Financial security in retirement is neither a luxury, nor something that can be taken for granted. It requires individuals to focus on developing good financial habits in preparation for the future. Retirement systems or pension systems have been characterised as a ‘five-pillar’ model according to the World Bank. Although there are no universal solutions to the complex array of retirement issues, the World Bank has developed principles of analysis and a conceptual framework to guide towards better retirement planning.
World Bank’s Five-Pillar Model
We recently commissioned a poll to measure the retirement readiness in Singapore and how people intend to fund their retirement. Here are some of the results from the survey.
Sources of retirement income
Jason is a Certified Financial Planner Practitioner, Chartered Financial Consultant, Associate Estate Planner Practitioner and a registered speaker for Financial Planning Association of Singapore who has been in the financial industry since 2001. He gives us a complete breakdown on how to better prepare your clients for retirement.
It is not possible for you to advise your client to simply reduce their expenditure as most people have waited a long while to retire and enjoy their lives. One way to manage your clients’ expenses is to ensure that they have a comprehensive insurance plan. As people age, unexpected health conditions may arise, and can leave a significant impact on their financial situation.
Steps to undertake:
1. Review your client’s insurance portfolio. Life insurance is one of the least managed policies. Regular reviews are necessary to ensure that your clients are receiving the best value for their money, and that the benefits are still relevant to them.
2. Ensure that your clients have proper coverage. Hospitalisation plan is of utmost importance as it prevents your clients from eating into their savings for retirement.
Increase passive income
(with a focus on Pillars 1, 3 and 4)
Pillar 1: CPF Life
One of the best retirement plans available in Singapore is CPF life which is a life annuity that provides a monthly pay-out from age of 65 for as long as you live. Based on current calculations as of 2017, if your client has $161,000 in the retirement account, he or she will be able to receive approximately $1,220 – $1,320 per month from the age of 65 for life.
Pillar 3: Retirement Plans by Insurance Companies
Depending on your client’s risk appetite, you can advise your clients to take up retirement plans offered by insurance companies. Since the pay-out is guaranteed, your clients can be assured that a fixed amount will be paid to them over a period of time. This can be useful especially during times of recession or a crisis period when your investments are not performing to expectation.
Pillar 4: Income from Investments
Investments for retirement should be geared towards capital preservation with regular dividend pay outs instead of towards capital appreciation (as such investments are mostly high-risks based).
Generally, you should advise your clients to look into established, large capital companies that have a regular dividend pay-out scheme such as banking stocks, Singtel, Singapore Press Holdings and etc. However, the entry level is generally higher because of the large capital requirement.
Investing in unit trusts that pay regular dividends is one way to increase passive income during retirement. Advise your clients to look out for unit trusts that has dividend pay outs from investment gains and not those that draw down from the units. Compared to stocks and shares, investing in unit trusts has less risk, and it is easier to enter the market.
- Rental Income from Properties
This is a favourite investment among Singaporeans. People generally feel a sense of security investing into properties to generate rental income. Advise your clients to be wise in their choice of property. Unless they fully own the property with no loans, they have to take note of the high interest rates and also, factor in the period of time where they are still financing the mortgage while finding a tenant.
To understand retirement readiness in Singapore better, download the latest retirement report here.
RSVP to our event where we will be discussing the various solutions to the retirement challenges in Singapore.