investment in retirement-related financial products
Medisave Account
Savings can be used for hospitalisation expenses and approved medical insurance
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 2011
Source: 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
| Employee Age (Years) | Contribution Rate (for monthly wages ≥ $1,500) | Credited into | ||||
| Contribution by Employer (% of wage) | Contribution by Employee (% of wage) | 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
Source: http:// mycpf.cpf.gov.sg
| 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)
Source: http:// mycpf.cpf.gov.sg
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
Source: http:// mycpf.cpf.gov.sg
| 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.PDF
Unit Trust - http :// mycpf.cpf.gov.sg/NR/rdonlyres/83FD2278-D807-445B-B063-F301B30CDE09/0/RCSUT.pdf
ETF - 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)
CPF Medisave Account (CPFMA)
Source: http:// mycpf.cpf.gov.sg
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
Source: http:// mycpf.cpf.gov.sg
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
Straits Times, Thursday 5 July 2012, Mind Your Body
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
MMS
MRA
$43,500
$38,500
$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
*Source: http:// mycpf.cpf.gov.sg
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 Savings
be 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)
*Source: http:// mycpf.cpf.gov.sg
CPF Minimum Sum (MS) Scheme
| Year | 2003 value | 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 be Announced | To be Announced |
| 1 July 2014 | ||
| 1 July 2015 | $120,000 |
*Source: http:// mycpf.cpf.gov.sg
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 Withdrawal
| Cash 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 at 31 Dec 2011 | Applicable DDA |
| 62 and above | 62 |
| 60-61 | 63 |
| 58-59 | 64 |
| 57 and below | 65 |
*Source: http:// mycpf.cpf.gov.sg
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
*Source: http:// mycpf.cpf.gov.sg
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 2012
Source: 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:
monthly payouts are not indexed against inflation, therefore subsequent payouts will depreciate in value and hence, purchasing power
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
Singaporeans are expected to live much longer
Better lifestyle
Better medical support and advancement
*Source: http:// mycpf.cpf.gov.sg
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
*Source: http:// mycpf.cpf.gov.sg
CPF LIFE - Eligibility
An Individual may apply to join LIFE between the age of 55 and 80, but must satisfy two conditions:
Must be a Singapore Citizen or a Singapore Permanent Resident
Must have Retirement Account Savings
*Source: 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.
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 |
*Source: http:// mycpf.cpf.gov.sg
Improved and Simpler CPF LIFE
From 1 Jan 2013, members can choose between 2 CPF LIFE plans*
Standard Plan (default plan)
Is a combination of the Balanced and Plus Plans
Higher payouts while preserving flexibility in the use of Retirement Account savings prior to age 65
Members can also leave a bequest for their beneficiaries
Basic Plan
For members who prefer to leave a higher bequest and lower monthly payouts
Allows 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
MA goes towards funding
medical expenses
Amounts in excess of MS can be withdrawn in cash as long as MRA is met
Finances lifelong disbursement for retirement
MSS
(age 55)
LIFE
(age 65)
CPF
OA
SA
MA
RA
(created at age 55)
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
*Source: Ministry of Finance
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.
