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You may have heard that starting as early as in your 20s is ideal when it comes to planning for your retirement. Unfortunately, due to other commitments in your life, you may have missed the ideal time to start. Before you knew it, your 20s were over, and you’re already in your mid-30s with even more financial worries than before.
You’ve realised that you need way more than you expected to retire comfortably, and you don’t know if you’ll be able to catch up. Starting later than your peers may put you at a disadvantage, but there are methods you can use to get you to the same finish line. However, you must be willing to make a few sacrifices along the way.
As you’re already late to the game, you will need to be extra diligent in optimising your spending to save more. Remember that if you fail to save enough, you may have to let go of your desired retirement lifestyle, or worse still, work longer than you intend to. Here are a few ways to spend less and catch up in the growth of your nest egg.
Small amounts can add up really quickly, and reducing unnecessary expenses can help you to save a little more each day. You need to start eliminating “nice to have” items and focus on only purchasing necessities. You might want to use an expense tracking app like Seedly so that you’re aware of where all of your money is going.
If you have trouble prioritising savings over daily expenditure, practice “paying yourself first”. Decide on a percentage of your salary that you’re realistically able to save, and set up an auto-debit that moves that sum into a separate savings account once you get paid each month. You can also work towards slowly increasing the percentage that you’re saving each month.
It’s difficult to save more if your main source of income remains the same as it always was. If a job switch or negotiating for a pay raise is not feasible, you could start freelancing to supplement your income and put what you earn towards your savings goal.
Your Central Provident Fund (CPF) accounts provide interest rates of 2.5% and 4% for the Original Account (OA) and Special Account (SA) respectively. A 4% interest rate is quite good, especially for a fairly risk-free instrument.
If you’re sure that you don’t need the liquidity of cash or the funds in your OA account, putting more into the SA could be a good way to earn more interest on your savings. If you have less than S$60,000 in both your OA and SA accounts, of which not more than S$20,000 is in your OA, you’ll receive an additional 1% interest per year.
Making cash top-ups into CPF could also be a good option, as you can enjoy tax reliefs of up to S$7,000. Every dollar in savings and percentage of interest matter when you’re trying to catch up, and using CPF’s steady returns is a beneficial, low-effort way to get there.
If you haven’t started investing yet, you need to start investing immediately. Cash savings alone aren’t enough to tide you through retirement as the returns from savings accounts only average around 0.05%.
In comparison, even investing in low-risk instruments like the Singapore Savings Bond will provide you with around 2% effective interest rate if you hold it until its maturity of 10 years. The common rate of return for high-risk investments like ETFs are estimated to be around 7%.
Making some form of investment is the only way you’ll realistically be able to catch up to your peers who started earlier, and if done right, you may even surpass them.
Investment fees can take away a significant amount of your investment earnings, and you need to ensure that the fees you’re paying are adequately covered by how much you get back. Brokerages charge anywhere between 0.5% to 2% and the amount will vary depending on how much you invest.
If you make frequent but small transactions, you may be losing out on your returns because of these fees. Consider making less frequent but larger transactions, or switch over to a brokerage with better rates.
Starting your retirement plans later than your peers doesn’t mean that you won’t be able to reach your goals. With diligent planning and determined effort, you’ll be on par with them sooner than you realise.