The MoneySmart Guide to Retirement Part 4: Preserving Your Wealth
by Joanne Poh on 27th September 2021
Longevity is a big deal in many Asian cultures. In China, everything from bamboo to overly-long noodles can be a symbol of longevity. But in Singapore, one of longest-lived countries in the world, people living too long is becoming a problem.
In this fourth installment in our four-part series on retirement created in conjunction with CNA (see the first, second and third parts here), we examine how you can ensure that your retirement income enjoys the same longevity as you do. Think of it as anti-aging cream for your portfolio.
What if you outlive your retirement savings?
Even the best-laid plans can fall apart if one of the following happens:
- You live longer than projected – Planned for your retirement income to last until age 85 but now you’re 90 and still not dead? Tough luck.
- Inflation erodes your retirement income – The Pioneer Generation never imagined that the cost of living would shoot up the way it has.
But are these real concerns?
Singapore’s life expectancy was the third highest in the world as of 2018, but the life expectancy is expected to rise even further, making us potentially the longest-lived people in the world in 2040. In 2020, the average life expectancy at birth was 83.9, but it is expected to rise to 85.4 in 2040. And those are just averages, so if you have good luck and good genes, you could well find yourself still alive in your 90s.
What about inflation? We’re already a developed country, so how high can inflation go, right? Well, the inflation rate spiked big time from around 2008 to the mid 2010s, which were Singapore’s peak immigration years, being consistently over 5%. That period actually saw our highest inflation rates since the 1980s.
These days, the inflation rate is much lower and expected to stay that way. However, you never know when global events or government policies will cause another spike, so you might want to plan for at least, say, 3% to 4%.
3 strategies to mitigate the risk of living too long
Here are three strategies to deploy here and there in your portfolio to give yourself a degree of security:
- Choose payouts for life
- Choose escalating payouts
- Have fallback options
Strategy 1: Opting for lifelong payouts
There is a reason the CPF Retirement Sum scheme got upgraded to CPF LIFE — the government realised people were living longer and thus devised CPF LIFE to offer payouts for the entirety of a person’s life.
Like CPF LIFE, some products, most notably insurers’ annuities or retirement plans, offer two payout modes: “term” and “life”.
Term annuities will provide you with an income for a specific period, say, 20 or 30 years. Conversely, life annuities will offer payouts for life.
So, if you’re looking to boost the longevity of your portfolio, you can sign up for an annuity or retirement plan with lifelong payouts to boost the income you should already be receiving from CPF LIFE.
If you don’t have sufficient CPF LIFE contributions, such as if you’re self-employed, you can also consider topping up your Special Account (SA) or Retirement Account (RA) in order to take advantage of the high interest rates and to guarantee yourself a lifelong income later in.
By the way, when it comes to insurance, you might also want to consider a CareShield Life supplement, which can provide you with a lifelong payout if you become disabled.
Strategy 2: Choose escalating payouts
Inflation is the reason it’s so hard to find hawker meals for under $3.50 these days. As you will (hopefully) have at least one or two decades to enjoy being retired, you’ll probably feel the effects of inflation as a retiree, too.
One way to protect yourself against this is to choose to receive escalating payouts from your plans wherever possible.
The first place to start? CPF LIFE. CPF LIFE offers three payout plans to choose from:
- CPF LIFE Standard Plan – You receive stable monthly payouts for life
- CPF LIFE Escalating Plan – Your payouts increase by 2% every year
- CPF LIFE Basic Plan – Your payouts decrease once your RA balance falls below $60,000
As you can see, the Escalating Plan tries to hedge against inflation by offering you increasing payouts. Your first payout will be lower than it would be under the Standard Plan, but in the long run you will find yourself receiving more.
If you’re signing up for a private retirement plan or annuity with an insurer or financial institution, some will give you the option of an escalating payout structure, which is ideal if you’re concerned about inflation.
Strategy 3: Fallback plans
For extra security, it’s always good to have a diversified portfolio that includes more than just CPF LIFE and an annuity/retirement plan. You should ideally also include a fallback plan in case of emergencies.
Other than giving you a higher retirement income, your portfolio and fallback plan can also save you if inflation goes through the roof or you live a reaaally long life.
One example of a fallback plan would be to monetise your home by renting out rooms in it, downsizing or, if you own an HDB flat, participating in the Lease Buyback Scheme. You don’t have to use it if you don’t need to, but it is always an option in a worst case scenario.
When it comes to your investment portfolio, it’s up to you to make sure you don’t withdraw or spend everything in the early years of retirement. Instead, make sure you reinvest or leave invested a fraction of your yield just in case you need more income later.
Conclusion: Longevity risk is real
Advancements in technology and healthcare are helping us live longer lives than ever. Even if you live on a diet of whiskey and McDonald’s, you may still outlive your retirement savings. (It’s more likely that subsequent health problems would drain your savings.)
Instead, take steps to mitigate the risks of outliving your retirement savings by choosing payout mechanisms that will guarantee you a lifelong income and escalating income. In addition, don’t forget to diversify your portfolio to give yourself a buffer and have a fallback plan that you turn to if needed.