Transitioning from saving to spending in retirement can be psychologically challenging. This is especially true for Asian parents, who see frugality as a key virtue and part of their identity.
After years of hard labor, giving themselves the freedom to spend money requires a significant amount of mental effort. Even before this, discussing money doesn't seem as simple.
The concept of retirement itself has evolved significantly over the years. In the past, retirement often meant a complete cessation of work, but today, many retirees are opting for a phased approach. This gradual transition allows individuals to maintain a sense of purpose and identity while slowly adjusting to a new lifestyle. For Asian parents, who often derive a strong sense of self-worth from their work, this approach can be particularly beneficial, easing the psychological transition from full-time employment to retirement.
Singaporeans reached two CPF milestones.
When it comes to CPF, Singaporeans look forward to two significant milestones: the first at 55 years old, when your Retirement Account (RA) is established and the first withdrawal begins, and the second at 65 years old, when you start receiving monthly payouts.
If your parents are a few years, or even months, away from turning 55 or 65, you may begin to have some concerns regarding their retirement:
Should they withdraw their CPF? What amount should they withdraw? Will their monthly CPF LIFE payouts be sufficient to provide a pleasant retirement?
You are not alone in this; it can be difficult to manage retirement, let alone have a conversation about it with your elderly parents. Retirement planning is highly individualized, and you're unlikely to discover someone in the same situation as your parents or even yourself.
The importance of early retirement planning cannot be overstated. While the CPF system provides a solid foundation, it's crucial to supplement it with personal savings and investments. Financial experts recommend starting retirement planning as early as possible, ideally in one's 20s or 30s. This early start allows for the power of compound interest to work its magic, potentially resulting in a much larger nest egg by retirement age. For those who are closer to retirement and feel they've started too late, it's important to remember that it's never too late to begin planning and making positive financial changes.
However, there are still blueprints that can provide you with direction and support. These are some of the best advice on how some individuals approach and support their parents' retirement preparation.
Having "the talk": Money, Old Age, and Death
Talking to aging parents about retirement planning entails uncomfortable discussions about aging, finances, and end-of-life issues. Here are four recommendations to help you get through this sensitive task.
Right time, right place: It's critical that the conversation begins on the proper note, by selecting a private situation in which your parents feel comfortable speaking openly and aren't distracted by what's going on around them.
Be open about your intentions: Not everyone feels comfortable discussing their finances, especially amongst parents and children. To have an open conversation with your parents, make it evident that you are genuinely concerned.
Respect their boundaries: Encourage your parents to discuss their goals, ambitions, and even anxieties, but keep in mind that trust is developed over time, and they may not always be willing to reveal more.
Be prepared, but you don't need to know everything. Learn as much as you can about retirement planning alternatives, CPF milestones, and other essential financial facts so that you may ask the right questions and share your knowledge with your parents. It's okay if you can't answer all of their questions; instead, offer to reach out for help on their behalf, such as meeting with a financial expert, to reduce any anxiety they may have about the procedure.
The role of technology in retirement planning has become increasingly significant. Many financial institutions and government agencies now offer online tools and mobile apps that can help individuals track their retirement savings, project future needs, and even simulate different retirement scenarios. These digital resources can be particularly useful when discussing retirement plans with parents, as they provide concrete, visual representations of financial situations. However, it's important to remember that while these tools are helpful, they should be used in conjunction with professional advice, especially when making major financial decisions.
Understand our parents' relationship to money.
Every person has a distinct attitude about money, formed by their experiences and economic circumstances. According to one study, people who experience economic downturns in their early years are more prone to engage in risk-averse financial behaviors as adults. This could imply that they prefer low-risk investments and value savings above spending.
The same may be said of our parents, whose financial difficulties during their early years, as well as their exposure to significant economic events, may have influenced their attitudes about investing.
It may have been the 2007-2008 Global Financial disaster, or something as recent as the Hyflux disaster, that rattled investors' expectations of a guaranteed profit when they purchased the high-growth company's stock.
In either case, we can only strive to understand our parents' relationship with money rather than try to change their beliefs, allowing us to approach money conversations with the appropriate level of empathy and sensitivity.
