2 What is Retirement Planning It is preparing financially for when you are too old to work when you are too young to quitInvolves making decisions about how well you want to live when you still have the means to craft how well you will liveRequires you to defer some degree of current enjoyment in favor of future survival
3 Who should be concerned about your Retirement? The Government is concerned You family is concerned You should be too!
4 Population Statistics By 2030, almost 20% or 1-in-5 of Singaporeans will be aged 65 and aboveSingapore Department of Statistics, 2005
5 Population Statistics Source of Chart: Role of the Government in Healthcare Provision and Financing in Singapore, presented by Mr Edward Reiche
6 Population Statistics Source of Chart: Role of the Government in Healthcare Provision and Financing in Singapore, presented by Mr Edward Reiche
7 Population Statistics Source of Chart: Role of the Government in Healthcare Provision and Financing in Singapore, presented by Mr Edward Reiche
8 Decreasing Health and Independence 3 Phases of RetirementActivePassiveSupportDecreasing Health and IndependenceRetiree may still be working albeit at a slower pace. Also lives an active lifestyle and have various hobbies. Extra income from work seen as a supplementRetiree stops work entirely. Less physically demanding hobbies will be preferred. Retiree may be more careful with expenses, but is still capable for caring for themselvesRetiree is no longer able to take care of themselves, and may require special nursing care and other support services.
9 4 Pillars of Singapore Social Security DescriptionProgram1Targets working poor who can’t or don’t saveWorkfare2Compulsory SavingsCentral Provident Fund (CPF)3Voluntary SavingsSupplementary Retirement Scheme4Informal Mechanisms, like Home Ownership and Healthcare, as a vital source of income protectionHigh Level of Home Ownership and HealthcareBased on paper by M Ramesh entitled “Singapore’s Multi-Pillar System of Social Security”
10 Successful Ageing for Singapore To ensure that all levels of society are well prepared for the challenges as well as opportunities of an ageing Singapore:Family Level – strong, extended and caring familiesCommunity Level – strong network of community services, as well as with opportunities for engagement and the integration of the communitiesNational level – high level of national preparedness with a competitive and vibrant economy, as well as social cohesion and rootednessFamilyCommunityNationalSource: Inter-Ministerial Committee on the Ageing Population, 1999
11 WorkfareAims to provide support for low-wage workers so that they have the best chance to progressWorkfare Income Supplement (WIS) scheme was introduced in 2007 to encourage older low-wage workers:to work regularlyTo build up their CPF savingsWorkfare Training Support Scheme (WTS)Complements WIS by encouraging employers to send their older lower-wage workers for training, as well as encourage workers to go for and to complete their trainingWorkfare Special BonusThis bonus is announced from time-to-time to ensure that low-wage workers benefit from economic growthMore details on Workfare from
12 Central Provident Fund (CPF) CPF savings are meant to provide for housing and medical needs and for basic living needs after retirement*Consists of 4 main fundsCPF Ordinary AccountSavings can be used to buy a home, CPF Insurance, Investment and EducationCPF Special AccountFor old age and investment in retirement-related financial productsMedisave AccountSavings can be used for hospitalisation expenses and approved medical insuranceRetirement Account (created at age 55)Administered by CPF BoardMandatory contributions by:EmployersEmployeesSelf-Employed*Source: SRS Booklet (Ministry of Finance) 18 Feb 2011Source:
13 Central Provident Fund (CPF) Main milestones include1955, the British colonial authority in Singapore established the CPF as a compulsory savings scheme to allow workers to save for their retirement1984, Medisave was introduced as a savings for Hospitalisation expenses for contributors and their family members1987, Singaporeans were required to set aside a minimum sum in their CPF when they reached age 55. This amount would provide them with a monthly income when they retiree.Source:
