With the current cost of living, a fair number of Singaporeans can expect to be happily retired. Maybe by the age of, say, 162. Now there’s any number of external causes you can blame for that: inflation, growing household debt, inadequate pension plan, etc. But some of the causes are self-inflicted…like these myths we keep believing:
1. I Will Spend Less as I Grow Older
Consider how most of us spend more during a weekend.
Without work, our brain has trouble processing how much time there really is to muck about in. This effect is magnified when you’re retired, since every day becomes a weekend. And according to the MoneySmart Science department (i.e. me when I’m playing with magnets) you can lie in bed watching TV till 3pm maximum, before your legs drag you out the door.
The boredom makes us take up new hobbies, go on vacation, socialize more, etc. And since retirees combat boredom every day upon retirement, many will spend more during their initial retirement years.
On top of that, the cost of healthcare and insurance will increase. Don’t assume that, just because the mortgage is paid up, the extra cash will cover the difference.
You also have to factor the cost of replacing stuff every three to five years: you’ll need cash for home maintenance, replacing your guitar / computer / TV etc. Tabulate the cost of all that, and you’ll realize even $1,500 a month is a dangerously tight sum to retire on.
2. The House Will Make Me Rich
First, I’m going to make the assumption that you’ll have no problems selling the house and downgrading. This is already a huge stretch, since the thought of it causes most retirees to flip the hell out.
(Oh, you don’t see why? Wait till you’ve spent 25 years of your life paying off the house you live in, and which your children and grandchildren grew up in. See how you feel about selling then).
The good news is Singapore’s property values tend to head up over time. And at present, the government has a $15,000 silver housing bonus.
The bad news is there’s no predicting what it will cost to buy a new house by that point; even a smaller one. No one can guarantee that your specific house will bring huge gains, whatever the condition of the country’s property market.
Now I’m not suggesting you’ll end up homeless (because if prices are bad, you can just keep the house and not sell). All I’m saying is, don’t count on getting rich when you sell the house. The profit margin may not be as huge as you imagine.
If you want to ensure a luxurious retirement, invest in other asset classes besides your house. You might also want to follow us on Facebook for the next 30+ years, as we track the state of home prices in Singapore.
(Hey, can’t blame a blogger for trying).
3. Saving Money Alone is Enough
To understand why we no longer stuff money into Milo tins, let’s look at something called the Consumer Price Index (CPI).
The CPI is an annual gauge of how much the prices of goods have risen. So a CPI of 4% means that, over the year, the prices of everything went up by 4%. That’s why a cup of kopi cost your grandma about a cent, and costs you around $1.20.
Now, grab your wallet and check the dollar bills. You will notice that, despite the prices of everything going up, the numbers on those dollar bills are not changing to compensate.
In effect, the money you have is worth 4% less. And every year, Singapore’s CPI reaches around 3% to 4%. Over the course of 20 to 30 years, you can expect inflation (the CPI) to utterly destroy your wealth if all you do is save.
In order to be safe, you should aim to beat the CPI by 2%. So you need to invest the money, and fetch returns of about 5% to 7%. There are plenty of ways to do this, from insurance policies to ST Index funds. You can check out investment basics in our other article.
And incidentally, the cost to get started can be as low as $100 a month. (Try POSB, OCBC or Philip Securities)
4. Invest Only in Super Safe Assets to Ensure a Happy Retirement
In general, safer assets tend to have lower returns. Take, for example, a safe investment option like your CPF: the returns are guaranteed, but they only yield 2.5% for the ordinary account, and 4% for the special account. Likewise, bank fixed deposits tend to hover around 1%, even though they’re safe as fortresses.
(As to why those returns are low, see point 3 about the CPI)
In effect, your investment guarantees may just be guarantees of poor returns. A more reasonable approach would be to diversify your portfolio: mix low and medium risk investments. The riskier investments provide higher returns, while the safer ones offset any losses.
It’s worth talking to a stock broker or independent financial advisor about it. Right now, while you’re young.
5. Retirement Happens at 62, I’ll Think About it Later
Retirement happens when you have attained financial freedom.
Some people retire at 62, some people retire at 70, and I know a lucky few who retire in their 30′s. If you start to manage your finances as early as possible, you don’t have to base everything on your CPF draw-down age. And even if you don’t aim to retire at 30, there can be no harm in understanding how others have managed it.
When you insist on thinking of 62 as the magic age, you tend to put off your financial education. You don’t bother learning about stocks and bonds, you don’t build your emergency fund, you don’t invest, etc. You take the all too common route of blissful ignorance, and panicking only after your 40th birthday.
Don’t do it. Regrets aren’t worth a damn, and you don’t want to find yourself hauling cans to a recycling centre at 62 because you started planning too late.
Nicolas Lannuzel, xmichh, phalinn, digitalmoneyworld, jessica.diamond