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After much consideration, you’ve decided that you want to start planning for your retirement as soon as possible. You know that the goals you want to achieve require more than CPF is able to provide, and that you need to get started immediately if you want to give yourself the best chance possible of meeting them.
There are 2 “rules of thumb” that are commonly used as guides for someone who wants to figure out their retirement finances.
This rule serves to estimate how much you’ll need to retire comfortably by multiplying your targeted annual income during retirement by 25.
The number 25 assumes a safe 4% withdrawal rate. Why 4%? With this rule, the estimated rate of return on investments is projected to be 7%, and inflation is estimated to rise around 3% a year. Hence, after inflation, your investments only leave you with a reliable 4% to spend for the rest of your life.
In our previous article about setting retirement goals, we calculated that you might need S$30,000 per year for your expenses and leisure activities. Using this rule, you would require S$750,000 (S$30,000 X 25) for your nest egg. This number is just an estimate, and doesn’t take into account how many years you intend for this amount to last for.
The withdrawal rule below will tell you how much you’ll get a year with this figure and how long it’ll last for. If the figure doesn’t last for as long as you’d hoped, you can increase the multiplication accordingly.
The 4% rule is a guide to how much you should withdraw annually after you’ve retired. It recommends that you withdraw 4% of your retirement portfolio in the first year, and withdraw the same amount which has been adjusted for inflation, every year after.
In short, the 4 Percent Rule takes into account that you will withdraw more and more funds yearly, due to inflation.
Following from the example above, let’s say you’ve managed to hit your target of having S$750,000 in your overall portfolio. In your first year of retirement, you would S$30,000, based on the 4 Percent Rule. Assuming 2% inflation, you will withdraw S$30,600 (S$30,000 x 1.02) in the second year.
You only need to calculate the 4% once (S$30,000) and multiply that by the projected inflation rate for each year after that. With this withdrawal method, your initial amount of S$750,000 will last you approximately 20 years.
However, do note that some retirees may want to spend more in the first few years of their retirement and less at the end. If this applies to you as well, it may be safer to overestimate when planning how much you need and re-adjust your withdrawal numbers depending on your circumstance.
Due to the Central Provident Fund (CPF) and the numerous roles it plays in our lives, planning for retirement in Singapore can be more complex than it would be elsewhere.
The example amount above of S$750,000 only includes your assets (cash savings, investments) outside of CPF. When CPF is included, you’ll have more factors to consider. CPF LIFE is an annuity plan that will provide you monthly payouts for your expenses during retirement, and the amount you get varies depending on how much you have in your Retirement Account (RA).
CPF LIFE is structured such that it’ll give you a monthly payout until death, and the remaining amount will be passed to your beneficiaries after. If you manage to hit the Full Retirement Sum (FRS), which due to inflation may be about S$310,000 in 30 years, you should receive a payout of around S$1,200 per month. This adds up to S$14,400 per year.
In addition, if by age 55 you find that you have funds leftover in your Original Account (OA) and Special Account (SA), you will be able to withdraw them if you choose to do so.
The table below provides an example using both rules while accounting for CPF.
|Outside of CPF|
|How much you’ll need to have in cash savings to meet your goal||$750,000 - $310,000 - $100,000 =
|Desired annual income during retirement||$30,000|
|Multiply by 25 rule||$30,000 x 25 = $750,000|
|Using 4% rule||$750,000 lasts around 20 years|
|Assumed inflation rate||2%|
|CPF LIFE estimated FRS in 30 years||$310,000|
|CPF LIFE estimated yearly payout||$14,400|
|Remainder in CPF OA + SA||$100,000|
As you can see, CPF works towards supplementing the total you’ll need to achieve your desired retirement lifestyle. $340,000 is a significant number, and starting as early as possible will help you achieve your target in time for your retirement.
Falling short of your goals could mean a more difficult retirement, or having to delay your retirement, so it’s important to be financially diligent while choosing the right investment instruments.
Meanwhile, if you want to increase how much you’ll have in your CPF, you can increase your contributions or make investments through your OA or SA. Even so, CPF alone isn’t enough to sustain your retirement years, so your assets outside of it will play a big role in ensuring you have a comfortable retirement.
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