14 CPFOA ContributionContribution and allocation rates from 1 September 2012Employee Age (Years)Contribution Rate (for monthly wages ≥ $1,500)Credited intoContribution by Employer (% of wage)Contribution by Employee (% of wage)Total Contribution (% of wage)Ordinary Account (% of wage)Special Account (% of wage)Medisave Account (% of wage)35 & below1620362367Above 35-45218Above 45-50199Above 50-5514(12)18.5(18)32.5(30)13.5(13)9.5(8)9.5(9)Above 55-6010.5(9)13(12)23.5(21.5)12(11.5)2(1)Above 60-657(6.5)7.514.5(14)3.51.5(1)9.5Above 656.5511.51Rates bracketed and in red show Contribution and Allocation Rates for the period 1 September 2011 to 31 August 2012)*Source: Contribution Rate based on an Ordinary Wage of $5,000
15 CPFOA InvestmentThe OA is invested under the CPF Investment Scheme – Ordinary Account (CPFIS-OA)CPFIS-OAFixed DepositsSingapore Government BondsSingapore Government Treasury BillsStatutory Board BondsBonds Guaranteed by the Singapore GovernmentAnnuitiesEndowment Insurance PoliciesInvestment-Linked Insurance ProductsUnit TrustsETFsUp to 35% of investible savings can be invested in:SharesProperty Funds (or REITs)Corporate BondsUp to 10% of investible savings can be invested in:Gold, through the following:Gold ETFsOther Gold Products (offered through UOB)“Investible Savings” is the sum of your OA balance and the amount of CPF withdrawn for investment and educationSource:
16 CPF Special Account (CPFSA) Special Account (SA) is a saving account specifically for old age use, and can be invested in retirement-related financial productsCan be used to pay for monthly housing installments under very strict conditions, and only for properties bought before 1 October 2003OA savings can be transferred into the SA, but not the other way aroundSource:
17 CPFSA InvestmentThe SA is invested under the CPF Investment Scheme – Special Account (CPFIS-SA)CPFIS-SAFixed DepositsSingapore Government BondsSingapore Government Treasury BillsStatutory Board Bonds (Secondary Market Only)Bonds Guaranteed by the Singapore GovernmentAnnuitiesEndowment Insurance PoliciesSelected Investment-Linked Insurance Products*Selected Unit Trusts*Selected ETFs**For more information:ILP -Unit Trust -ETF -Source:
18 CPF Medisave Account (CPFMA) A national savings scheme to meet the healthcare expenses of members and their dependants, including grandparents who must be Singaporeans or Singapore PRs.Source:
19 Use of CPF MA Hospitalisation Expenses Certain costly Outpatient treatments and treatment for a number of chronic diseasesPremiums of approved medical insurance schemes and certain enhancements under the Integrated Shield Plans for members and their dependantsMedishield is run by CPF BoardMedisave approved Integrated Shield is offered by private insurersPremiums for approved long-term care insuranceEldershield and Eldershield supplements are offered by private insurersAvailable once members and their dependents reach 40 years of ageSource:
20 Use of Medisave Funds Medishield Eldershield Hospitalisation Expenses A catastrophic medical insurance programme to meet cost of medical treatment for serious illnesses or prolonged hospitalisationsMost programmes available today come with “as-charged” features with high yearly (up to $650,000) and lifetime limitsHas deductible and co-insurance features, which can be done away with by purchasing an enhancementEldershieldA national long-term care insurance programme initially launched in 2002, and enhanced in 2007With Eldershield Supplement, monthly benefits can be as high as $3,500 for lifeAvailable to persons above 40 years of ageHospitalisation ExpensesSince 2010, Medisave is allowed for use for medical treatment in certain hospitals Malaysia**Terms and Conditions apply. See
21 Straits Times, Thursday 5 July 2012, Mind Your Body
22 Medisave Minimum Sum (MMS) The Medisave Minimum Sum (MMS) is the amount that a member turning 55 needs to set aside for future hospitalisation expensesRegular MMS adjustments are necessary to help Singaporeans plan for their long-term healthcare needsFrom 1 July 2012, MMS will be increased from $36,000 to $38,500.
