Your To-Do List For Recession-Proof Retirement Savings
You’ve spent the last few years working hard while diligently building your retirement savings. It seems like you’re on track towards a comfortable retirement in Singapore. But then the COVID-19 pandemic came out of nowhere, causing Singapore to enter a recession in 2020.
Even though things are looking brighter this year with a strong growth forecast (Source: TODAY), there's still some level of uncertainty involved as the pandemic situation keeps evolving. We won't know how long it'll take for the economy to recover, and there's no guarantee that you won't face financial challenges during this time. However, there are still ways to protect your nest egg from it.
Here are some tips that may keep your retirement savings recession-proof.
Figure Out How Much You'll Need
The concept of retirement can mean many things to different people so it's important to first think about what kind of retirement you'd like to have.
What kind of lifestyle do you expect? Apart from having enough funds to cover your basic needs, do you still want to eat out and go on holidays? Or would you be happy living a more simple life with your loved ones?
Once you determine the kind of activities you'd like to partake in when you retire, you'll have a better idea of the financial commitment you'll need for it. Use a retirement calculator to help you plan for your retirement fund.
Stay ready for emergencies
Financial emergencies can strike at any time, but they’re far more likely to happen during a recession. You might need to take a pay cut, go on unpaid leave, or go unemployed for several months. Without a cash safety net, you might end up borrowing from your retirement accounts, and risk the comfortable future that you’ve been saving so hard for.
If you don’t already have a robust emergency fund, now is the time to start building one. Ideally, you should have around three to six months of living expenses saved in case of emergencies. Keep this in a high-yield savings account that you can access in a pinch, and without penalties.
Next, take steps to protect your finances against accidents and medical emergencies. To ensure you’re prepared in case of medical situations or hospitalisations that may arise, make sure you have adequate health and life insurance. These will serve to ensure your retirement funds aren’t touched in the event you need to seek medical treatment.
Similarly, protect against emergencies involving your home, your car or critical illnesses by getting the appropriate insurance coverage. All this provides financial cushioning against emergencies that may arise and help you avoid taking money out of your retirement fund to deal with immediate needs.
Pay off or avoid taking on new debts
Taking on debts is common during good times because you can comfortably pay the monthly instalments without making a dent on your retirement savings. During a downturn, however, the risk of taking a pay cut or losing your job increases. If this happens, you’ll struggle to pay off your debt, and you might not have anything left to contribute to your retirement accounts.
While good debt like your mortgage can’t be paid off quickly, you should prioritise paying off bad debts and avoid taking on new debt altogether. Bad debt includes car loans (since cars depreciate in value very quickly in Singapore), credit card debt, and other unsecured short-term loans with high interest rates.
So make sure you pay your credit card bills on time to avoid the high interest rates, and avoid taking loans for big-ticket purchases until the economy gets better.
Live within your means
The key to building recession-proof retirement savings is to live simply and cut down expenses. By doing so, you’re less likely to struggle with debt and expenses during financial emergencies, and more likely to live comfortably no matter how the economy fares.
When living within your means becomes a habit, you’ll still be alright even if you or your spouse gets retrenched during a recession because you’ll be used to living on less.
Keep contributing to your retirement accounts
It might be tempting to stop putting money aside for retirement, and use that for emergencies instead. However, if you can still afford it, keep contributing to your retirement accounts and try your best to stay on track with your retirement plan.
Try to do so for as long as you can, even if you've hit the minimum retirement age but you're still earning an income. After all, you don't want to be caught out when you retire, only to realise that you don't have enough to lead your best retirement life.
Be on top of things when it comes to your finances. Check them regularly to ensure that you're on track to meeting your retirement goals. Have a clear grasp of what your savings and investments are worth, including your CPF savings.
To plan better, find out when (and how much) of your CPF funds you can withdraw, the schemes you're eligible for, and learn how to maximise its benefits for greater returns.
If you haven't started here's how you can start saving for retirement.
For those in their 20s to 30s
At this age, you probably feel like retirement is too far off into the future to start preparing for. But recession or not, you should start thinking about getting a retirement plan as soon as you can afford it. Now that you have worked for a few years, think about when you want to retire and how much you'll need when the time comes.
Starting early gives you a longer lead time and takes the pressure off. This is because the longer you have until retirement, the more time your money has to grow, and the more room you have for recovering from mistakes. You also have fewer financial responsibilities at this age, which means that you can stash more away and get a head start on building your nest egg.
