What does retirement mean to you? To some, it represents the end of having to work. To others, it signifies new beginnings.
According to Vincent Chan, head of multi-asset of Fullerton Fund Management, Singaporeans now see retirement as the “start of a new phase of life with many possibilities”.
In a survey commissioned by Fullerton Fund Management, the group found that 84% of the respondents aged between 21 to 60 years old, view retirement as a “life stage”, while 80% of the respondents view retirement as a “time to learn and grow”.
In Singapore, the retirement age as at 2021, is 62 years.
The government will raise the retirement age to 63 and the re-employment age to 68, from July 1, 2022.
These numbers will rise again, with the retirement age at 65 and re-employment age at 70 by 2030.
That said, with the higher retirement age, older workers aged 55 years and above will get to enjoy increased Central Provident Fund (CPF) contribution rates.
The current CPF contribution rate is 37% for workers up to 55 years old, and it drops progressively to 26% for workers aged 55 to 60; 16.5% for workers aged 60 to 65 years; and 12.5% for those above 65.
With the new changes, workers aged 60 and above will get to enjoy the full CPF rates.
The changes were announced by Prime Minister Lee Hsien Loong at the National Day Rally in 2019.
In an email interview with Chan, he shares how much money is needed for millennials to be able to retire comfortably, how millennials can manage their investment portfolios to ensure a comfortable retirement, and more.
The magic number
According to Chan, millennials need around $1.4 million to be able to retire comfortably.
The figure, which is derived from the survey findings, show the rising aspirations of Singaporeans over the years. It also reflects the low level of interest rates, which will reduce future interest income significantly.
Leveraging on the Covid-19 economy
“Covid-19 can be viewed as a watershed event. It changes the way we live, work and interact. This means existing companies have to reinvent themselves to be relevant in the new environment,” says Chan.
There are many new industries positioned for growth, and there are others that are failing, he adds.
On some of the opportunities that millennials can take advantage of, especially during instances like Covid-19, Chan notes that the e-commerce industry is thriving.
“The internet of things and the demand for high-speed connectivity, as well as niche areas in the healthcare sector, have all seen exponential growth,” he says.
In the meantime, the pandemic means investors are likely to see an “extended period of low interest rates… as governments have taken on a large amount of debt”.
“This low cost of borrowing has encouraged the use of leverage and asset values have risen,” he says.
“As such, we expect financial markets to experience volatility and bouts of disruptive cycles. It is thus important to be positioned for growth whilst maintaining a well-diversified portfolio when seeking higher returns.”
How to accumulate your savings for retirement as quickly as possible
To Chan, a prudent and well-considered approach is best.
He suggests millennials top up their CPF savings, especially the Special Account, as it provides “an exceptionally high rate of return in today’s environment”. This compares to the negative interest rates for bonds offered by developed countries.
Beyond government guaranteed returns, Chan also suggests investments in growth assets such as equity.
“Equity investments should favour countries and sectors with strong fundamentals. The US and China are the largest economies in the world with deep financial markets. Their economies are dynamic and companies operating in these countries can rely on a large domestic market to sustain growth for many years to come,” he says.
“As the world economy is in transition from an old economy to a digital economy, there will be many companies that will capture market share away from the laggards,” he adds.
In fixed incomes, Chan believes that high yield bonds will be supported by the continued low rates and strong fiscal stimulus.
That said, investors will need to be selective and pay attention to the corporate fundamentals, he adds.
“Active management is preferred over passive investment to take advantage of investment opportunities.”
How millennials should arrange their investment portfolio, and how it should differ when they get closer to their retirement age
“Younger investors tend to have a higher appetite for risk. Secondly, they have a longer time horizon and can benefit from the compounding of wealth over a longer period,” says Chan.
As such, he recommends millennials have a portfolio that has a substantially higher allocation to growth assets such as equities. One example of a balanced portfolio for younger investors, is to allocate 80% in equity and the remaining 20% in bonds.
As investors approach retirement, their financial risk profile will drop. Their preference for stable income will increase.
“Hence, the asset mix can lean towards fixed-income assets such as a portfolio with 80% in bonds and 20% in equity,” he says.
What to ask your financial advisors
To Chan, millennials should make full use of their advantage of having some time before they reach their retirement age.
Hence, they should ask their financial advisors for solutions that help them stay invested with regular investments through time.
These investments can even form part of a regular savings plan in which investments can allocated into different funds, he says.
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Millennials should consider insurance, especially term insurance, as well.
However, Chan emphasises that it is key to ask for a clear account of fees to prevent the erosion of investment returns.
“The investor can compare the return of these solutions (net of fees) to passive investments such as Exchange Traded Funds (ETFs),” he says.
“Finally, an annual review of the retirement plan is useful to ensure that the retirement savings plan is consistent and on track with the desired retirement goals.”