23 Medisave Contribution Ceiling (MCC) The MCC is the maximum a member may have in his Medisave AccountThe MSS value is set at $5,000 above the MMS valueFrom 1 July 2012, MCC is increased from $41,000 to $43,500Excess of the prevailing MCC will be transferred toSpecial Account if the member is below 55 years oldRetirement Account if the member is above 55 years old and has a Minimum Sum shortfall
24 Medisave Required Amount (MRA) The Medisave Required Amount is the amount that you are required to have in your Medisave Account before you can withdraw the savings in your Ordinary or Special Accounts.If you do not have at least the prevailing Medisave Required Amount, you are required to make a top-up to your Medisave Account with part of the balances from your Ordinary or Special AccountsSince 1 Jan the MRA has been set at $32,000. This value will be adjusted for inflation every January until it reaches $25,000 (in 2003 dollars) on 1 Jan 2013
26 CPF Interest RatesSavings in the Ordinary Account earn an interest rate of 2.5%The interest is computed every quarter, and is based on the weightage of80% of the average 12-month fixed deposit rate, and20% of the average savings rate published by major local banksSavings in the Special and Medisave Accounts earn an interest of the higher of:4%, or12-month average yield of the Singapore Government Securities (10YSGS) plus 1%Interested is adjusted quarterlyAn additional 1% is paid on the first $60,000 of a member’s combined balances:Limited to $20,000 from the OAAdditional 1% interest received on the OA will be deposited into the member’s SA or RA to enhance the retirement savings*Source:
27 CPF Interest Rates RA savings earn an interest of of either: 4% (the floor rate), or12-month average yield of the Singapore Government Securities (10YSGS) plus 1%Interested is adjusted annuallyAnnounced 30 September 2011, the minimum of 4% pa will be earned for all Special, Medisave and Retirement Account monies until 31 December After that, interest rates on ALL CPF Account monies will be subject to a minimum rate of 2.5% pa*Source:
28 CPF Minimum Sum (MS) Scheme Intended to finance the increase life expectancy of retirees.Provides members with a monthly income to support a modest standard of living during retirementQ: Will CPF Savingsbe enoughfor Retirement?
29 CPF Minimum Sum (MS) Scheme First began in 1 July 1995 with the initial amount of $40,000to reach an amount of $80,000 by 2003$40,000 annual incrementsSince 2004, MS has been increased from $80,000 to $120,000, in incremental steps of $4,000 (all values in 2003 dollars)The 2003 MS value (with increment) is then adjusted for inflation each year.The $4,000 increment in 2012 (adjusted for inflation) would have amounted to a $12,000 increase of the MS.To mitigate the large increase in MS due to inflation, CPF Board has decided to spread out increase in MS to reach $120,000 (in 2003 value) by 2015 instead of 2013From 1 July 2012 to 30 June 2013, CPF members will need to set aside $139,000 (up from $131,000)*Source:
30 CPF Minimum Sum (MS) Scheme Year2003 valueActual1 July 2003$80,0001 July 2004$84,000$84,5001 July 2005$88,000$90,0001 July 2006$92,000$94,6001 July 2007$96,000$99,6001 July 2008$100,000$106,0001 July 2009$104,000$117,0001 July 2010$108,000$123,0001 July 2011$112,000$131,0001 July 2012$113,000$139,0001 July 2013To beAnnounced1 July 20141 July 2015$120,000The initial MSS 2003 value for 2012 was $116,000. Adjusted for 2011 inflation, this would have resulted in a MS of $143,000 This is a large jump of $12,000 or 9% from the previous MS of $131,000Instead of the target of reaching $120,000 MS in 2003 value by 2013, CPF Board has decided to reach the target $120,000 over 4 years.The 2012 MS stands at $139,000.*Source:
31 CPF Minimum Sum (MS) Scheme To help increase CPF LIFE payouts, members who turn 55 from 2013 onwards and who have not met their MS will have their post-55 contributions to the OA and SA automatically transferred to their RA when they reach the draw-down age (DDA) or 65 years old*This will translate into higher monthly payouts for membersAmount a member can withdraw in cash under the existing withdrawal conditions remains the same.*Source: CPF Board – New CPF Changes in More details on the new LIFE plans will be made available in 3Q 2012
32 Cash balances CPF Accounts* Amount which you can withdraw CPF MS WithdrawalCash balances CPF Accounts*Amount which you can withdraw$5,000 or lessAll your cash balancesMore than $5,000 but less than or equal to $50,000$5,000. The remainder will be set aside in your Retirement Account (RA).More than $50,000 but less than or equal to $154,44510% of the cash balances. The remainder will be set aside in your RA.More than $154,44510% of $154,445 and any further cash balances after setting aside the CPF Minimum Sum** and the prevailing Medisave Required Amount ($32,000 for 2012)From 1 January 2013, members who reach 55 can withdraw their cash balances only after setting aside the CPF Minimum Sum and Medisave Minimum Sum. However, members can still withdraw the first $5,000 from the CPF account at 55.*Refers to cash balances in OA and SA, and any balance above MMS (currently $38,500) in Medisave Account (MA) at age 55**The CPF Minimum Sum applicable for members turning 55 between 1 July 2012 and 30 June 2013 is $139,000.
