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Retirement is the period when an individual is no longer actively employed or running a business. It can start at any age and in Singapore, the statutory retirement age is 62 years old. With increasing longevity and rapid social and demographic changes in Singapore, there is a need to consider retirement planning as early as possible in ones financial plan. This chapter covers the importance of retirement planning and its underlying principles. It also takes a look at some of the changing demographics that will affect retirement planning. With a rising standard of living and the desire for financial independence, it is necessary to consider what constitutes a comfortable retirement. Finally, it will elaborate on the financial planners role in retirement planning.
Learning Objectives
This chapter will help you to: Understand the importance of retirement planning Understand the underlying principles of retirement planning Understand how Singapores changing demographics affect retirement planning Know what adds up to a comfortable retirement Understand the role of the financial planner in retirement planning
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However, financial security in old age cannot be achieved overnight. The earlier the planning takes place, the easier it is to accumulate a sizeable nest egg. The effect of compounding magnifies the accumulated assets if one has a long time horizon to allow the assets to grow. For example, to achieve $100,000 at age 60, a 30-year-old needs to set aside only $41,198.68 at a 3% annual rate of return, whereas a 45-year-old needs to set aside $64,186.19 at the same 3% annual rate of return. With this in mind, it makes sense to start retirement planning as early as possible. 1.4 Ensuring a Smooth Transition into Retirement When one retires, one has to make many decisions that have financial implications like: What kind of lifestyle do I want? How much will it cost? What are my financial commitments and responsibilities? Will I be living where I am or will I be staying with my children? How often will I go for medical check-ups? How do I keep myself active? What kind of transportation needs do I have? Will I still be working during retirement? There is a common thread that runs through the answers to all the above questions: money. Therefore, it is vital to accumulate enough money to see one through old age. With careful retirement planning, the individual will be able to ensure a smooth transition into retirement. Otherwise, retirement can be a fearful stage in a persons life if he is unprepared for it.
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two models to determine the amount needed. One assumes that the capital is eventually depleted at the end of the retirement phase while the other assumes that the capital is preserved during the retirement phase.
3.2 Longevity According to the Singapore Yearbook of Statistics 2000, the average life expectancy for female is 80 years while that of the male is 76. Thus when one retires at the statutory age of 62, one can look forward to living another 16 years on average. Table 1.2 below shows that male and female life expectancies have increased over the past 10 years.
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Year 1990 1995 1996 1997 1998 1999 2000 2003 2004 2005
Male 73.1 74.1 74.4 74.8 75.3 75.6 76.0 76.9 77.3 77.7
Female 77.6 78.6 78.9 79.1 79.4 79.6 80.0 80.9 81.3 81.6
Total 75.3 76.3 76.6 76.9 77.3 77.6 78.0 78.9 79.3 79.6
With advancements in medical technology, better nutrition and healthier lifestyles, it is likely that Singaporeans will live longer. In this regard, the governments primary emphasis will be on health promotion and disease prevention to enable the elderly to remain socially active during their retirement years. In their vision to achieve successful ageing for Singapore, the Inter-Ministerial Committee advocates adopting a prevention approach to ensure that the younger population will age healthily in 10 to 30 years time. 3.3 Better Educated, More Independent The education profile of Singapore residents has improved significantly over the last decade as shown in the recent Population Census. The number of Singapore Residents without any educational qualification has dropped while the number of those with university qualification has increased over the past 5 years (Table 1.3). The young working adults of today place much emphasis on continuing education and upgrading to enhance their marketability in an economy that values professional skills and up-to-date work-related knowledge. The census also showed that there is an increase in the percentage of administrative, managerial, professional, technical and related occupations in the last 10 years. In the 21st century, a knowledge-based economy will produce well-informed and educated senior citizens of tomorrow. Table 1.3 Highest qualification attained by Singapore residents Singapore Permanent Citizens Residents 2000 2005 2000 2005 No Qualification 20.9 18.0 7.5 5.6 Primary 23.6 22.9 17.6 15.6 Secondary 25.3 22.5 18.5 14.2 Upper Secondary 14.5 14.9 18.4 16.6 Polytechnic 6.3 8.2 5.2 8.1 University 9.5 13.5 32.7 39.9 Total 100.0 100.0 100.0 100.0
Source: General Household Survey 2005 Socio-Demographic and Economic Characteristics
There is a significant rise in the number of nuclear families over the years due to the economic boom in the past decade and an increasing affluent young workforce. With better pay, newly married young couples would invariably prefer to set up their own nucleus family unit. Refer to Figure 1.1. The Governments effort to assist every Singaporean own a property also provides the impetus for young married couples to purchase their own home. Coupled with this is the retirees desire to remain independent especially in his initial retirement years. Such independence allows them more freedom to enjoy their retirement without the encumbrance of making day-to-day living decisions of an extended family.