For example, if a parent is afraid to invest in the stock market owing to previous losses, addressing their worries and providing information on low-risk investment options can help foster trust and confidence.
Similarly, if a parent prefers traditional savings methods, you can look into ways to increase their savings while honoring their preferences.
The concept of financial wellness in retirement extends beyond just having enough money. It encompasses physical health, social connections, and mental stimulation. Many retirees find that their expenses in retirement are different from what they anticipated. While some costs may decrease, such as commuting expenses, others may increase, particularly healthcare costs. Encouraging parents to consider these holistic aspects of retirement can lead to more comprehensive and satisfying retirement planning. This might include budgeting for hobbies, travel, or continuing education, which can contribute significantly to overall life satisfaction in retirement years.
Every Singaporean's retirement toolkit: CPF and SRS.
There are two major components of retirement in Singapore: the Central Provident Fund (CPF), which many people are familiar with. The second is the Supplementary Retirement Scheme (SRS), which serves as a complementary scheme by providing additional channels for retirement savings with tax benefits.
CPF withdrawals and CPF LIFE payouts
As our parents approach 55 or 65, they will have to make some crucial decisions on their CPF. At 55, people must decide whether to withdraw a portion of their CPF savings.
They can take up to $5,000 from their Retirement Account (RA) regardless of the amount in it, or any amount in excess of their Full Retirement Sum (FRS) if they have saved enough. This option necessitates thorough assessment of their long-term financial needs and the advantages of leaving the money in the CPF to accrue interest.
When they reach 65, they will need to determine whether they are near to the monthly payouts required for their retirement. CPF LIFE provides lifelong monthly dividends, the amount of which is determined on the amount saved in their RA and the CPF LIFE plan chosen.
They can also delay the start of their dividends until age 70, which might result in bigger monthly payouts due to the additional interest accrued. The timing of the payouts will have an impact on their financial stability and quality of life in retirement.
SRS Tax Relief and Investment
SRS is a voluntary scheme that complements the CPF by providing extra opportunities for retirement savings. Individuals may contribute to their SRS up to the annual ceiling, which is eligible for tax relief. Funds in the SRS can then be invested in a variety of financial instruments, including equities, bonds, unit trusts, and insurance.
For people aged 55 and under, the SRS can be an effective instrument for increasing their retirement savings. At this age, they may still have a few years of employment left, allowing them to contribute to their SRS accounts and benefit from tax breaks. Our SRS calculator can help you figure out how much tax relief you'll receive.
On the other side, parents who have retired or will retire soon may not find SRS useful. Their attention is likely to have moved to selling their funds or investing in more stable, low-risk items that are more liquid (for example, short-term bonds and money market funds).
For those who have previously contributed to their SRS accounts, withdrawals made after the statutory retirement age are subject to a 50% tax reduction, meaning only half of the amount removed is taxable, which can be useful for managing tax bills after retirement.
What are your options for playing a supporting role?
CPF top-ups are voluntary.
One of the most efficient methods to help your parents save for retirement is to make voluntary CPF contributions. By increasing their Special Account (SA) or Retirement Account (RA), you can assist them earn up to 6% per year in interest.
Under the Matched Retirement Savings Scheme (MRSS), the government would match every dollar of funds added to qualifying members' Retirement Accounts, up to $600 each year. This will be increased to $2,000 starting January 1, 2025, with a lifetime ceiling of $20,000 for qualifying members. Furthermore, cash top-ups of up to $8,000 qualify for tax breaks on your assessable income.
SRS to increase spare cash.
If your parents are still working, have a long time horizon before retirement, and have spare income, you should consider introducing them to SRS for its tax benefits. SRS money can be invested to increase retirement savings and potentially earn higher investment returns. Here are some methods to invest your SRS account and maybe earn more than the bank's meager 0.05% return.
Combat inflation with cash management products.
Inflation reduces the value of idle cash. Endowus Cash Smart is a cash management solution designed to maximize cash rewards while minimizing risk. It is also quite liquid, making it great for our parents who are approaching or have reached retirement age.
It's alright to ask for professional assistance.
Navigating the complexities of retirement planning can be stressful. It is totally reasonable to feel stuck at times because this is such a broad and difficult topic, and you want to make the best decisions for your parents' financial future.
