| 1: | What is retirement planning? |
| | | Ans: Retirement planning is basically planning ahead so that you are in a position to retire at the age you want and be living in comfort during your retirement years without having to compromise on the standard of living that you are accustomed to.
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| 2: | Why is retirement planning important?
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| | | Ans: With people retiring earlier and living longer, the amount of years you spend in retirement could be longer compared to your parents. The average life expectancy of man is 76 years and for women, 80 years. You could be living in retirement for 20 years or more without receiving a pay check. Basically, with retirement planning, you want to create a stream of retirement income to see you through your retirement years when your pay check stops coming. Having a stream of retirement income for 20 years or more do require careful and serious planning and the earlier you start the less “catch up” you need to do.
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| 3: | How would the recent CPF revisions (August 2003) affect my retirement planning?
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To what extent do the recent CPF cuts affect retirement planning of middle income earners? Are the cuts significant?
Middle income earners making $6,000 or more are hit hardest by the recent CPF cuts. If we take a shorter-term perspective, those in the age group of 50-55 are hit hardest.
With an eventual 7 percentage point cut in employer’s contribution and the lowering of monthly salary ceiling to $4,500, this older group could be looking at a yearly cut of $6,660.
For a person who is 50 years old, the $6,660 reduction per year over a period of 5 years at a 4% rate of return will result in lost of retirement funds of $37,500.
Comparatively, those in the younger age groups are only looking at a 3 percentage point cut in employer’s contribution. If they are making more than $6,000 a month, the yearly cut is $4,500. Although on a yearly basis, the cut is less but if we take a longer-term perspective, the cut can be quite significant.
Assuming a reduction of $4,500 per year for 20 years at 4% rate of return, the lost in retirement funds could be $140,000. If we take a 30-year time horizon, the lost in retirement funds could be as high as $263,000.
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Because of the lower salary ceiling, some say that middle income earners will have to pay higher taxes. Is there anything that they can do about it?
Your employee’s portion of CPF contribution is tax deductible against your personal income. With the lowering of the salary ceiling or employee’s contribution rate, naturally, the tax deductible amount will be lowered and thus personal taxes will be raised.
Take someone in the age group of 50-55 making $6,000 and above, with the lowering of the salary ceiling from $6,000 to $4,500 and cutting of employee’s CPF rate from 20% to 18%; it will result in an increase of $4,680 in taxable income. If you are in a 10% tax bracket you will be paying $468 dollar more in taxes per year.
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Can the Supplementary Retirement Scheme (SRS) help? What other options do they have besides SRS?
To avoid an increase in taxes, the person could channel the $4,680 into a Supplementary Retirement Scheme account.
Some other options include relooking at your tax deductible items:
- Increasing donations to charity
- Taking a course which gives you course relief of up to $3,500 per year
- Top up the retirement account for your parents under the CPF Minimum Sum Scheme and enjoy a tax relief of up to $6,000
- Claim parent’s relief if you have supported your parent. You may claim up to $5,000
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What about investing through SRS, who is it for? What should one know before investing via SRS?
The Supplementary Retirement Scheme is a voluntary retirement scheme which allows Singaporeans, PRs and foreigners above age 21 to save for retirement. It complements the CPF. Under SRS, Singaporeans and PRs can contribute as much as 15% of their income to enjoy tax relief.
The SRS contributions can be used to invest in a wider range of products compared to the CPF Investment Scheme.
The other benefit is that returns from the SRS investment will be accumulated tax-free in your SRS account. Tax will only be payable upon withdrawal.
If you withdraw your SRS account at age 62, only 50% of the withdrawn amount will be treated as your personal income and thus subject to your marginal tax rate then. Early withdrawal will result in 5% penalty and 100% of withdrawn amount will be taxable.
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What about retirement planning for the middle income group who may have made substantial investments in property? What can they do now?
There are a few alternatives for this group:
They can talk to their bank to restructure their home loans such as extending the tenor of their loans or adding a second loan applicant to help with the monthly repayments.
Other loans could be restructured as well such as transferring higher interest credit card loans to personal lines of credit which have lower rates.
Find alternative sources of funds by reviewing the family’s budgets and cash flows to cut down on unnecessary spending.
In the longer run, those who really face difficulties in meeting monthly payments for their homes, the very real option is to downgrade or downsize. The key message is that you should not over-commit yourself. It is best to live within your means and spend prudently.
Whilst this group is concerned with the property loans, they should also try to start retirement planning as early as possible. By starting early, time is on your side and you don’t have to play “catch up” when you are closer to your retirement age.
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| 4: | What should I know about retirement planning?
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| | | Ans: Let’s get back to basics. The recent CPF cuts is a wake up call for all of us. The message is clear that we cannot rely solely on our CPF for retirement.
Here are some tips on what you should do if you want a comfortable retirement.
- Take retirement planning seriously if you want to retire in comfort. Retirement dreams don’t just happen overnight.
- Start retirement planning early. The earlier we start planning, the more prepared we are when we are near retirement age.
- Have a retirement plan set up. If you don’t know where to start, it’s best to talk to a financial adviser.
- Create the discipline to save.
- Re-examine your lifestyle and manage your cash flow.
- Invest your savings prudently according to your risk tolerance levels, time horizon and investment objective.
- Asset allocation and diversification of investment portfolio are important.
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| | | Ans: Visit any OCBC branch and speak to our Personal Financial Consultants for an obligation-free consultation.
Call our OCBC toll-free hotline at 1800 438 6088 to find out more about our retirement products & services.
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| 6: | What should I do after my plans are set up?
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| | | Ans: Retirement planning does not end once your plans are set up. Most people tend to treat retirement planning as a one-time affair, which is not correct. Once your plans are finalised, don’t put it on auto pilot. You need to review them periodically to ensure you are on the right track. |
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