Retirement planning: How to build your wealth for retirement

SINGAPORE: When it comes to investing and saving for retirement, the advice often is to start young.

The current economic climate, however, has added certain challenges to that, with many worried about their job security.

But it is precisely because of such challenging times that starting early becomes even more important.

Starting early means investors have a longer runway to benefit from the compounding effect over a longer period, said market watchers. Another advantage to a long runway is the ability to ride out market volatility.

“We are in a very difficult environment where the interest rates are low and equity markets are pricey. For any individual planning for their retirement, they have to worry about two things - their own job security and income will be less, and on the other side, their financial portfolio will also earn less,” said Mr Vincent Chan, head of multi-asset at Fullerton Fund Management.

For Singaporeans, CPF savings are often the foundation of their nest eggs.

The Ordinary Account (OA) earns at least 2.5 per cent per annum, while the Special Account (SA) gets at least 4 per cent.

To optimise CPF savings, members can top up their Special Account or Retirement Account. They can also transfer unused Ordinary Account savings to their Special Account or Retirement Account to tap on the higher and risk-free interest of up to 6 per cent.

The money can be withdrawn, either in full or partially, after members turn 55, and have set aside the Full Retirement Sum, which is S$186,000 this year.

But experts warn that CPF members need to do more to optimise its use, if they want to outpace inflation.

“The OA interest of 2.5 per cent is barely above long-term inflation rates. Your cost of living rises with inflation, and we know that it's way beyond the official inflation rates," said Mr Samuel Rhee, chairman and chief investment officer of Endowus.

"So ... what we save is not going to grow. It's just going to be the same,” added Mr Rhee.

One option investors can invest their savings is through the CPF Investment Scheme, which can be used for approved investment assets. These include equities, gold, bonds, property funds and investment-linked insurance products.

In financial year 2020, about 534,000 members used money in their Ordinary Accounts to invest.

About half of them made profits that exceeded the Ordinary Account's guaranteed rate of 2.5 per cent, according to data from CPF.

However, 41 per cent of them made losses on their investments, while 9 per cent made profits equal to or less than 2.5 per cent.

Over a five-year period from October 2015 to September 2020, 66 per cent of them made cumulative total profits in excess of the Ordinary Account interest rate, while 21 per cent made losses.

Another way to invest for retirement is to set up a supplementary retirement scheme (SRS) account with any of the three local banks.

"The supplementary retirement scheme is a great tax benefit," said Mr Rhee.

"You set that money aside, and if you keep it for more than 10 years, then you can have even more tax benefits as you withdraw in your retirement. The other added benefit is SRS is completely flexible so you can invest in anything, much more choice than CPF," he added.

The third pillar of our wealth accumulation for retirement would be cash investments.

Mr Vinod Nair, CEO of MoneySmart said his recommendation is that people should learn how to invest their own money.

There are three main categories that most investors consider. They can choose to invest directly in stocks. The second option is exchange-traded funds (ETFs), which allow one to invest in a basket of securities that track an underlying index. The third category is unit trusts, which invest in a group of companies around certain themes.

To mitigate investment risks, the advice is to diversify.

“If you don't put all your eggs in one basket and you diversify across different asset classes, across different geographies and markets, then it gives you a higher chance of success with a better outcome, with lower risk," said Mr Rhee.

"The second thing is really focused on costs. Reducing costs directly impacts returns. Because if you save cost by 1 per cent, that’s 1 per cent more of your return. And if you invest for 30 years, that 1 per cent compounds to make a difference of over 240 per cent. And that's a huge difference in returns over 30 years.”

As all markets go up and down, one way to stay invested is through dollar-cost averaging.

“You don't time the market, and you're just setting aside a fixed amount of money every month or every year, whatever that period is for you to invest into these instruments. So when it's low, you end up getting more units; when it is high, you end up getting fewer units but it's a prudent way instead of trying to wait for the dip and buying the dip," said Mr Nair.

"It’s a passive strategy. If you just do it consistently, don't touch it, don't take it out. And leave it there over a long period of time, your money will compound and grow for you over the long term.

"The only time you need to re-evaluate is when fundamentals change. So if it comes to a point where you believe that China no longer is on a growth trajectory and maybe it's on the decline, then that's where you might want to re-evaluate whether that's the right option.”

Insurance advisers recommend a fourth pillar.

“Customers who are going into their retirement years need to look into products that pay them regular income. This will come in the form of retirement income plans or insurance savings plans that will be able to give them the potential of a regular income throughout the years, or potentially a lump sum, at the end of it, so they can use it for other needs and meet their financial goals in their retirement years,” said Mr Goh Theng Kiat, chief customer officer at Prudential Singapore.

But such plans also have their critics.

Mr Rhee said that while such plans might be well-designed, others are not, and many come with high costs. They are also less liquid, he said.

With a variety of assets available for retirement planning, investment professionals recommend a total balance sheet approach.

“For individuals planning for retirement, they should take total balance sheet approach. One bucket is called the safe assets: This will include CPF, insurance products and bank deposits.  The other bucket is for growth assets, which typically would include property or equity investment. These are more risky,” said Mr Chan.

Individuals can then adjust their allocation of safe and growth assets, depending on their target retirement sum.