If in doubt, you can always start small and adjust your plans in tandem with your career progression. By starting early, you’ll get to benefit from the effect of compounding, which is essentially earning interest on interest. Multiply that over the years and you’ll be able to save much more in the long run.
Consider endowment plans such as Gro Retire Flex to help you save for the future, or top up your CPF Special Account (SA) to leverage on the relatively high interest rates of 4% per year on your savings.
For those in their 40s
You've worked hard for the past two decades or so, and perhaps even more if you have a family. It’s easy to get caught up in the daily bustle of life, not to mention financial responsibilities such as your home loan or your children’s education. You may have a lot on your shoulders, but don’t forget to carve out time for yourself.
Take a step back and think about your retirement. If you haven’t started planning for it, it’s not too late to start now. Review your finances and figure out how much more you’ll need for a comfortable retirement. With that, you can calculate the gap you need to close and how to go about doing it.
One way is to reduce your expenses. Besides cutting down on things you don’t need, find out if you are eligible for government schemes such as the Child Care Subsidy or Baby Support Grant to help alleviate the financial burden.
Alternatively, consider additional sources of income to supplement your savings. This could be embarking on a side hustle like that home baking business you’ve always been interested in, or investing to earn passive income.
You have a good 20 years or so before retirement, and that’s sufficient time to build up your retirement portfolio. Even small monthly contributions will make a difference to your retirement fund, and you can tap on insurance savings plans such as Gro Retire Flex to help you grow your savings further. The most important thing is to commit to your plan, even if it means making changes to your lifestyle now, so that you can have a better one tomorrow.
For those in their 50s to 65
At this point, you’re pretty close to retirement and the time for planning is now or never. Think hard about the kind of retirement lifestyle you want, and take a long honest look at your finances to decide if you need to adjust your retirement outlook. What is your expected retirement income and how does it measure up to what you have at the moment?
While it may require some work, it’s not too late to plan for a comfortable retirement in your 50s. At this point in your life, you’re probably at the peak of your career and receiving the higher bracket of your earning potential. It's also likely that your dependents have become independent and are no longer as financially reliant on you. This is the perfect opportunity to make a last mile dash and save as much as you can, especially if you’re short on your retirement savings.
If you need more time, consider delaying your retirement by continuing to work or getting re-employed. You can also make voluntary contributions to your CPF Retirement Account (RA) if you have yet to reach the Enhanced Retirement Sum. Besides enjoying tax reliefs of up to $7,000 when you contribute to your own CPF accounts, you’ll also earn extra interest of up to 6% per year on your retirement savings.
And for those who are on track with their retirement planning, continue to contribute to your retirement funds. Consider plans such as Income’s Luxe Solitaire, which not only provides monthly cash payouts1 starting from the end of the second policy year till age 120 but also helps you with legacy planning.
You can never save too much for retirement
When it comes to your retirement funds, it’s always better to have more than less. After all, retirement should be about enjoying life at your own pace rather than worrying about finances.
With the right foresight and financial preparation, a happy retirement can be achieved. Approach any of our financial advisors if you need help with your retirement plans.
1 If the insured survives at the end of 2 years from the policy entry date, you will start to receive cash payouts starting from the 25th policy month after the policy entry date. The monthly cash payout consists of the guaranteed monthly cash benefit and the non-guaranteed monthly cash bonus. The guaranteed monthly cash benefit is 0.104% of the net single premium, while your non-guaranteed monthly cash bonus is up to 0.20% of your net single premium (based on the assumption that the Life Participating Fund earns a long-term average return of 4.25% per annum). Over 12 months, you would receive 1.248% of the net single premium as guaranteed cash benefit and up to 2.40% of the net single premium as non-guaranteed cash bonus. The non-guaranteed monthly cash bonus may vary according to the future performance of the Life Participating Fund. If the Life Participating Fund earns a long-term average return of 3.00% per annum, the non-guaranteed monthly cash bonus will be up to 0.1025% of the net single premium. You will continue to receive your monthly cash payout at subsequent policy months if the insured is still alive and the policy has not ended. Net single premium means the single premium amount as shown in the policy schedule, or the reduced single premium amount if a part of the policy has been cashed in earlier.
This article is meant purely for informational purposes and should not be relied upon as financial advice. The precise terms, conditions and exclusions of any Income products mentioned are specified in their respective policy contracts. For customised advice to suit your specific needs, consult an Income insurance advisor.
This advertisement has not been reviewed by the Monetary Authority of Singapore.