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Let’s break down the steps to planning for you and your parents’ retirement

Most Singaporeans associate retirement with their CPF savings. Yet payouts from the CPF Board’s retirement savings scheme are meant to offer only a very basic retirement income, so ensuring that you have other sources of finances is crucial.

However, planning for your retirement can be challenging if you are also financially supporting your aged parents’ retirement. Careful planning is the key to doing both successfully.

Let’s break down the steps to planning for your and your parents’ retirement.

Plan for your retirement

Your first step to a comfortable retirement is to determine how much money you need to set aside for retirement at your desired age. Take into consideration the lifestyle you wish to lead and work out how much income you would need to live like that today. A common approach is to take your current annual expenses and multiply by 25. Using this approach you can safely withdraw 4% per year without drastically reducing your savings.

When you retire, the cost of living is likely to be significantly higher than it is today due to inflation. So, your next step is to adjust the sum upwards to take this into account. Typically, you can use a 2% inflation rate when planning for your retirement. Based on your estimations, you should have an idea as to how much money you will need when you reach your desired retirement age. You should also know how much time you have before the age you wish to retire.

Suppose you are currently 35 years old and wish to retire at 60 with $3 million. Assuming you have not begun planning for retirement, you would have 25 years to build up a retirement nest egg of $3 million. Next, you will need to draw up a plan that enables you to achieve your retirement goals by setting aside a certain sum of money on a monthly basis.Where you allocate your retirement money depends on how aggressive you want to grow your savings. More aggressive growth strategies typically come with additional risk, so do your research before allocating your money in any investment vehicle.

With that said, some common ways to save or invest include:

  •  Conservative Risk / Low Returns: Savings Accounts, Money Market Funds, Fixed Deposits, Government Bonds (Singapore Savings Bonds or SGS Bonds)
  • Moderate Risk / Medium Returns: Corporate Bonds, Unit Trusts, Index Funds and ETFs, Real Estate
  • Aggressive Risk / High Returns: Equities, Futures, Options

The actual risk of your investment can vary greatly based on the individual fund or stock you purchase, so do your homework before investing your money, and diversify your money where possible. Seek out an investment professional to ensure you understand the risks of any investment decision, and to help structure a plan that works best for you. Properly structuring and allocating your retirement savings, especially in your younger years, will help you take advantage of compounding returns over the course of your career.

Plan for your parents’ retirement

If your parents do not have a retirement plan of their own and are relying on you to support them financially, you will have to do the planning on their behalf.

The first thing you should consider is fulfilling your parents’ basic needs. Set aside a monthly allowance for necessities including food, housing, and utilities. Even if your parents have not retired yet, setting aside that money now will allow you to adapt your budget ahead of time, as well as accumulate an emergency fund dedicated to your parents’ needs.

Your next step is to plan for any unforeseen circumstances. If you are the sole provider for your family and your parents, consider your options to provide them financial security should you pass away or become permanently disabled. One option is to purchase a life insurance plan. Whole-life insurance plans will provide coverage for your entire life, but premiums are often higher, whereas term-life insurance plans will provide coverage for a fixed period of time, with lower premiums. What you choose will depend on your unique circumstances, so review your needs before purchasing any plan.

You can also consider disability income insurance, which offers payouts to cover your financial commitments and savings or investment plans if something should happen to you. Critical illness insurance is another type of plan that can offer financial support if you are unable to work because of an illness. In addition, ensuring that your parents have adequate health insurance is key, as medical care costs can be prohibitively expensive as they age. Consider purchasing additional health insurance coverage that can cover the bulk of their medical bills if they are hospitalised.

Lastly, any extra savings that you can set aside and invest now will lighten your financial burden when they do retire. Since the time horizon for this money is much shorter than for your retirement, your risk appetite will likely be lower. Consider less risky options, like the Singapore Savings Bonds, Fixed Deposits, and High Interest Savings accounts, as you may need to tap on that nest egg in the near term.

Review your finances and plan your budget

Now that you have determined how much you should set aside for your and your parents’ retirement, it is time to see how it will fit into your current budget.

Based on your income after taxes, subtract all necessary spending such as home loan repayments, groceries, utilities, transportation expenses, as well as your children’s school fees. With that remaining sum, do you have sufficient funds to put aside for you and your parents’ retirement?

If you find that your income is not sufficient to support both you and your parents through retirement, you will either need to identify additional sources of income, or review both your budgets to streamline your spending. The remaining sum is what you can afford to allocate to discretionary spending. This includes money for dining, shopping, and holiday travel. It is this category of spending that needs to be reduced in order to make way for your retirement savings.

For instance, you may find that you were previously allocating $3,000 a month to discretionary spending (this includes money for dining, shopping and holiday travel) but should cut this amount to $2,000 a month in order to accommodate for you and your parents’ retirement plans. You will thus need to identify ways in which you can reduce your spending by $1,000. You may opt to go on fewer overseas holidays a year, spend less on retail therapy or dine out less often. If you can afford the required monthly amounts for both retirement plans, you can set up systems that will make it easy and convenient to set aside the required sums each month.

Some ways to do this are:

  • Automatically invest money through a regular savings plan
  • Autopay your insurance premiums by credit card
  • Set up recurring deposits from one account to another to set sums aside for specific uses

Even if your retirement plans are within your current budget, you may wish to review the retirement plans once again – to park aside even more savings for the days ahead.

The infographic below offers an overview of retirement planning for your and your parents’ retirement:

Retirement planning for two generations is much less daunting if you break it down into simple steps. Take an honest look at how much you need to set aside every month, and then work to incorporate it into your budget. You will be rewarded for your efforts by the satisfaction of taking care of your parents, and later on, by enjoying a comfortable retirement.

Speak to one of our trusted financial advisors today to learn more about how we can help you.

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Disclaimer:

This article is for general information only and it does not constitute an offer, recommendation or solicitation to enter into any transaction. This article has not been prepared for any particular person or class of persons and it has been prepared without regard to the specific investment or insurance objectives, financial situation or particular needs of any person. You should seek advice from a licensed or an exempt financial adviser on the suitability of a product for you, taking into account these factors before making a commitment to purchase any product. In the event that you choose not to seek advice from a licensed or an exempt financial adviser, you should carefully consider whether the product is suitable for you. You are fully responsible for your investment decision, including whether the investment is suitable for you. The products/services involved are not principal-protected and you may lose all or part of your original investment amount.