Senior Stories Lawrence Loh

RETIREMENT PLANNING

by Lawrence Loh

Retirement is the golden chapter of one’s life. It is an entitlement and a privilege. Hence, it is baffling that some choose to forgo the entitlement and squander the privilege.

So it begs the question : Why?

Do you think that those elderly men who go about collecting cardboard boxes do it for exercise, as some quarters will have us believe? Come on, let’s get real.

They do this because they did not prepare sufficiently for retirement. Therein lies the importance of retirement planning.

Retirement planning invariably over-emphasises financial planning, due to the belief that money is the panacea of all retirement woes.

Yes, money is important because retirement means the absence of employment income. But how do we explain the fact that many who have the means to retire refuse to do so? These people are not mentally prepared.

In order to enjoy a hard-earned and well-deserved retirement, fulfilling two important conditions is paramount, which are mental preparedness and financial adequacy.

Mental Preparedness

Central to this is the fear of retirement. The word ‘retirement’ instils fear in many people. Some see retirement as a scary and undesirable phase of life, with idleness as the order of the day. Although untrue, this seems to be the stereotypical view of retirement, which underscores the undue fear.

Ernest Hemingway said retirement is the ugliest word in the English language. On the contrary, Ernest J Zelinski said that to fear retirement is to fear life.

Why the fear?

Most people go through life with a somewhat set regime and order. From infancy to the time they approach retirement, life is regimented, and seems to follow a process. For instance, education, national service (for males), work, marriage, starting a family, and bringing up children seem to be a logical continuum, with one life stage naturally leading to another. There is predictability and order.

The fulcrum of this process is work. The income from work facilitates this process and helps to materialise needs and desires. Work is also used as a measure of success and self-worth. Many people’s life revolves around work, so retirement to them means the end of life, pathetic as it may be.

It is not surprising then for people who are retrenched or unemployed to have low self-esteem. Some descend into depression. The extreme ones become suicidal.

Hence, for many people, removing work, even though they are due for retirement, upsets the process, causing disequilibrium. They lose their sense of self-worth. It can be daunting.

The transition from working life to retirement can be a drastic and sobering one.

Imagine someone who is in a senior or top management position, a job which comes with many bells and whistles – a substantial remuneration, power, recognition, being revered, molly-coddled or even feared, an expense account, a company’s car, a driver or generous car allowance, business-class travel, a secretary, a large well-equipped office, a formidable business network, invitations to golf, events, concerts, musicals, and so on.

Remove all these and he immediately feels naked.

The trappings of the job are too good to part with. It can be extremely daunting to wake up realising that all these are gone.

But how long can they hang onto the umbilical cord? At some point, it has to be cut. Employment immortality is a myth. Of course, there are those who want to hang on for as long as possible. In any case, working till ill-health or death beckons is an unattractive proposition.

A common argument is that life-span has increased, so people should continue working. Little do they appreciate that even if they live to 90, in the last 10 years or more, they are likely to be saddled with health and/or physical impairment, reducing the number of productive years for enjoyment.

People who are unable to let go will invariably indulge in self-rationalisation, posing questions like:

“How much golf can you play?”

“How many books can you read”

“How often can you go out with friends?”

“How much travelling can you do?”

And so on.

Needless to say, this is a form of escapism, a reluctance to accept reality.

So it is important to carefully and thoroughly go through a mental process to prepare for retirement. Once we are convinced that we are ready, do not look back.

It is not easy. Not everyone has the ability and courage to do this, but those who succeed will reap great rewards.

A good starting point is to believe that retirement is inevitable. It is a matter of time, and we must be prepared when the time eventually arrives.

Life is a journey, and retirement is part of this journey.

Financial Adequacy

Financial adequacy has nothing to do with money madness, the craving for it and not having enough, even though many people are obsessed with amassing wealth. It is about having enough to pursue a desired lifestyle, devoid of financial worries.

A frequently-asked question is: “Can I afford to retire in Singapore?”

A valid question, given the high cost of living, which is still rising. A 2014 survey by the Economist Intelligence Unit which dubbed Singapore as the world’s most expensive city is cold comfort. In the same year, The Straits Times published an article ‘Majority unprepared for retirement: Survey’, which focused on financial adequacy for retirement, and the fear of retiring due to a lack of it.

Related to this issue are a number of myths.

Myth No. 1 : The children must be financially independent

This simply implies that people who have children late are doomed to continue working until their children finish school and are gainfully employed.

Not necessarily true. If they have proper financial planning, it will allow them to retire and continue to support their children through school.

In fact, the time before they embrace parenthood is opportune for amassing savings for the future, being spared the expenses needed to raise children.

My discourse with some young people, including some young parents, was shocking. Some do not see the need to save. One particular person was influenced by her businessman father who does not believe in saving. For him, when times were good, money came easy. Banks were more than willing to advance loans. Unfortunately, his business hit a bad patch. Banks withdrew their support as his business is highly collateralised. He has no savings to tie him through this setback, and had to sell his bungalow, which was once his beacon of success.

Myth No. 2 : I must not have financial liability

We need to define the nature of the financial liability.

Ideally, the house that we live in should be fully paid for.

For investment properties, if any, the rental income should, at the very least, be sufficient to cover all expenses related to them. Of course, we should aim for having a surplus, which constitutes investment income.

In the event of an unfortunate circumstance, the properties can be liquidated. However, we need to be mindful that this may not always result in recouping our investment, as we are subjected to the vagaries of the market.

In any case, this form of liability, even in retirement, is acceptable.