33 The DDA may eventually be increased to age 67 Draw Down Age (DDA)Age as at31 Dec 2011Applicable DDA62 and above6260-616358-596457 and below65The DDA may eventually be increased to age 67*Source:
34 CPF Minimum Sum Plus Scheme If you are aged 55 and above from 1 January 2001:Can buy life annuities (currently only from NTUC) beyond your Minimum Sum with your withdrawal CPF SavingsMonthly income from these annuities is tax exemptMonthly income from life annuities purchased with cash is not tax exempt*Source:
35 Retirement AccountThe account is created at age 55. The Minimum Sum is then transferred into this account for disbursement of monthly income under CPF LIFE once the contributor reaches 65 years of ageIn the 10 years when the funds remain in the RA until the DDA, it earns interest* whichCannot be withdrawnForms part of the RA savings for monthly payments when you reach DDAFrom 1 January 2013, CPF members aged 55 with at least $40,000 in their RA or with at least $60,000 at 65 will be placed on CPF LIFE. Members who are not placed on CPF LIFE can choose to join CPF LIFE before reaching 80, or remain on the MS Scheme.*Currently 4% pa until 31 December 2012Source:
36 CPF “Income” for Life?CPF will not be able to adequately finance your retirement:monthly payouts are not indexed against inflation, therefore subsequent payouts will depreciate in value and hence, purchasing powerCPF MS is able to provide monthly income to the member for years. This may not be a long enough period of time for retirement incomeSingaporeans are expected to live much longerBetter lifestyleBetter medical support and advancement*Source:
37 CPF LIFESingapore has one of the highest life expectancies in the worldFor Singaporeans aged 65 today50% expected to live beyond 8533% expected to live beyond 90Singaporeans are expected to live longer, and a growing number expected to outlive their CPF savings if they were on the MSSCPF Life introduced to provide members with income for life*Source:
38 CPF LIFE - EligibilityAn Individual may apply to join LIFE between the age of 55 and 80, but must satisfy two conditions:Must be a Singapore Citizen or a Singapore Permanent ResidentMust have Retirement Account SavingsFrom 1 January 2013, CPF members aged 55 with at least $40,000 in their RA or with at least $60,000 at 65 will be placed on CPF LIFE. Members who are not placed on CPF LIFE can choose to join CPF LIFE before reaching 80, or remain on the MS Scheme.*Source:
39 CPF LIFE Today 4 plans are available: LIFE Plan Payout Bequest Level Bequest (Refundable Plans)LIFE Plus PlanHighLowLIFE Balanced PlanMediumLIFE Basic PlanNon-Bequest (Non-Refundable Plans)LIFE Income PlanHighestNone*Source:
40 Improved and Simpler CPF LIFE From 1 Jan 2013, members can choose between 2 CPF LIFE plans*Standard Plan (default plan)Is a combination of the Balanced and Plus PlansHigher payouts while preserving flexibility in the use of Retirement Account savings prior to age 65Members can also leave a bequest for their beneficiariesBasic PlanFor members who prefer to leave a higher bequest and lower monthly payoutsAllows members to use their RA savings for housing after 65 years oldMembers who are currently on the 4 current LIFE plans can remain in those plans, or switch to the new Standard Plan before 31 Dec 2013*Source: CPF Board – New CPF Changes in More details on the new plans will be made available in 3Q 2012
41 MA goes towards funding CPF in SummaryCPFOASAMAMA goes towards fundingmedical expensesMSS(age 55)Amounts in excess of MS can be withdrawn in cash as long as MRA is metRA(created at age 55)LIFE(age 65)Finances lifelong disbursement for retirement
