Start early, they say. Let compounding take care of the rest, they say.
Personal finance literature tends to espouse the virtues of starting early when planning for retirement. Central to this argument is the benefit of compounding returns.
We are certainly no different – we too have and will continue to extol the benefits of compounding. It is a real wonder as Einstein calls it, and the mathematics bears this out. It is also important to note that compounding can only make a great difference if the person were to start saving and investing his/her money as early as is possible as chart 1 illustrates.
But, who has time for compounding
It's easier said than done as life usually gets in the way. Even those who have taken heed of this age-old advice and started planning for their retirement early find themselves worried that they may still be financially ill-equipped for retirement. Our customers have often told us as much. Indeed, about 40 percent of the customers we spoke to have started planning for retirement but are sadly behind targets, while another 24 percent have delayed planning for retirement entirely due to other short-term obligations.
The sombre reality is life is never as easy as financial planning pamphlets and brochures make it out to be. The need to start early is easy to advocate but for individuals, it may be difficult to execute, particularly because most of us have other pressing short-term priorities that require our immediate attention like paying off our tuition loans or buying a house or even starting a family. Our salaries can only stretch so far, at least for the time being.
And so we wait in eager anticipation for performance bonuses and yearly increments with the hope that these additional income could finally afford us the ability to save and invest towards our goals. But those hopes are dashed with meagre bonuses and disappointing increments and our finances made all the more complicated by other unforeseen issues that surface at the most inopportune time.
As a consequence, a long-term goal like retirement is often left on the back burner. However, like it or not, retirement is a life stage most of us will have to live through. It is only a question of when and how long we have to prepare for it. It may seem far off to some, but its salience and urgency only grow insidiously with time.
Never too late
For those who are a little late in the game, it's of little use to mull over the "shoulda", "coulda", "woulda". It's time to take action and now is as good a time as any to start planning for your retirement.
The good news is there are a number of strategies you could consider to maximise your retirement income, even if you started late. Remember, we are making up for lost time and so the road ahead may be more challenging, but definitely not impossible.
- For late planners, the priority should be saving aggressively towards retirement. Assuming you have little time to allow for compounding returns to take its full effect, you may have to augment the size of your retirement portfolio by increasing the quantum that you save and invest moving forward. This may entail a little (or a lot) individual austerity, which could go some way to mitigate potential financial hardship in the future. It's time to trade current gratification for future financial security.
- You could also set aside funds in the Supplementary Retirement Scheme (SRS) that offers attractive tax benefits. Once you retire, only 50 per cent of the amount withdrawn will be taxable. In addition, investment returns from investing your SRS funds can be accumulated tax-free. This national scheme helps minimise financial leakages in the form of taxation, boosting potential savings for retirement. SRS aside, you can still factor in your CPF savings to help meet your basic retirement expenses.
- You could also consider delaying retirement to add on more years to save. Life after retirement is not just about money, but your well-being as well. Leading a more active lifestyle through work could improve your mental and physical well-being and limit health care expenses potentially incurred later.
- Also, for those with an existing retirement investment portfolio, begin a yearly review with your financial advisor to discuss alternative methods in which you may maximise the yield or return of your portfolio on a risk-adjusted basis. For those without one, strongly consider building a retirement portfolio so that you can track and manage your progress better. Investing is still important to maximise the returns on your savings. A financial advisor should be well-equipped to assist you in building a diversified portfolio that can offer stability of returns and potential for long-term growth.
- Another option may not be particularly appealing, but helpful nonetheless. You could consider unlocking the value of your illiquid assets - primarily your home - by downsizing or tapping on reverse mortgage-like instruments as a way to earn income for retirement. Government schemes like the Silver Housing Bonus offers up to $20,000 cash bonus to households looking to move from larger to smaller HDB homes. The net sale proceeds can be used to enhance your retirement income. Meanwhile, the HDB Lease Buyback Scheme allows you to sell the tail-end of your lease to receive a certain amount of cash bonus depending on your housing type. You could also consider renting out a room when your children are out of the house as a form of income generation for retirement.
Save the pain. Start early.
Ideally, one should begin planning for retirement as early as possible. Yet we seldom feel the urgency to plan for things so far off in the future, our mind often fixated on the short-term hurdles we need to clear to beat our way forward. Life is difficult after-all.
But fret not. We are never alone in these circumstances and there's always a solution to our problems. It's only a matter of how much we are willing to sacrifice.
Ultimately, just save the pain (if you can help it) and start early.