We all have dreams for retirement—our own little piece of heaven where we can finally relax and spend the time doing whatever we want. But if you think about it, retirement is just another pace of life that demands more responsibility with your money to make sure it lasts for the rest of your life. And like a job, it’s not something you can just wake up one day and live as you like; there are steps you need to take in order to make sure that your hard-earned cash lasts as you get older.
Here’s a helpful way to think about your retirement nest egg. Imagine you have a cake and it’s made up of three layers: CPF, insurance, and investment.
The bottom layer is your Central Provident Fund (CPF)– a compulsory for Singaporean citizens and residents, and has a very low contribution rate. This layer is made up of money that you’ve put into your CPF account over the course of decades—your regular contributions, plus any interest that’s been added on top of it. The next layer is insurance—which is a great hedge against disability and life-long medical expenses, protecting you from experiencing greater financial losses in the future. This is the next layer up, above your CPF, which is what you’ll invest in and build into actual money so that you’ll be able to take care of yourself when you can no longer work.. And that third layer is where you’ll find stocks and bonds, real estate and cash or cash equivalent investments.
Base Layer (CPF)
Your CPF LIFE benefits will serve as the first layer. Whether you like it or not, the CPF system can be helpful since it’s virtually risk-free. Even if all of your other investments fail, you can always rely on CPF LIFE to provide you with payments for the rest of your life.
In Singapore, you are automatically a member of the CPF (Citizens’ Provident Fund).
Every month, salaried employees receive CPF contributions. These are All of this is taken out of your salary and deposited into your accounts, along with any additional funds provided by your employer, and the sum is then divided among your Ordinary Account (OA), Special Account (SA), and MediSave.`
Your OA and SA balances are combined once you reach the retirement age to determine your monthly CPF LIFE disbursements. The total combined savings (OA + SA) indicates how much your CPF LIFE paychecks will be.
Second Layer (Insurance)
The CPF is a great start, but it doesn’t cover everything. You should be looking into insurance as well—not only will this provide benefits in case something unfortunate happens, but you’ll also find that they’re tax-efficient, which means your money will go further (and grow faster) than if you were to put it in a savings account.
As you get older, you’ll become more vulnerable to certain risks, such as the risk of being unable to work due to illness or injury. Insurance can protect you from some of those risks, and it just takes a few minutes to do that.
Now that you’re on the verge of retirement, you might be less interested in taking on new risks—you have enough on your hands with trying to figure out what you’re going to do all day! But don’t let that stop you from insuring yourself against the kind of risk that can be just as devastating: losing your life’s savings due to an event like death or disability.
Insurance is a way to protect yourself, your family and your future. When you have an insurance policy, you’ll pay a monthly premium to cover yourself if something happens to you. If this seems like something that only people older than you should think about, remember that life and death are never guaranteed—accidents happen all the time.
It is possible to build money over a long period of time with some insurance policies. As you put more money into the plan and wait for a certain time, you’ll eventually receive more money than you put in once the plan matures.
Endowment plans and whole life insurance are examples of such products, but the most essential variety for retirement is known as a retirement annuity.
Third Layer (Investments)
Everything else you can do to earn passive income is included in the third layer of your retirement portfolio such as: rental property, dividends from stocks & REITs, and fixed income assets like bonds.
The best way to make sure your retirement nest egg keeps growing is by investing it wisely. But don’t worry—even though investing can seem daunting at first, it’s not rocket science. The most important thing is that you don’t let yourself get scared off by the jargon words.
The key to a successful retirement is having a long enough time horizon for your investments to grow, and not being afraid to take the risks necessary to generate those returns.There is no need to immediately invest in income-generating investments. Investing in growth firms without dividends and more risk-tolerant when you’re younger, and then switching to dividend-yielding blue chip stocks later in life can be a good strategy.
Saving Up Now!
For many people, retirement seems like a far-off place that they’ll end up at when they’re old and gray. But it’s important to start saving for your retirement as soon as possible—so how do you begin? Just remember the three layers: CPF, insurance, and investment. The most basic step is to set aside money for retirement in a tax-protected account, like the Singapore government’s Central Provident Fund (CPF).
If you’re young, don’t put it off any longer. There are now a slew of easy-to-understand alternatives to get started investing even with tiny sums, such as robo advisers and recurring savings programs.
Finally, as you grow older, the ideal strategy you have today may no longer be ideal for you when you reach old age. Your risk levels should be reduced as you get closer to retirement, in case another pandemic occurs and the markets crash just as you’re ready to start a new path.