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28%
8%
12%
Years
Source: Singapore Census of Population 2000
OF
DEMOGRAPHIC
CHANGES
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RETIREMENT
Demographic changes are a cause of concern at both the national and personal level. As a nation, making provisions for future senior citizens requires a multi-pronged and cohesive approach at all levels of society. The Inter-Ministerial Committee for Ageing Population is subdivided into six workgroups to look into the following areas: Social Integration of the Elderly Health Care Housing and Land Use Policies Employment and Employability Financial Security Cohesion and Conflicts in an Ageing Society The Inter-Ministerial Committee carried out a broad audit of present policies and programmes concerning the issue of ageing. It also made suggestions and recommendations in each of the above areas to deal with the issues of an ageing population. Policies changes, public education, working with private and voluntary welfare organisations and campaigns are some measures that the Government adopts to help Singaporeans age successfully. However, it is necessary for the individual to take personal responsibility and make deliberate plans for life beyond the active working years. 4.1 Take Charge and Plan Early In view of Singapores rapidly ageing population, there is an urgent need to educate the population on the need to begin planning for their financial security in old age early. Each individual ought to take charge of his retirement needs by anticipating the various issues that he is likely to address upon his retirement. The CPF scheme is but a basic financial backbone and is not adequate to provide for a comfortable retirement. In fact, most CPF savings are used for property purchase, thus creating an asset rich and cash poor phenomenon common among many Singaporeans. This leaves insufficient funds for retirement. By planning early, the individual will have time to build up a sufficient nest egg for a desired retirement lifestyle as well as rectify any investment failures one may make in the process. Being conservative in ones investment may impede the growth of it while being too aggressive may wipe out a persons resources entirely. Proper asset allocation and appropriate wealth accumulation strategies must be in place and executed with discipline to achieve success. However, if the value of the portfolio gets eroded for whatever reason, the individual who starts
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planning as early as in his 30s will have an advantage in recovering his losses over another who starts in his 40s. Planning early also allows a person to adjust his plan at various stages of his life taking to account for conflicting financial goals. Also, it is never too early to adopt a holistic approach towards retirement planning and consider other aspects of life in retirement like housing, family support, accessibility to amenities, and hobbies. 4.2 Needs versus Desires Todays Singaporeans are well-educated and have higher expectations of retirement. Besides a healthy, independent and fulfilling life, younger Singaporeans also desire a comfortable lifestyle with financial independence and security. Having been exposed to a higher standard of living in their youth, they would most likely want to maintain a fairly similar lifestyle when they retire. For them, retirement does not mean retire from enjoyment but to enjoy the same amount of freedom of choices as before. Retirement planning is therefore tailored personally to individuals desires and circumstances. With a longer life expectancy, it is also necessary to consider the possibility of elderly employment and making larger provisions to retirement nest eggs. As Singaporeans live longer and have greater aspirations in life, the definition of a desired retirement lifestyle keeps changing with the times. As such, the blueprint for retirement must be regularly reviewed to ensure that it remains relevant to address beyond the living, medical and housing needs of the individuals. All said, the greater challenge for the professional financial planner lies not just in helping his client manage his money, but his expectations as well.
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5.3 Purpose Retirement does not have to be meaningless. However, the individual will have to redefine the meaning of life when he retires. This is where relationships with family and friends take on renewed importance as he seeks not only support but also meaningful companionship. The early departure of ones spouse or partner may deepen the state of loneliness. However, a newfound purpose and meaningful relationships will encourage him to live life to the fullest. Sufficient material comfort and excellent physical well-being are certainly important to enjoy ones retirement. However, without a renewed purpose and perspective in retirement, the individual cannot achieve total contentment. Hence, as we lay plans to accumulate sufficient wealth for our old age, we should also not neglect the other non-financial aspects of retirement planning. Plan early and holistically to have a comfortable retirement.
