Personal Financial Planning – Retirement Planning

Advances in medical science have resulted in people living longer. This increase in life expectancy makes retirement planning even more crucial. Furthermore, with better affluence, there is also an increase in demand for a better lifestyle during retirement.

The objective of retirement planning varies depending on circumstances, and normally includes:

  • Maintaining a self sufficient pre-retirement standard of living
  • Coping with increasing health care cost
  • Protection of property and against personal liability
  • Providing for dependents
  • Estate planning

The process for retirement planning:

Step 1: Overcome Obstacles
Step 2: Determine Goals
Step 3: Measurement
Step 4: Reference Point
Step 5: Overall Plan

Overcoming The Road Blocks

There is only a limited period of accumulation and a continuous period of consumption. The first step is to overcome the many obstacles hindering retirement planning. These include spending beyond means, unprepared for unexpected expenses (like repairs), inadequate insurance (like property loss, medical bills), tapping into retirement funds for other purposes (like upgrading house, holidays), etc.

(1) Aim to save at least 10% of income and gradually increase it to 20% when it is nearer to retirement. This accumulates towards the retirement funds and helps to accustom to a retirement lifestyle within financial means.

(2) Establish an emergency fund of at least 6 months of income that is separate from the retirement planning fund. The will be used for risk retention, covering for unexpected expenses without drawing on the retirement funds.

(3) Have sufficient insurance. A major crisis will be a huge drain on all of the savings, it is best to transfer this risk by being adequately covered.

(4) Saving for other specific purposes should be saved for separately. It will derail the retirement plans due to the shortfall.

Determine Retirement Goals

Depending on the circumstances, the goals will vary from individual to individual. Some common areas to consider:

(1) Lifestyle.

  • Housing: Same house, mortgage remaining, upgrade, downgrade, migrate.
  • Leisure: Pursuit of hobbies like golf, yoga, charity or religious activities.
  • Travel: Overseas holidays, car ownership.

(2) Age of retirement.

  • The last day to have to work or the last day to want to work.
  • Early retirement due to corporate issues, health, care giving concerns, etc.

(3) Health.

  • Coping with increasing health care cost.
  • Health screening.
  • Dental care.

(4) Estate planning.

  • Passing on the wealth eventually.

(5) Caring for dependents.

  • Physical or medical care for elderly parents.
  • Providing for children not yet independent or siblings requiring aid.

Measuring The Finance Required

From the above goals, the required amount needs to be quantified.

(1) Lifestyle and dependent expenses. An estimate is about 60% of pre-retirement income.
(2) Project the retirement age. The statutory retirement age is 62 years old.
(3) Health expenses. Total up the amount of insurance premiums and health screening cost.

In addition, some assumptions need to be made:

(1) Inflation rate. The average historical inflation rate in Singapore is about 1.5%.
(2) Investment returns. Depending on the choice of investment, this varies significantly.
(3) Life expectancy. A reference will be the natural death ages of great-grandparents, grandparents or parents. The average age is 78 for males and 82 for females, and this average is increasing.

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