February 16, 2024, marked the closure of the loophole to ‘shield the Special Account’ – the risk-free and high-yielding liquid CPF account.
Two of my colleagues are moderators of the 1M65 Telegram group. According to one of them (Choong Hwee), his unread messages shot up to over 3000 messages at one point, after the announcement.
As expected, most of the comments were emotionally charged, given that the announcement was unexpected. The pain was real. As one member said, he could potentially lose $100,000 of interest per annum with this change. Amongst other remarks, what stands out for me was a comment from a member who said, “If your retirement plan does not account for policy risk, then your plan is not good enough.” Policy changes are not uncommon. The same is true for the market if you are investing, or the security of one’s job.
How then, does one have a fail proof retirement strategy? Here is some food for thought:
a) Start with a Clearly Documented Wealth Plan
We are bombarded daily with product options to grow one’s money. Before you go about deploying your monies, you need to ask yourself, what is the end state you would like to achieve? What are the life events you are saving for? A good wealth plan starts with clear goal setting. It helps you organise your priorities in resource allocation in support of these goals. Knowing the “whys” helps you to stay on track to accumulate towards these goals.
Financial fitness is also important. Financial fitness includes:
– Risk mitigation using insurance.
At its core, insurance is about protecting individuals against potential losses or damage where the impact of such losses could potentially derail your wealth plan. For example, health insurance provides financial relief in the event of an illness or injury. With a comprehensive coverage in place, you can make quick decisions regarding the treatment and post-care.
Over time as your financial position changes, it is also important to review your coverage to ensure that your coverage is still adequate for your life stage. One such aspect is loading up on coverage for income replacement if you are diagnosed with a dreaded disease or occupational disability.
Your ability to bring in income provides the financial resources to support the family’s lifestyle as well as to save and invest for the greater future that you would want to provide for your loved ones. So, buy as much insurance as you need but pay as little as you can. You can find out more about Providend’s insurance philosophy here.
– Debt reduction.
If you are keeping cash above what is needed for short-term liquidity but not investing it, then a better outcome would be to pay down the debt. Debt reduction results in interest savings as well as peace of mind.
b) It’s About Your Saving Rate
Do you prioritise savings? For most people, savings is a behaviour that does not come naturally since humans are mostly consumption creatures. For some, their personal self-worth is tied up with what they consume; the house they have, the car they drive. It is not how much one earns but how much one saves that contributes to your ability to achieve financial independence. By raising one’s saving rate, you will need less money to live and therefore become financially independent quickly. Changing one’s views about consumption is also helpful. It is good to realise early that consuming more does not make one’s life better. In an article written by my colleague Kyith Ng, titled “The Surplus Rate of a High Net Worth Averages Around 37%. What’s Yours?’’, he concluded that if the savings rate goes above 50%, the rate of return of one’s wealth matters less. If you think a savings rate is reserved only for high-income earners- it is not. It’s about being intentional in where you allocate your resources. Know what you value most and what is optional in your life.
c) Start Your Investing Journey Early
After you have set aside monies for your short-term liquidity needs, resources should be directed towards longer-term wealth goals through systematic savings and investment in a globally diversified portfolio in accordance with your risk profile, using a low-cost index or evidence-based instruments to build your portfolio. Investment is about time in the market. Invest with conviction and follow the evidence about what works in investment. Market timing, individual stock selection, and forecasting do not provide reliable outcomes. Data has shown that a small number of stocks are responsible for the overall market return. So, missing out on those returns can greatly hurt the portfolio. By investing in a globally diversified portfolio, you have a higher probability of holding the best-performing stocks and capturing the upside when it shows up.
d) Provision for Essential Expenses
Retirement planning, to most people, is about accumulating towards a retirement nest egg and decumulating to fund towards a certain level of lifestyle.
However, the reality of retirement planning is more intricate than this simple framework suggests. A closer examination of a retiree’s expenses reviews a crucial distinction between two categories: essential and discretionary expenditure.
Essential expenses encompass those costs that are indispensable for maintaining a basic standard of living and meeting fundamental needs. Without these expenses, an individual would face significant inconvenience. Examples of essential expenses include food, utilities, transportation, and mortgage repayment. In contrast, discretionary expenses offer more flexibility and can be adjusted or cut back depending on an individual’s preference or financial circumstances. These typically include entertainment, hobbies, and travel.
During the COVID-19 pandemic, when people’s mobility was restricted, individuals were forced to prioritise their essential needs. This is when one must deeply reflect on which expenses are truly essential and non-negotiable. It is beneficial to assess how much one’s budget can be reduced until it becomes uncomfortable, thereby establishing a baseline for essential expenditure. The more inflexible one is with their essential expenses, the more conservative one will need to be. What this also means is that more capital has to be allocated for such provision.