*Source: Ministry of Finance
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
*Source: Ministry of Finance
| Absolute Income Base = $85,000 | ||
| Contribution Rate | Singaporean & SPR 15% | Foreigner 35% |
| 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
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
Growth of SRS Investments
Closing Investment Balance25 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 5100 10761 16689.75 23239.297500000001 30439.764374999999 38343.158193750001 47004.031823437501 56480.833470609374 66836.098143339841 78136.722053066827 90454.250538232169 103865.18458780939 118451.30688281621 134300.02858393328 151504.7581540432 170165.29358407718 190388.23947406767 212073.1570891123 234971.45145755628 259170.84088290308 284744.12797035644 311769.37842333055 340329.02610155201 370510.1888069518 402404.93037304503 436110.541701462 471729.83752384479 509371.47002593242 549150.26027736312 591187.54847891908 635611.56409556093 682557.81700429623 732169.51085002988 784597.97987028735 840003.15052128921 898554.02931350633 960429.21834478376 1025817.4601035941 1094918.2132042812 1167942.260810497 1245112.3536027537 Inflation Adjusted Value of Investment
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 5100 10447.57281553398 15731.690074465076 21267.249276351726 27045.3363887 92904 33075.145078960384 39365.136652786394 45924.086248550062 52761.033059864967 59885.291191953685 67306.45740204239 75034.419244091361 83079.363430170721 91451.784425351463 100162.49328188159 109222.62671920996 118643.6564565609 128307.74776113454 138020.96352993973 147801.50911261642 157655.91980411741 167591.40362208005 177615.16655507369 187734.45537761075 197956.56091985217 208288.82353033751 218738.63843522914 229313.46112487876 240020.81276472402 250868.28563490251 261863.54860256735 273014.35263092362 284328.53632901353 295814.03154629341 307478.86901606625 319331.18405185116 331379.22230079887 343631.34555828554 356096.03764785337 368781.91037069191 381697.70952889934
Age
SRS withdrawals
Under certain circumstances, SRS savings can be withdrawn with penalty. However, 50% of savings withdrawn will be subject to income tax if you
withdraw your savings after achieving the statutory retirement age prevailing at the time you made your first SRS contribution
withdraw your savings upon death
withdraw your savings on medical grounds – physical or mental incapacitation
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.
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 Taxed |
| Death | 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% |
*Source: Ministry of Finance
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
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
This being $124,511 less 10% (20% tax on 50% of the withdrawal), then discounted for inflation
Growth of SRS Investments
Closing Investment Balance25 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 5100 10761 16689.75 23239.297500000001 30439.764374999999 38343.158193750001 47004.031823437501 56480.833470609374 66836.098143339841 78136.722053066827 90454.250538232169 103865.18458780939 118451.30688281621 134300.02858393328 151504.7581540432 170165.29358407718 190388.23947406767 212073.1570891123 234971.45145755628 259170.84088290308 284744.12797035644 311769.37842333055 340329.02610155201 370510.1888069518 402404.93037304503 436110.541701462 471729.83752384479 509371.47002593242 549150.26027736312 591187.54847891908 635611.56409556093 682557.81700429623 732169.51085002988 784597.97987028735 840003.15052128921 898554.02931350633 960429.21834478376 1025817.4601035941 1094918.2132042812 1167942.260810497 1245112.3536027537 Inflation Adjusted Value of Investment
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 5100 10447.57281553398 15731.690074465076 21267.249276351726 27045.3363887 92904 33075.145078960384 39365.136652786394 45924.086248550062 52761.033059864967 59885.291191953685 67306.45740204239 75034.419244091361 83079.363430170721 91451.784425351463 100162.49328188159 109222.62671920996 118643.6564565609 128307.74776113454 138020.96352993973 147801.50911261642 157655.91980411741 167591.40362208005 177615.16655507369 187734.45537761075 197956.56091985217 208288.82353033751 218738.63843522914 229313.46112487876 240020.81276472402 250868.28563490251 261863.54860256735 273014.35263092362 284328.53632901353 295814.03154629341 307478.86901606625 319331.18405185116 331379.22230079887 343631.34555828554 356096.03764785337 368781.91037069191 381697.70952889934
Age
Planning for Your Retirement
Goal Setting
Gathering Facts
Developing Solutions
Implementing Solutions
Periodical Reviews
Analysing Facts
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 Enough
The 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?
Rule-of-Thumb: 60% of your last drawn income just before retirement, or
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 Techniques
When 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)
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
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)
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 $827,402
One 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 Website http://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 Booklet http://app.mof.gov.sg/supplementary_retirement_scheme.aspx
NLIC
SRS Main
CPF Member Main
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!
