There a million articles about why you should plan for retirement early, and they all have one problem: they assume everyone has the luxury of doing that. We tend to ignore the fact that some people start out the hard way, and are on a shoestring budget till they’re 40. Well here’s some help for them:
1. Conduct a realistic assessment of retirement goals
The emphasis on realistic. We hate to say this, but if you are starting your retirement fund at 40 or 50, you will have to give up on some things.
In particular, be realistic about provisions for people other than yourself. You may not be able to provide as much for your children, and providing for your grandchildren’s needs is probably out of the question. As an example, you may want to scale back on insurance that provides a high death benefit, because you’ll need that money for yourself.
One of the things you’ll have to come to terms with is cutting out big holiday plans, or hobbies. You may have to rely on help from children or other working relatives, with regard to such luxuries.
Speak to more than one financial advisor or wealth manager to get basic financial planning done for you. But do not agree to buy anything from them right away.
2. Cancel any plans to sell your flat to move in with the children
Do not sell your flat and give the proceeds to your children, thinking you’ll move in with them.
It is only safe to do this when you can buy / rent another home if things don’t work out. As you’re starting late, we’re guessing that isn’t the case.
When you don’t have much to retire on, your flat becomes your most important asset. Owning your flat means you can downsize in an emergency, rent out rooms, or use government schemes such as the lease-buyback. This will be critical if your limited funds run dry.
Also, if things don’t work out and you can’t live with your children, you’ll need a place of your own. But it will probably be impossible to get another flat, and even rental can put a big dent in your remaining funds.
3. Don’t just give up, start investing right now
Things may look bleak. But remember that, even at 40 or 50, you still have a decade or more to go. That’s still a significant time for savings and investments to grow. As an added advantage, most of us will be earning more between 40 and 50 (careers tend to peak at that age), so it becomes possible to save and invest larger sums.
We suggest saving 35 to 40 per cent of your monthly income until you accumulate at least three months of your income. After that, invest about a third of your monthly income in a diversified portfolio.
The savings give you enough liquidity to cope with emergencies, without resorting to credit. In the meantime, investing more can help to make up for some of the lost time.
It is impossible for us to write a list of what exactly to invest in, as everyone’s needs and situations differ. But you should check out some of the basics on The Fifth Person, or drop us a note on Facebook.
4. Seriously consider a second job/side-income
Aim to generate a small and achievable amount of side-income, such as an extra $500 a month.
If you think $500 a month won’t make any difference, we beg to differ.
An extra $500 a month, accumulated over 10 years and invested at five per cent per annum, comes to around $78,775. That could pay off the rest of your mortgage. Or buy 10 holidays to France, with change left over.
An extra $1,500 a month, if you can manage it, is life-changing (approx. $236,000 after 10 years, at five per cent per annum).
5. Refinance and pay down your debts
It is dangerous to have large outstanding debts past the age of 45. Make an effort to start refinancing them or paying them down, before they threaten your retirement.
One example is to use personal loans to pay off credit card loans. For example, say you have $15,000 in credit card debt, snowballing at 24 per cent per annum. You could take a $15,000 personal loan at six per cent per annum, and use it to pay off the credit card. This effectively slashes your interest rate to a quarter of the original.
With regard to your home loan, check if you can reprice or refinance the loan into something with a lower rate. As we write this, home loans in Singapore are at their lowest in 10 years, with DBS offering a mortgage at around one per cent per annum.
Look, we know reading bank brochures is about as enjoyable as a colonoscopy. But one weekend spent sorting this out could mean 30 years of stress-free retirement.
6. Ask your employer for help
We can’t guarantee it, but many companies have got financial aid programs for employees. And they are not just for 25-year-olds trying to pay student loans.
A wide range of financial institutions, from insurers to investment firms, have special deals with companies. Benefits can range from cheaper insurance policies to special funds that help you make the most of your stock options. There may even be free financial consultation with Independent Asset Managers (IAMs), which you’ll want to take advantage of. If you don’t work for a big corporation though, this may not work for you.
7. Sell your car and start leasing
If you have a car, sell it and start leasing instead.
Consider how much longer you intend to drive: if you are only going to need a car for another five years, for example, it makes more sense to get a long-term lease than to buy another depreciating asset. The money would be better used in savings or investments.
Or even better, if you have children who drive, tell them to go buy a car and drive you around. You’ve been providing for so many years, now it’s their turn.