In our RetireWell™ planning methodology, which is a spending plan for retirees and near-retirees, the income bucket is designed to provide a constant stream of income throughout retirement. Instruments that are suitable for this bucket would be direct bonds, annuities, rental income from properties and for Singaporean and Singapore PRs, CPF LIFE. Not all income-yielding instruments behave similarly. CPF LIFE payouts, payouts from retirement income products, and coupons from bond portfolios provide an income stream that is more reliable and certain, while rental income and dividends from stocks tend to be more variable.
Ideally, income sources for essential and inflexible expenses should be fixed and reliable. It is an income the retiree can rely on regardless of market conditions. Annuities and similar products can fulfill this role, thereby reducing the need to draw down cash/investment assets and preserving more resources for the latter retirement years. Having the safety of a reliable income stream helps one to stay invested as it eradicates the sequence of return risk. This thus frees up the rest of the resources for investment at a higher risk level, thereby providing for longevity or leaving more resources for unexpected expenses like healthcare and supporting family members.
From the year 2025, CPF members aged 55 and above have the option to allocate up to four times the enhanced basic sum scheme. At $426,000, an age 55 cohort can receive $3,300 per month from age 65 onwards for life. If CPF LIFE payout is insufficient, you can buy into a bond portfolio to derive coupons to fund essential expenses. As you may already know, annuities and similar products can provide an income stream that is reliable and certain, but they do not hedge against inflation. Therefore, in the RetireWell™ methodology, Bucket 1 is set aside holding cash or near-cash to supplement expenses that must be certain and inflexible. To have a failsafe retirement, it warrants one to have a handle on essential expenses to keep them to a low base.
Discretionary expenses can be funded through a portfolio of equity and bonds in various proportions according to the required time horizon. Equities offer inflation protection and potential capital growth to hedge against longevity, thus ensuring that the retiree will not deplete their resources.
e) Provide for More Resources
You may have read about the 4% safe withdrawal rule. This rule was created using historical data on stocks and bond returns over a 50-year period from 1926 to 1976. The 4% rule is a guideline to estimate a safe income stream that will meet a retiree’s current and future retirement needs after adjusting for inflation.
There are many contentions to this rule, for example:
– What if future market conditions change?
– It will also require the retiree to track his expenses year in and year out. A few major expenses during protracted market conditions will have severe consequences down the road. But for a quick and simple guide, it is still a good rule to use because here we are estimating whether we have accumulated enough for our long-term wealth goal. If your expenses divided by your financial assets can give you a 3% withdrawal rate or lower, you have indeed accumulated sufficient financial assets to achieve financial independence. If you want to be more conservative, you can exclude your income-yielding resources, e.g., your CPF.
f) Regular Review of Your Wealth Plan
In life, change is to be expected. Over time our philosophy and values change. Our lifestyles and preferences change. The people that we hang around with may also change. Our retirement sum is derived based on the lifestyle we have today. What may be a want may become a need as our desire for a higher quality of life increases. This could also be a result of declining health or a reduction in energy levels. We may also realise that money can help one buy more time. If we could afford this financially, then why not? One example of such is the engagement of a part-time cleaner. It not only saves you time, but it may potentially save you from injuring your back due to back-breaking household chores.
At Providend, our client advisers hold regular progress review meetings with clients. During these review meetings, the client adviser revisits the wealth plan they have developed for the clients based on the client’s life goals. There will be a check-in to understand the client’s situation. If such changes may possibly impact the plan that was done up for them, updates or replanning will be done to ensure the wealth plan remains current.
In Conclusion
I have given some financial planning handles on how to have a fail-safe retirement strategy. Out of these, I reckon that holding a tight rein on one’s expenses that are essential to support a basic lifestyle is most important. Taking a cue from the legendary investor Warren Buffet, despite all the wealth he has, he lived a prudent and simple lifestyle.
I have come to realise that life’s pleasures need not be extravagant. Personally, I find profound joy in simple moments like:
Witnessing the growth of my houseplant:
Learning how to make Kueh Dadar with my friend:
Spending precious time with my daughter:
By prioritising simplicity, not only do I enhance my quality of life, but I have also increased my saving rate. This, coupled with starting my investments early and harnessing the power of compounding, enables me to accumulate a substantial nest egg that exceeds my needs. Consequently, I pave the way for a more fail-safe retirement where financial worries are minimised.
My focus shifts to cherishing life’s simple and priceless moments.
This is an original article written by Eleanor Ng, Associate Director of Advisory Team at Providend, Southeast Asia’s first fee-only comprehensive wealth advisory firm.
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