42 Supplementary Retirement Scheme Was introduced in 2001Complements the CPF savings as part of the government’s multi-pronged strategy to address the financial needs of its aging population. This is due to the recommendations of the Inter-Ministerial Committee’s Report on the Aging PopulationContribution is voluntary, and can be in any amounts (subject to an annual cap)Contributions can be used to purchase various investment instrumentsContributions to SRS are eligible for tax relief, and investment returns accumulated tax-freeWhen withdrawn at retirement1, only 50% withdrawal from SRS is taxable1Retirement refers to the Statutory Retirement Age, which is the retirement age at the point in time the contributor makes his first SRS contribution*Source: Ministry of Finance
43 Supplementary Retirement Scheme All Singaporeans, Singapore PRs (SPR) and foreigners can open an SRS accountMust be at least 18 years oldNot undischarged bankrupts, andNot mentally disordered and capable of managing themselves and their affairsTo participate in SRS, you must first open an account (only one) with any of the 3 SRS operators:DBS LtdOCBC LtdUOB LtdYou may, however, transfer your account from one operator to another*Source: Ministry of Finance
44 SRS ContributionIf you earn any form of income, including directors’ fees in the current year, you are allowed to contribute to SRSEmployers are also allowed to contribute to your SRS account on your behalf. Their contribution is treated as part of your remuneration, and thereby taxable in your hands.*Source: Ministry of Finance
45 Absolute Income Base = $85,000 Contribution CapYou can contribute in a year any amount up to your contribution cap The Contribution Cap is determined by the product of the Absolute Income Base and the SRS contribution rateAbsolute Income Base = $85,000Contribution RateSingaporean & SPR15%Foreigner35%Contribution Cap(Absolute Income Base) x (Contribution Rate)= 85,000 x 15%= 12,750= 85,000 x 35%= 29,750*Source: Ministry of Finance
46 SRS Contribution and Taxation The contribution cap is calculated based on income earned the year previous to the year of contributionA contributor is entitled to tax relief on his contributions in the year following the year of contribution provided he is assessed as a tax resident in that year where the contribution is to be allowed.EXEMPT
47 Supplementary Retirement Scheme Contributions grow tax-free, and only 50% of the withdrawals is taxed at the then-prevailing income tax rateAssumptions: Starting Income $2,000pm, ROI 6%, General Inflation 3%, Income growth 5%
48 SRS withdrawalsUnder certain circumstances, SRS savings can be withdrawn with penalty. However, 50% of savings withdrawn will be subject to income tax if youwithdraw your savings after achieving the statutory retirement age prevailing at the time you made your first SRS contributionwithdraw your savings upon deathwithdraw your savings on medical grounds – physical or mental incapacitationfull lump-sum withdrawals by Singapore Permanent Residents (PRs) who have cancelled their PR status andhave been a non-Singaporean or a continuous period of 10 years preceding the date of withdrawalhave maintained their SRS account for a period not less than 10 years from the date of first contribution to the SRS account.full lump-sum withdrawal by foreigner who has maintained his SRS account for a period not less than 10 years from the date of first contribution to his SRS account.Under all other withdrawal scenarios, you will be taxed 100% of the withdrawn amount. This applies also for withdrawal upon bankruptcy and withdrawal before the statutory retirement age prevailing at the time of the first contribution.
