How much spending power will you have during your retirement? Here are 7 factors that will determine this

Aviva December 21, 2017 0
How much spending power will you have during your retirement? Here are 7 factors that will determine this

A lot can happen between now and when you finally retire. To bolster your spending power in retirement, here are 7 things you should pay particular attention to.

For many, retirement can feel like a long time away. However, this should not become an excuse for you to put off planning for it. Between now and when you finally retire, a lot can change. The good news is that you have time on your side to mitigate the financial impacts any unexpected events may have on your retirement.

After working hard for close to four decades, everyone desires to live a high quality life in our golden years. To help you piece a robust retirement plan to achieve this, here are seven important factors that will determine your spending power in your retirement.


#1 Inflation

Inflation is one of the biggest enemies that will eat away your spending power over the years. While it may not be immediately apparent, inflation is happening in front of our eyes.

Since 1990, the average increase in price for “All Items”[1] in Singapore has been about 1.75%[2] per annum. So, while you may not feel the actual cost of our chicken rice lunch or Starbucks coffee increasing on a daily basis, in the long run, prices of everything in Singapore are expected to increase by an average of 1.75% per year, based on historical trend.

This means that anything that costs $1.00 today, will cost you $2.00 in 40 years. To put this into context, if you’re 25 years-old today, you will likely retire in 40 years, or more, and the $1.00 you save today will only be worth half its value in 40 years.

This only takes into consideration “All Items”. If we look into specific segments such as “Food”, “Housing & Utilities” and “Health Care” under “All Items”, the average increase in price goes up to 1.9%, 2.0% and 2.7% respectively. This means your spending power in these segments will be eroded by more than half – i.e. $1.00 of your money today will not be able to purchase $0.50 worth of products and services in these segments in 40 years.


#2 Lifestyle

Your current lifestyle is an important determinant of how much spending power you will have in your retirement. If you are a big spender on expensive vacations, frequent restaurant dinners and luxurious items, you may be sabotaging your own financial security during your retirement.

Ensure that you have a plan for your retirement, and that part of your salary goes towards accomplishing the saving and investing plan you have set out for yourself. The rest of your salary can then be spent on luxuries you desire, after paying for your monthly bills and other fixed expenses.


#3 Savings

Instilling a saving habit is important. This will strengthen your financial position today and build a retirement that protects your spending power or even allow you to achieve an earlier retirement.

In Singapore, you contribute 20% of your salary to your various CPF accounts while your employer contributes an additional 17%. (These figures change when you turn 55, here is the full breakdown from CPF).

This can help service your mortgage liability (via your CPF Ordinary Account) and certain medical needs (via your Medisave Account). Contributions made to your CPF Special Account is another form of savings that can help to build your retirement nest.

To complement this, you should also set aside part of your take-home salary to enhance your financial position. You may adopt the 50/30/20 rule – where you aim to spend 50% of your take-home salary on necessities, 30% on lifestyle choices and 20% on savings. The more you are able to stash away in savings, the greater your spending power will be in retirement.


#4 Investments

Once you have set aside 20% of your take-home salary for savings, you will like to think about how to make this money grow by investing it. If you are able to grow your investment at a rate that is higher than the inflation rate, you will be increasing your purchasing power for the future.

You may top up your CPF Special Account (SA), which pays an interest of 4% on your balances. You may also consider investing in stocks and bonds listed on the Singapore Exchange.

For example, the SPDR Straits Times Index Exchange Traded Fund (SPDR STI ETF) and the ABF Singapore Bond Index Fund give you exposure to the biggest companies in Singapore and highly-rated government-linked bonds respectively. The SPDR STI ETF delivered close to 24.761% in the past 10 years and 7.4% in the last 15 years, while the ABF Singapore Bond Index Fund delivered close to 2.68% since its inception in 2005.

Other investment tools include unit trusts and investment linked insurance plans.

Besides cash savings, you may choose to invest your CPF Ordinary Account (OA) monies. It was reported in September 2017 that 78% of people who invested their CPF Ordinary Account (OA) monies achieved a return that beat 2.5% – the interest that CPF OA pays.

You can find out more about some these investments on Aviva’s Navigator platform.


#5 Home

Many people regard their home purchase in Singapore as investments and upgrade to bigger and more expensive properties as soon as they think they can afford, subjecting themselves to hefty mortgage obligations.

In the past, residential property prices in Singapore have appreciated significantly, rewarding investors handsomely. This trend may not continue going forward as Singapore is now a developed country, with a relatively matured real estate market.

By purchasing a home that you can comfortably afford, you will not be risking your financial well-being during downturns, where you may be forced to sell your property at a loss if you are unable to meet the monthly mortgage repayments.

Without overstretching yourself in the property market, you can choose to invest the additional cash you may have.


#6 Debt

Debt is a natural part of every Singaporean’s life. To afford a home, majority of people have to take up a property loan. As explained earlier, this is healthy if you buy a home you can comfortably afford.

However, debts such as student loans, personal loans, car loans and credit card debts can be extremely unhealthy with its high interest rates. By forking out large interest payments on these loans, you are putting yourself at risk of becoming overstretched as well as not setting aside enough for your retirement.


#7 Duration of your retirement

With life expectancy gradually rising over the years, people could be living far longer in the next 30 years. The average life expectancy in Singapore today is 80.6 and 85.1 for males and females respectively, almost seven years longer than it was in 1990.

With the retirement age in Singapore set at 62, this gives you about 20 years in retirement. If you set aside a sum to last you just 20 years today, you may be at risk of outliving your own retirement funds.

This is why you need to ensure you are prudently setting aside enough for yourself in retirement.


Life after retirement

Life after you retire will play an equally big role as the one before you retire.

Your health will heavily influence the spending power you are able to retain. With healthcare cost rising faster than general inflation rates, poor health can cripple your financial well-being very quickly. This is why you should not neglect keeping fit and active while you are young. You should also cover yourself with adequate health insurance coverage while you are young so that you do not have any exclusions tied to your policies in your later years.

Lastly, even while you’re in retirement, it doesn’t mean that you should not invest your money. With over 20 years to go, you still need to invest part of your money to ensure it continues to grow.

Aviva’s Navigator allows you to find suitable funds that invest into both equity and bonds that pay out dividends to supplement your retirement income or continue growing your portfolio.


To find out more about Navigator, speak to your preferred financial adviser representative or leave down your details in the form below and we’ll be in touch.


[1] Department of Statistics Singapore

[2] Department of Statistics Singapore

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