Myth No. 3 : Retirement planning is for seniors

Young working adults, pre-occupied with chasing their careers and enjoying life, tend to relegate retirement planning to the back burner, believing that time is on their side. This is certainly not advisable.

The recurring monthly salary gives a false sense of security and misplaced complacency.

Spending $8.00 or more on a cup of coffee is no skin off the back.

Despite this, do not forget that retirement planning should be a priority early in life, so as to 

accord a sufficiently long runway to grow one’s savings.

Unfortunately, many people, as surmised by various surveys on retirement, discover this too late.

Myth No. 4 : A lot of money is not necessary in retirement

With the escalating cost of living, retirement does not come cheap, especially if we want to achieve a desired lifestyle, one which is close to or the same as that we have been enjoying pre-retirement.

Myth No. 5 : My property can take care of my retirement funds

This may not be a tenable assumption, given the uncertainty and volatility of the property market. More so when it is the only roof above our heads, so the only way to derive money from the property is to either downgrade, reverse mortgage, lease buyback, or participate in the Silver Housing Bonus Scheme (the latter two for HDB flats only).

Early retirement planning can mean that we have adequate funds for retirement, without having to compromise our home.

It is common for retirees to be asset-rich but cash-poor, as they are reluctant to trade their homes for cash, due to sentimental reasons.

Myth No. 6 : 70 to 80 per cent of pre-retirement income is needed during retirement

Estimating the amount we will spend during retirement is complex and unique to each individual. Hence, the commonly used 70 to 80 percent rule of thumb can be deceptive.

Whilst we can expect spending during retirement to reduce over time as we age, due to diminished activity and consumption, we can also expect increased spending due to inflation and rising healthcare costs.

Predicting how these two contradictory influences will affect total spending is a challenge, if not impossible.

A more reliable option is to estimate a budget based on our personal situation and retirement goals, and test these numbers with various inflation assumptions and potential healthcare costs. Even so, it is only a guesstimate, as the future is unpredictable.

A HSBC survey in 2015 found that Singaporeans are not financially prepared for the future, partly due to a lack of understanding on how to plan it.

56% said they were most concerned about long-term financial security. Of this group, 40% said they could not manage well or have no specific alternative in place should something unforeseen occurs.

So when do we start financial planning?

It should commence the moment we start work.

The young generation is generally very fortunate compared with their parents and grandparents, as most do not have to support their families.

Consequently, they have more disposable income. However, many are spendthrift and careless spenders.

So for them, financial planning as a discipline must begin early. The habit of saving money needs to be internalised.

For a young employee whose earning power is initially not high, care in managing expenses is important.

After accounting for expenses, he should try to save as much as possible, given that he will be incurring heavy expenditure going forward, for instance, car loan, housing loan, insurance, income tax, marriage expenses, cost of raising children, vacations, and so on.

With time, the financial situation will improve, as he ascends the corporate ladder, with higher salary, better bonuses, and other monetary incentives.

By now, he is older. For many at around 40 years old, this is the time when their career is fairly stable, their income stream is steady and largely predictable, and the family unit, for those who are married with children, is established. This is the time to go beyond saving, and start growing their money through prudent investing.

A very important aspect of financial planning is family legacy planning, which is often neglected by many people, either because they do not appreciate a need for it, or they feel they have the time to consider it later, so there is no urgency. However, we need to be mindful that ill-health and death transcend age, so it is never too early to act.

Family legacy planning essentially comprises three pillars:

Will

Lasting Power of Attorney (LPA)

Advance Medical Directive (AMD)

Will

Making a will ensures that your assets end up where you want them and your wishes are adhered to. We have heard of horror stories when a person died intestate, leaving family members to fight with and sue one another. I have witnessed squabbles among family members during a deceased’s wake, even though the content of the will has not been revealed. So what more if there were no will? Although, to some of us, thinking about death is taboo, doing this earlier than later gives us more time to think about it, at a time when we have higher cognitive ability. The will can be reviewed and amended at any time, in accordance with circumstances.

A will can be a simple one if your assets are fairly straightforward. It is important, however, to realise that important legal implications found in common assets are not addressed by a simple will. For instance:

Immovable assets (properties)

Cash in bank accounts

Central Provident Fund (CPF)

Insurance policies

SME (Small and Medium Enterprise) businesses

As an example, a person has a joint account with another person. The simple will states that, upon his death, all cash in his bank accounts will go to his wife. However, in a joint account, upon the death of an individual, the surviving joint account-holder is entitled to the money, not the wife of the deceased.

A complex will is one in which the assets involve various jurisdictions. For instance, a person owns properties in different countries. A will drawn up in Singapore may not recognise these properties because the laws in these countries are different from that in Singapore. A case in point is China. Properties owned in China need to be covered by a separate will drawn up by a lawyer based there.

Lasting Power of Attorney

This is a legal document which allows a person who is at least 21 years old (called a donor), to voluntarily appoint one or more persons (donee(s)), to make decisions and act on his behalf as his proxy decision-maker(s), should he lose his mental capacity one day. A donee(s) can act on his personal welfare as well as his property and affairs matters.

A LPA alleviates the stress and difficulties faced by your loved ones in the event of you losing your mental capacity.

Advance Medical Directive

This is a legal document that allows a person to state that he does not wish to prolong the process of dying, in the event he is unconscious and terminally ill, with no reasonable prospect of recovery.

When it comes to real estate, the agent will tell us that it is about location, location and location.

Similarly, with retirement, it is about planning, planning and planning.

By the time we reach the current retirement age of 62 years, most of us would have worked for at least 35 years. Given this, it is important that we plan for the

 next stage of our life journey.