49 SRS WithdrawalA withdrawal from the SRS can be made at any time subject to the penalty imposed (where applicable) on the amount withdrawnWithdrawal EventPenaltyPortion TaxedDeathNil50%Medical GroundsBankruptcy100%Foreigner (10 year rule)Before retirement5%Upon first and subsequent withdrawal when retirement age is reachedWhere no withdrawal is made even when you reach the then current retirement age.*Source: Ministry of Finance
50 SRS withdrawalsAt Statutory Retirement Age, SRS balances can be withdrawn in 10 yearly installments.50% of each annual withdrawal will be taxed at the prevailing income tax rate
51 Supplementary Retirement Scheme Based on the hypothetical closing values presented earlier:An equal annual withdrawal of $124,511 can be made for 10 yearsOf the $124,511 drawn down, only 50% (or $62,250) will be subject to income taxThis being $124,511 less 10% (20% tax on 50% of the withdrawal), then discounted for inflationBased on tax rates today, that would mean that about 90% of his annual withdrawal will remain intactThis equates to about $34,400 per annum in today’s valueAssumptions: Starting Income $2,000pm, ROI 6%, General Inflation 3%, Income growth 5%
53 Planning for Your Retirement Goal SettingGathering FactsAnalysing FactsDeveloping SolutionsImplementing SolutionsPeriodical Reviews
54 Planning for Your Retirement Goal SettingWhat, when and why you intend to achieve in your retirementGathering FactsCash Flow Statement and Net Worth, as well as other additional sources of income or expenses when you retireAnalysing FactsDetermine how much you need and whether you have a shortfallDevelop strategies that will help you reach your goals. This includes researching, comparing and shortlisting the various instruments available for this purpose. You will also have to put in place an implementation scheduleDeveloping SolutionsImplementing SolutionsPutting your plan into actionPeriodical ReviewsReview your plan regularly, as well as track your progress.
55 Setting your Retirement Goals What do you envisage your retirement to be like?What would you like to do?How would you like to live?With whom would you be living with?
56 Common Misconceptions in Retirement There’s always time to prepare for retirement, I can do it when I’m in my 40s or 50sI will earn more, so be able to save more, when I am olderI voted for the government, so they must take care of meCPF Life or the Minimum Sum will be sufficient for my retirementI do not need as much in retirement as I do now when I am actively working. I will live simplyMy children will take care of me
57 How Much is EnoughThe more relevant question is “how much do you need?”Your need is determined by:The type of lifestyle you would like to have – everyone has a different expectation and it determines the periodic amount you wantDependent or IndependentFinancial Freedom or Financial AusterityShould it include a regular holiday or only focus on survival?The period you want to provide forHow long do you want to provide for. Better safe (longer period) than sorry (shorter period)?All else being equal, does your family have a history of long life?
58 How Much is Enough Consider your potential expense pattern: Which expenses will increase/decrease? Ongoing Mortgage repayments? Debt repayments?Which current expenses will disappear?What possible new expenses will be needed? (Grand)Children Education?What other sources of funds will you have during retirement?CPF/SRS?Support from family (not usually considered due to its uncertainty)Sale of home (future values are uncertain, and costs involved in selling/buying of homes may be significant)Do you want to leave anything behind for your loved ones?Legacy and InheritanceWills and TrustHow far along are you towards building your retirement fund?How much resources have you already set aside for this?How much more do you need to commit?
