Ideally, Singaporeans should save for retirement in their 20s. So how do you start saving for retirement if you start at 50?
First published on 21 October 2016. Last updated on 15 December 2016.
By the time they reach retirement age, the average Singaporean would have only half (or less!) the amount of money they need in order to retire comfortably. Also, 6 in 10 Singaporeans only start saving for retirement from the age of 45 onwards.
If you’ve fallen behind on building your retirement fund, all is not lost. Depending on how you utilise your remaining years during which you are economically viable, you may still be able to come out on top.
Here are some strategies to help strengthen your financial position and make up for lost time.
Before All Else, Clear Your Debts
Credit card debt is a common problem faced by many Singaporeans. The issue with debt goes far beyond a queasy feeling every time you open your bills. There are three ways that debt negatively impacts you.
First, the presence of debt erodes your quality of life by eating into your expendable funds. This means you have less money to pay for the things that you enjoy.
Next, if you’re not careful, your debts could go out of control, thanks to the power of compounding interest. You could find yourself struggling to get by.
Finally, debt has a negative impact on your future. That’s because every dollar spent on debt means dollars lost from your future retirement fund. (S$1 saved today at 3.5% yearly interest will grow to S$1.99 in 20 years).
If you have debt that will take you more than a year to pay off, drop everything and deal with it first. Classify your debts according to interest rate, and prioritise clearing the one with the highest interest. If you have debt from multiple credit card worth 12 months your monthly income or more, use a debt consolidation plan to pay it down.
Set Up an Emergency Fund
It is a good idea to set aside between 3 to 6 months of living expenses in an easily accessible account. This emergency fund will help you cope with unexpected situations such as costly home repairs or retrenchment, without getting deeper into debt.
Saving money while dealing with debt can be tough, as there’s always the temptation to pay down the debt as quickly as possible. However, not saving any money will leave you vulnerable if an emergency occurs.
It’s still possible to save money while repaying debt with strategies like a 0% balance transfer. Whatever money you’ve saved from avoiding interest can go straight into your emergency fund.
Earn a Second Income
Hopefully, you should be throwing every last cent you can spare towards clearing your debts and building your emergency fund. Kudos to you for doing the difficult (but right) thing, but consider creating a second stream of income to help you out.
Aim to earn an extra S$300 per month to start with. It’s an achievable figure, yet also not insignificant, especially once it starts stacking up.
Your secondary income can be used in several helpful ways:
- As an R&R fund – you’ll dip into this to reward yourself every time you reach a milestone, such as each time you clear a credit card debt. Rewarding yourself regularly will help keep you going.
- As seed money to kick start your investment portfolio – some instruments require a minimum investment amount in the thousands.
- As a booster to clear your debts faster – every few months, you can throw in an extra thousand or so to lower the overall interest you need to pay. This is immensely gratifying.
- As spare cash – an extra layer of financial cushioning can be helpful in keeping your motivation and energy up.
How can you start earning an additional S$300 per month, without having to spend long hours at a second job, or time and money on a professional certification? Chances are, you already possess a skill or two that can be parlayed into a paying side gig. The trick is to understand what needs people have, and how you can fulfil those needs.
For example, let’s say you work as an admin officer. Offer to help organise monthly bills and correspondence for others so they don’t miss payments, which costs them extra money. At S$30 per person per month, you just need 10 clients to hit the S$300 target.
What if your skills are too niche, or you have none? Well, as long as you’re in good health, you can still earn a side income through physical labour, such as being a part-time house painter, or a dog walker. There are also other side jobs you can do.
Monetise Your Assets
Frivolous spending is probably one of the reasons why you find yourself struggling to get ready for retirement now. You can help yourself get back on track by monetising your assets to help recover those lost funds.
We’ve talked about how much money you can save by cutting out unnecessary subscriptions and selling off possessions that you no longer need. Another angle to tackle is how you can make money off your existing assets.
For most Singaporeans, their HDB flats are their only non-cash asset. If you and your family can spare the space, consider subletting a room. The high number of migrant workers and foreign students coming through Singapore, coupled with existing single-unfriendly policies, help make finding tenants easy.
Subletting your property can help you offset your mortgage payments, while putting more cash into your pocket. And if your mortgage is paid up already, then any rental income can go directly towards your retirement funds.
Besides subletting or short-term rentals, there are also other ways to make money from your flat.
Cash Out Your Insurance Policies
If you have any insurance policies that have matured, consider cashing them out and putting them into other instruments. One good option is to put them into your CPF Special Account to take advantage of the high interest rates.
Another good reason is to make up the Full Retirement Sum (previously known as the Minimum Sum, now standing at S$166,000) to receive higher lifelong monthly payouts through the CPF Life scheme.
When you cash out your policies, it is likely that your insurance company will attempt to get you to re-invest your funds with them. They may try to sell you an annuity plan, which also provides a lifelong payout.
If an annuity plan and CPF Life sound like they’re the same thing, that’s because they are. However, as it is underwritten by a fund backed by Singapore Government bonds, the CPF Life scheme provides the highest returns in the market, at present. In other words, you’ll be hard-pressed to find an annuity plan that gives a higher total return.
Having said that, you should be aware that annuity plans offered by insurers may be structured differently from CPF Life. Depending on your needs, you may find these plans more appealing.
Before you re-invest your funds in any new schemes, ask a trusted financial adviser to do a side-by-side comparison for you. Don’t be tempted by high-risk products. Instead, focus on protecting your capital and mitigating the effects of inflation.
Never cash out your policies and leave yourself without protection. Replace your high-premium life plans with cheaper term protection plans to ensure you’re sufficiently covered.
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By Alevin Chan
A Certified Financial Planner with a curiosity about what makes people tick, Alevin’s mission is to help readers understand the psychology of money. He’s also on an ongoing quest to optimize happiness and enjoyment in his life.