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All of us have limited financial resources. The financial planners role is to ensure and guide the client to consider how his retirement plan may fit into the overall financial plan so that the other goals, together with the retirement plan, can be achieved without much compromise. Additionally, financial products may have to be bought as part of the implementation plan. Another role of the financial planner is to assist the client in product analysis and information. As Singapores ambition is to become the financial hub of Asia, it is not surprising that, with the Governments encouragement, there is a plethora of insurance, investments, annuity and debtbase financial products in the market. With the proliferation of financial products, the extensive range of choices may create confusion for the client. At the same time, the client may need appropriate and sufficient inputs to choose the most suitable and effective products to match his goals. These are the value-added services that a financial planner may provide. The financial planner must recognise that it is never too early to provide for medical contingencies even when one is healthy. It is best to advise the client to have a comprehensive health insurance plan in place to ensure complete coverage as early on in the planning stage as possible. Otherwise, it is necessary to indicate to the client that postponing the acquisition of such insurance may result in an uninsurable risk caused by poor health later on in old age. Also, a medical condition may arise later on, and this will lead to an imposition of an exclusion clause that renders the coverage incomplete. Health insurance planning is a critical part of retirement planning that cannot be neglected. It is important for the planner to help the client realise that retirement planning is an ongoing process that requires periodic fine-tuning. With the familiarity of the various strategies and goals of the plan as well as the assurance of continuity, the financial planner is a valuable asset to the client in ensuring his financial security during retirement. 6.2 Post-Retirement Planning The first thing to evaluate upon ones retirement is the availability of passive sources of income like annuities and rental income. It is important for the financial planner to assist the client to evaluate the dependability, consistency, variability, and perpetuity of these sources and the need for a supplementary income. Will there be sufficient liquidity for a supplementary income or does the client need to liquidate some investments to attain this? If so, what are the most suitable assets one should liquidate? How will this affect the overall asset allocation during the remaining years of retirement? Upon retirement, it is unlikely for a client to convert all his assets into liquid capital for consumption purpose. Hence, there is a need to consider proper asset allocation to continue to preserve and grow the remaining assets. Also, they should be protected against any inflationary pressures so as to retain or enhance their purchasing power. There is a need to work with the client to reconsider investment strategies, as the objective during retirement is skewed towards wealth preservation. Lastly, as death may occur unexpectedly, the financial planner must not overlook the need to discuss issues involving the transfer of wealth to beneficiaries. Most people will need advice on proper estate distribution, an area most people are unfamiliar with. Wills may also be used as a vehicle to transfer assets. Thus, the role of the financial planner is to highlight the implications of the various options that the client may exercise to ensure proper wealth distribution.
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SUMMARY
Financial security cannot be achieved overnight. Careful, deliberate and early planning ensures the success of accumulating a sufficient retirement nest egg. The changing demographic characteristics and the states advocacy towards self-funded retirement are strong indicators that we have to be financially independent in our retirement. A holistic approach to retirement planning in the areas of wealth, health, relationships and purpose is essential for a comfortable retirement. The role of the financial planner in retirement planning is to provide the necessary guidance and advice relating to the various financial concerns a client has before and during his retirement. It involves needs analysis, product comparisons, strategy implementation and counselling the client to achieve a successful retirement.
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REVIEW QUESTIONS
1. Why is retirement planning important? 2. Why is there a need to take personal responsibility for retirement planning? 3. What are the possible competing financial goals to retirement planning? 4. What are some of the issues that a retiree would face that may have financial implications? 5. What are the underlying principles of retirement planning? 6. Identify the various sources of income that a retiree can depend upon apart from his employment income. 7. Describe the characteristics of Singapores demographics. 8. What will be the ratio of senior citizens to the rest of the population 30 years from 2000? 9. What is the average life expectancy of a Singaporean male and female? 10. What are the six workgroups formed by the Inter-Ministerial Committee on Ageing Population? 11. Why do individuals need to plan early for retirement? 12. What are the retirement expectations of the young affluent? 13. What adds up to a comfortable retirement? 14. What is the role of the financial planner in retirement planning? 15. Why is it never too early for the financial planner to help his client set up proper health insurance as part of retirement planning?
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10. The six Inter-Ministerial Committee workgroups are: (i) Social Integration of the Elderly (ii) Healthcare (iii) Housing and Land Use Policies (iv) Employment and Employability (v) Financial Security (vi) Cohesion and Conflicts in an Ageing Society 11. The advantages of planning early are: Sufficient time to build sufficient nest egg for ones desired lifestyle during retirement. More time to rectify any investment failures one may make in the process. Flexibility to alter ones plan to take into account the different financial goals. More time to consider a more holistic approach, taking into account issues like housing, family support, accessibility to amenities and hobbies so as to plan holistically. 12. Young Singaporeans today are impatient and cannot wait to enjoy the fruit of their labour. They are used to a comfortable lifestyle with all the trimmings of material wealth, and would not expect life in retirement to be any different. With growing affluence, such desires become basic needs in the future. 13. A comfortable retirement consists of: Sufficient financial resources to be independent Good health to live an active life Purpose in life with meaningful relationships 14. The role of the financial planner is to: Set up, implement and monitor the retirement plan of the client so as to ensure that the retirement goals are achievable Provide financial product analysis and advice Ensure adequate and comprehensive health insurance is established Evaluate the dependability, consistency, variability and perpetuity of the various income sources Plan for wealth transfer upon death: estate planning 15. The financial planner must recognise that it is never too early to provide for medical contingencies even when one is healthy. It is best to advise the client to have a comprehensive health insurance plan in place to ensure complete coverage as early as possible during the planning stage. Otherwise, it is necessary to inform the client that postponing the purchase of such an insurance may result in an uninsurable risk caused by poor health later on in old age. Also, a medical condition may arise and this will lead to an imposition of an exclusion clause that renders the coverage incomplete. Health insurance planning is a critical part of retirement planning that cannot be neglected.
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