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Our previous article on retirement talked about two rules of thumb for retirement planning and how CPF plays an important role. While cash savings are an important part of your portfolio, investments are necessary to grow what you have and ensure you stay ahead of inflation.
Choosing the right investment instrument depends on a few key things, which include your investment goals, risk appetite, and time horizon. Thinking within the context of these factors will let you know which investment is the most suitable for you at this time.
Bonds are widely recognised as a good investment tool for retirement planning due to its relative stability and low risk. There are generally 2 main types of bonds – those issued by the government and those issued by corporations.
Government-issued bonds, or Singapore Government Securities (SGS) are ‘safer’ as the government is less likely to default on their loans, and is usually able to give investors their returns back reliably. Because of this, the interest rates on government bonds are lower as compared to most other instruments and range from 1.5%-3%.
Corporate bonds can be riskier depending on the company’s performance and credit standing. In the unfortunate event that the company goes bankrupt and is unable to pay their investors back, you stand to lose the total amount of your investment. They tend to offer yields between 3%-6% due to the higher risk you undertake.
Investing in bonds requires a longer time horizon, as their maturity dates usually range from 5-10 years. With the exception of the Singapore Savings Bond (SSB), they aren’t particularly liquid, and selling them on the open market could nett you less than what you paid depending on current market conditions.
However, assuming that your retirement is at least 20 years away, you should be able to hold your bond to maturity and reap the maximum returns. It’s also a good way to get started on your retirement savings because you need as little as S$500 to start.
Exchange-traded funds (ETFs) are funds that were created to mirror the performance of a particular stock index. There are many types of ETFs available to investors, one of which is the Straits Time Index (STI) ETF, which mirrors the performance of the biggest stocks on the Singapore Exchange (SGX).
ETFs provide access to a diversified portfolio of the top 30 stocks on the SGX at a lower cost, and is more convenient since you don’t need to select individual stocks to invest in. Many new investors choose to start with ETFs for these reasons.
As with any type of stock investment, having a longer time horizon for ETFs is advisable. If the stock market crashes, you’re able to wait out the bad times for a chance to liquidate at a higher price than when you first bought it. Using it for retirement planning (unlike investing for short-term yields) gives you a long enough time horizon to do so.
If you want to grow your retirement funds faster and have at least a medium risk appetite, ETFs could be very helpful to you. Returns vary depending on the market, but a conservative assumption would be 6% and above, which is better than most bonds.
If you don’t want to actively manage your portfolio or think about when to sell your holdings, insurance policies may be a good option for you. Insurers provide many types of life insurance that can help you provide for retirement. Some of these include endowment plans, investment-linked policies (ILP), and permanent life plans.
The 3 types mentioned above usually have a combination of 2 elements – investment and life coverage. After paying a premium for a set amount of time, you have to wait until the policy matures to withdraw your funds for the best returns, which are usually 3% and up.
Depending on your risk appetite, you can choose plans with higher returns but no guaranteed value or ones with slightly lower returns but with guaranteed cash value attached to it. The time horizon for life insurance policies are usually quite long, and the funds you place into your policy are mostly illiquid.
Locking in your funds may seem inconvenient now, but is quite an effective way to make sure that you don’t touch the money that you’ve set aside for retirement. You’re also incentivised to keep your funds in the policy for as long as possible or until it matures so you get the maximum interest.
On the other hand, withdrawing what you have placed before your policy matures may cause you to end up losing money. Insurance policies are best used as an alternative to a savings account for long-term goals, but if you’re looking for higher returns and liquidity they are probably unsuitable for you.
If you’re prepared to take on more risk, you may want to consider investing in standalone stocks or REITs. Both options are openly traded on the SGX, and you can invest in your choice of stocks or REITs through your brokerage account.
Doing so requires more research compared to the comparatively hands-off investment methods suggested above, since you need to have a good understanding of a company’s performance before choosing to invest in them. Another potential downside to individual stock picking is the lack of diversity.
Unless you have the means to buy several different types of stock to build a balanced portfolio, you may be assuming too much risk. However, if you pair them with other medium and low-risk instruments, equities and REITs can be a good way to increase your returns significantly.
Even though their prices depend on the market, they can be sold for cash immediately and as such are more liquid than some of your other options. If prices are favourable to you and it makes sense to sell, you might want to do so instead of holding them for longer.
Because of how easy it is to liquidate these 2 options, you must be disciplined enough to set aside your principal and any associated returns for your retirement, or reinvest what you’ve earned. Otherwise, you may end up spending these funds on more immediate needs instead of putting it toward your future nest egg.
The few instruments mentioned above are just some of your options when it comes to planning for your retirement. Knowing what you want out of your investment and the risks you’re willing to take will help you choose the instruments that are more suited to you. If you can afford it and want some expert advice, you can also get help from a wealth manager to plan your portfolio.