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When it comes to financial planning, small and specific goals are best. Aspiring to make $15,000 or $25,000 a month without working is all well and good, but don’t forget to take concrete steps to secure a realistic amount. With some discipline and prudence, it’s not unrealistic to aim for an extra $1,500 a month (on top of CPF payouts) after retirement. Here are three ways:
First of all, why an extra $1,500 a month?
An extra $1,500 a month may not seem dramatic but its effects on retirement can be life changing. Consider that the average Singaporean, who retires with the Full Retirement Sum of $166,000 in CPF, will only get around $1,280 to $1,380 per month (estimated payout via CPF LIFE). That comes to about $44 per day. If that seems enough to you, you’re forgetting to account for the effect of inflation.
Let’s assume an inflation rate of 3% per annum and look ahead 25 years. At that rate, something that costs a dollar today will, by rough estimate, cost around $2.09 by the year 2042. This means your purchasing power decreases by around 52.2%.
Now the effect is easier to visualise if you work backwards, so let’s do that.
At a loss of 52.2% of purchasing power, your CPF payout of $1,380 per month would effectively be around $659.10 today. If you were retired right now, with that kind of purchasing power, how pleasant would life be? You would be living on around $22 a day. That’s survivable but it’s far from luxurious. Beyond three square meals and the occasional indulgence, there’s not much to look forward to for the rest of your years.
(Editor’s note: This example assumes the CPF Full Retirement Sum and monthly payouts remain at $1,380 and are not revised upwards. If the retirement sum is revised upwards, the payouts will likewise increase.)
That’s why finding a way to make an extra $1,500 a month at retirement is important. $1,500 is effectively an extra $783 a month if you take away the 52.2% reduction in purchasing power. That’s enough to maybe go on vacation twice a year, replace your television when it’s broken, take up those music lessons you always wanted and so forth.
The best part is $1,500 is a small enough sum to be realistic and achievable.
There are three ways you can get it:
There are two ways to make money from the stock market. One is to trade, in which you get quick returns by buying low and selling high. We don’t recommend this, except as a full-time job for professionals or you have a knack for it.
The other way is to use a simple buy and hold strategy. You can look to purchase stable dividend-paying stocks, in which a company pays out some of its profits to shareholders (usually every six months). When you use this method, there is no need to buy and sell at the right time. You simply purchase the stocks and hold on to them while collecting dividends.
Some favourite dividend paying stocks in Singapore are the Straits Times Index fund, REITs and blue-chip stocks with a good dividend track record. For a more in-depth understanding of how these stocks work, check out Dividend Machines.
But the almighty question is, of course, how much you need to invest to generate $1,500 a month in dividends?
A simplified answer is to take the amount you want to generate annually, and then divide it by 0.05. The reason we use 0.05 is that most good, dividend-paying stocks deliver yields of around five percent per annum. (Although your yields can increase over time based on your initial cost, we’ll use five percent to be conservative.)
In this case, If we want to generate $18,000 per annum ($1,500 a month), then we would need to invest around $360,000 in dividend paying stocks. Hold on, don’t panic.
Obviously, you don’t need to come up with $360,000 all at once. If you start setting aside around $1,000 a month, from the age of even 40, you’ll probably get there even before retirement – don’t forget that, as you slowly acquire the shares, you are also getting more dividends. You can re-invest the dividends from the stocks to buy more stocks, and so on until you reach the target amount.
In point 1, we mentioned that most good, dividend-paying stocks can generate returns of about 5% per annum. But there is another way to generate those returns in a guaranteed manner.
We’re talking about your CPF Special Account (SA), which generates 4% interest per annum (you also earn an extra 1% interest for the first $40,000 in your SA and Medisave Account combined). You may have recalled reading about this in the Straits Times recently, with several Singaporeans now striving to use their CPF to hit one million dollars by age 65.
One way to do that is to constantly transfer money from your CPF Ordinary Account (OA) to your CPF SA to maximise the amount of interest you can earn. The catch is you can only transfer an amount up to the prevailing Full Retirement Sum (which currently stands at $166,000). Beyond that, the money in your SA will continue to grow via your regular monthly contributions and interest earned.
The advantage the CPF has over stocks is that the returns are absolute (they don’t fluctuate with market conditions), and they are safely locked away – even if you should go bankrupt or get divorced, your CPF assets cannot be taken from you.
The downside is that you have less flexibility. If you are using dividend stocks, for example, you can sell those stocks in the event of an emergency. Once you put money in your CPF, it’s mostly stuck there till you’re retired.
Also, do remember that most people also use the CPF OA to pay for housing. If you decide to empty your OA into your SA, you must also be prepared to service your mortgage in cash.
For those of you who are high-income earners ($10,000 a month or more), we suggest you strive to do both points 1 and 2. It will take a lot of discipline to both invest and pay the mortgage in cash, but the rewards are considerable.
If you downsize your flat to fund your retirement, try to at least get a three-room flat. Yes, we’re talking about renting out a room here; at which point, some of you will be shouting that you can’t get $1,500 a month for renting out one room.
Again, remember inflation – if you work backwards, $1,500 a month in 20 or 25 years translates to around $700 or $800 today, which is entirely possible for renting out a room. Odds are, by the time you’re retired, $1,500 a month will be the standard rate.
There’s also an upside to relying on rental. If the rate of inflation rises significantly, the rental rate goes up with it. This is different from, say, a perpetual income bond, in which the regular payouts don’t rise with inflation. And while rental income does fluctuate, Singapore’s land scarce nature (and rising population) practically guarantee that you’ll always have a tenant when you need one.
So don’t be too quick to downsize to the tiniest flat, just to rake in more dollars. Think long term. Retirement lasts much longer than many of us imagine.