Retirement is a complex topic, because it’s different for everyone. A retirement plan that works for one person might be a disaster for another, and vice versa. There are, however, some things that all retirement plans have in common. These are the common things to avoid, if you hope to retire well:
1. Start Worrying About Retirement and Savings Only in Your 40s
Retirement planning should be a concern from your 20s. This is due to the nature of compounding interest.
If you were to save S$200 a month for 42 years (from the age of 20 to the retirement age of 62), at a compounding interest rate of 5% (attainable from many financial products, such as insurance policies), you would have around S$342,000 by the time your retire.
If you start saving $200 a month from the age of 40 (22 years to retirement), at the same interest rate, you would have around $97,600 at retirement. That is a difference of around $244,000.
That can make the difference between retiring in a studio apartment, and retiring on a beach house in Bali.
2. Make a Habit of Rolling Over Your Debts
The best credit card in the world, as well as the best line of credit, cannot help you if you keep rolling over your debt. Many people forget that you’re supposed to pay your debts in full, even if the banks allow you some leeway.
At an interest rate of about 24% per annum, there is no way to “out invest” your credit card debt. As such, you should avoid ever accumulating it in the first place. In a worst case scenario, when you cannot pay your debt in full, you should use a balance transfer to pay it down before the interest accrues. You can use comparison tools to find the best balance transfer options.
You cannot retire well if you are still struggling with mounting debt in your 40s and 50s, so when you do incur debt try to pay it down as soon as you can. The only possible exception to this rule is your housing loan (visit our blog for more details on that).
3. Take Loans as and Where You Find Them
As there are around 117 banks in Singapore, and countless other credit options it is understandable that you might get a bit overwhelmed. You might feel a temptation to just grab the closest loan when you need it, without bothering to check the details.
This can have a devastating long term impact on your wealth, and hence your retirement. For example, clueless Singaporeans who turn to licensed moneylenders can be saddled with interest rates of as high as 48% per annum.
Most banks offer personal loans at just 6 to 8% per annum, but even these differ significantly. Some alert borrowers, for example, can get loans at 0% interest. In order to work out what’s best on the market, without visiting every bank, you can just use a loan calculator in Singapore.
The cheaper your loans, the sooner you can pay them down. And the more you’ll be able to accumulate for retirement (see point 2).
4. Assume You Can Live on $X a Month
It is an erroneous belief, among some people, that they can happily live on (insert ridiculously small amount) a month. For example, some claim they are happy to live on S$900 or less a month, so retirement will not be an issue.
These are dangerous assumptions to make.
For example, if you truly only had S$1,000 a month to live on, what would you do if the plumbing in your house breaks down? Or if you need a good suit for an occasion but yours is worn out or no longer fits?
These unpredictable expenses are not “little”, and have caused retirees to resort to pawn shops or living in extreme discomfort. Remember that most of us think we spend much less than we really do, and that it is difficult to live on a tight budget for long (if you really think you can live on a small amount, try it out for a month and see how it feels. Then decide if you can live that way for 10 or 20 years).
Speak to a qualified wealth management service, or a financial adviser, to get realistic long term planning.
5. Rely Only on Fixed Deposits
The average cost of living rises by 3% per annum in Singapore. The average fixed deposit grows at less than 1% (we can try and find you better alternatives at SingSaver, but it is unusual to have fixed deposits above 1%).
In effect, your money stagnates when you leave it in the bank. This is called inflation rate risk, and to beat it you need to both save and invest. A typical way of doing this is through insurance policies or Exchange Traded Funds, which can provide returns ranging between 5% to as high as 9% (speak to a financial adviser for more details), and are fairly safe.
Some financial advisers may also point you toward investments such as gold, which act as a hedge against inflation.
The means are varied, but the general rule is the same: to plan for retirement, you should have investments that beat the inflation rate by about 2%. You should also save until you have an emergency fund of six months of your income at all times, within immediate reach. This is to minimise the chances that, during an emergency (e.g. you break a bone and need surgery), you will not incur rollover debt.
Rohith Murthy runs SingSaver.com.sg, a personal finance website dedicated to savings and smart credit choices. He has worked in the banking industry for more than 10 years, and believes that informed financial choices change lives.