Are we worried about retirement adequacy in the right way?

If we have a plan on achieving adequate retirement funding but have trouble executing the plan, we should be worried. If we do not have a plan on how to achieve retirement adequacy, we should be very worried.

This was a conversation with a reader on FB:

J A

Hi AK, was talking to my friend about the pros of cpf, but they were saying we will not be able to fully withdraw the amount, and if we pass on before we totally withdraw all out, it will be pass to the child and it goes on.. what do u think about it?

Assi AK

Why would we want to make a full withdrawal?

The minimum sum goes into an annuity that pays us a monthly allowance for life from age 65.

If your friends do not believe in buying an annuity to fund their retirement, then, I can understand.

A clever fellow in Hong Lim Park.

J A

They are worrying they will not be able to withdraw the full sum.

Assi AK

They should be worried that they might not have adequate retirement funding from age 65. 
They are worried about the wrong thing.

Knowing that I will have a meaningful monthly income for life from age 65 gives me some degree of assurance when it comes to the topic of retirement adequacy.

Source: CPF Board.

J A

So how do they calculate the monthly income age, from 65 till ?

Assi AK

You can share these videos with them: http://singaporeanstocksinvestor.blogspot.sg/2014/09/videos-on-reaching-55-and-what-is-cpf.html

Videos on reaching 55 and what is CPF Life? | A Singaporean Stocks Investor (ASSI)

Assi AK

There is also a very good guest blog on the CPF Life here: http://singaporeanstocksinvestor.blogspot.sg/2015/05/tea-with-ey-is-our-cpf-life-payout.html

Tea with EY: Is our CPF LIFE payout going to be sufficient? | A Singaporean Stocks Investor (ASSI)



Source: CPF Board.

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J A

Ok. They reply me with a few question

 "My question is will we get our entire cpf sum back whether it's thru annuity etc"
By my friend

Assi AK

I started typing numbers and I deleted. He can go and do his own calculations to see for himself why CPF Life makes sense. Don't be lazy. LOL.

As he seems to be fixated with getting back all his savings in his CPF account, I will simply show him how most of the money in my CPF-SA is from the government. At age 55, whatever I have in my CPF that is above the minimum sum, I can withdraw.

The minimum sum which is really money from the government will go into CPF Life to fund my retirement for life from age 65.
See:
http://singaporeanstocksinvestor.blogspot.sg/2015/01/a-lot-of-money-in-my-cpf-sa-is-from.html

A lot of the money in my CPF-SA is from the government. (AK reveals his CPF-SA numbers in detail...

Ask him what would he do if he were allowed a 100% withdrawal? What would he do to ensure that the money will be able to fund his retirement for the rest of his life?

Worry about the right things in the right way.

Related post:
Proposed changes to the CPF system.

Important things to do before we start investing.

It might come as a surprise to some but it is very common for me to see people who are very excited about starting their journeys as investors and neglecting matters of personal finance. Of course, regular readers would know that I always tell people that they must get their personal finances in order before thinking about investing in the stock market.

So, the question is whether we have overlooked essentials in financial planning in our haste to invest? What could possibly be the most overlooked area of financial planning? Not surprisingly, it is the area of insurance. Insurance is an expense that many would like to dispense with but we really shouldn't.

Many people are attracted by the high returns investments could potentially provide but fail to understand enough what it takes to become an investor. Many jump into the sea of investments and end up drowning. Fear strikes me when my peers get overly excited about “investment opportunities” or when they are too eager to begin investing before taking care of the essentials.

As with everything in life, we should prioritise and take care of what are most important first:

Debts - In our financial plans, we know that we first have to take care of our debts. (Do you know that many Credit Cards effective interest rate is at 24.9% per annum now?) It would not be logical for us to invest before clearing these debts, loans and cash lines with high interest rates that we might have. How could we achieve 24.9% investment returns per annum?

Emergency Savings - Emergency savings of at least 6 months of our monthly expenses is recommended. This is important in case of a stoppage of our income which could happen, for example, in a retrenchment. Emergency savings is also critical to cover unexpected expenses such as medical expenses for our loved ones, household, vehicle repairs and other unfortunate events.

Essential Expenses - If we expect some essential expenses to come our way such as hosting a wedding banquet, having our home renovated or planning to have a child, then, we should save up for these expenses. These are all expenses which could end up being five figure sums. This is money we should not invest with because it is money we cannot afford to lose. We do not want to have to liquidate our investments at a time and price not of our own choosing.

Insurance - We must get sufficient insurance coverage where it matters. Bad things do sometimes happen in life and we should not think that bad things happen only to other people. Without proper insurance coverage, we could see plans for retirement adequacy or financial independence derailed.

Examples of Financial Risks

Medical bills:  How would we deal with hefty medical bills if we did not have sufficient savings?

Loss of income due to medical crisis or death: If we should die or be disabled due to some illness, who is going to provide for our dependents?

These are all real issues which have to be dealt with. The good news is that it is possible for us to be adequately insured at a low cost if we purchase the right insurance products.

If you are wondering what kind of coverage and what type of insurance you should be buying, have a look at the following table:

Seems like there are many types of insurance we have to buy. Does it have to cost an arm and a leg? No, it is possible for a person aged 35 years old to be adequately insured for as little as S$200+ a month.

Where & How to Plan for Insurance?

You could easily calculate your insurance needs:
Click here to find out your life insurance needs
and
Click here to find out your critical illness needs.

To compare and purchase insurance, DIYInsurance –Singapore’s First Life Insurance Comparison Web Portal by Providend Ltd aggregates products from various insurance companies and provides 30% commission rebates in addition to ongoing promotions.

Staff from DIYInsurance are all paid a fixed salary and do not participate in sales-based compensation or incentives of any kind. Not being remunerated on a commission-basis means they are independent and there is no hard-selling and over-selling.

If you require any advice on your insurance needs, do contact them and seek their expertise. Visit www.diyinsurance.com.sg and request a quote for what you require.

Have you planned for the above must-dos?

If you have not, please do so as soon as you can. We do not want to risk having our savings and investment gains wiped out due to our carelessness when it comes to personal finance matters. We have to protect our assets and also plan ahead for any unexpected events.

It probably pays to be patient before diving into the stock markets. We will not only be doing ourselves a favour but a very important favour for our loved ones as well.

The is a sponsored blog post by the good people at DIYInsurance.

Related post:
6 questions to ask about your insurance.