59 Key to Successful Retirement Increase FundingIf possible, increase your sources of income, especially passive incomeReducing impact of expensesExpenses can only be estimated within certain marginsUse of risk management instruments to mitigate impact of unexpected expenses – Medishield, Eldershield, Critical Illness and Personal Accident
60 Funding your Retirement Expenses How much should you provide for expenses when you retire?Rule-of-Thumb: 60% of your last drawn income just before retirement, orExpenses that you incur today, adjusted for expected increase in medical expenses and possible reduction in lifestyle expenses (the net amount adjusted for inflation)Consider also new expenses arising during old age as well as existing expenses which will no longer be necessaryBear in mind that your lifestyle during retirement may not change very much from that which you currently enjoy
61 Quantitative Techniques When solving for problems involving retirement funding, the Present Value of Annuity Due is frequently used.𝑃𝑉=𝑃𝑀𝑇 1− (1+𝑖) −(𝑛−1) 𝑖 +1Annuity Due is used because each “income” drawn from your retirement fund is required at the beginning of each year (assuming that you use an annual budget)
62 Quantitative Techniques 𝑃𝑉=𝑃𝑀𝑇 1− 1+𝑖 − 𝑛−1 𝑖 +1Explanation ofPV is the Present Value of Annuity Due for the cash flowPMT (or payment) is the annual amount required at the start of your retirementn is the number of years you are providing fori is the net return on investment after adjusting for inflation, or the Real Rate of Return* given by (1+𝑅𝑂𝐼) (1+𝑖𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛) −1 ×100%*Please refer to Text, p463
63 Case Study 1Gilbert, a manager aged 30, reckons that he will need $2,000 every month (in today's value) when he retires at age 65. Given his family history, he believes he will live to 90 years old. How much retirement funding would he have to accumulate when he reaches 65 years of age?(assume ROI and Long-Term General Inflation Rates to be 5% and 3.5% respectively)
64 𝑖= (1+𝑅𝑂𝐼) (1+𝑖𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛) −1 ×100% Case Study 1 (con’t)Step 1 – Determine the Future Value at age 65 of Gilbert’s current estimated annual retirement amount𝐹𝑉65=𝑃𝑉 1+𝑖 𝑛=24,=80,006.17Step 2 – Determine the real rate of return (of inflation adjust return) for Gilbert’s retirement fund (between his age 65 to 90)𝑖= (1+𝑅𝑂𝐼) (1+𝑖𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛) −1 ×100%= (1+0.05) ( ) −1 ×100% =1.45%
65 Case Study 1 (con’t)Step 3 – Calculate Gilberts Retirement Funding using the future value of his estimated annual retirement requirement as his annual income𝑃𝑉65=𝑃𝑀𝑇65 1− (1+𝑖) −(𝑛−1) 𝑖 +1=80, − ( ) −(25−1)=80, − (1.0145) −(24) =1,691,907Note that the FV of Gilbert’s requirement at age 65 (FV65) has become the annual income requirement for his retirement, PMT65,and the interest used is the real rate of return, i=1.45%
66 Case Study 2Gilbert already has $150,000 invested in various instruments, and he estimates that his overall yield to be about 5%. Advise Gilbert if he will be able to reach his retirement target (previously determined), and if not how much more he must save annually to be able to do so.(assume ROI and Long-Term General Inflation Rates to be 5% and 3.5% respectively)
67 Case Study 2(con’t)Step 1 – Determine the Future Value at age 65 of Gilbert’s current investment portfolio𝐹𝑉65=𝑃𝑉 1+𝑖 𝑛=150,=827,402.30Given that Gilbert needs $1,691,907 to retire, and that his current portfolio will grow to only $827,402, Gilbert still has a shortfall of $864,502
68 𝐹𝑉=𝑃𝑀𝑇 (1+𝑖) 𝑛 −1 𝑖 𝑃𝑀𝑇= 𝐹𝑉 𝑖 (1+𝑖) 𝑛 −1 Case Study 2(con’t)Step 2 – Determine how to make up the shortfall of $827,402One way to do this is by additional annual contributions to his savings which will be invested at his current (comfortable) yield to make up the difference.To find the annual savings, we manipulate the Future Value of Ordinary Due* formula𝐹𝑉=𝑃𝑀𝑇 (1+𝑖) 𝑛 −1 𝑖 𝑃𝑀𝑇= 𝐹𝑉 𝑖 (1+𝑖) 𝑛 −1=827, (1+0.05) 35 − =9,161This means that in order for Gilbert to make up his shortfall, he will need to save an additional $9,161 every year, and invest it instruments which will yield a minimum of 5%pa*Please refer to Text, p59
69 Additional ReadingCPF Member MainCPF Board Website Report by the National Longevity Insurance Committee (NLIC) Ministry of Finance SRS BookletNLICSRS Main
70 ConclusionHow well you plan today, and carry out what you plan, determines how well you live when you can no longer plan
71 Hey… you! You’ll never get there unless you stop looking at this poster and get back to work!