Creating Your Own Lifelong Income

Date: 22 January 2019

 

When it comes to planning for our retirement, we should take leaf out of the CPF LIFE playbook – ensuring we receive a lifelong income stream. While CPF LIFE already seeks to achieve this, we should not 1) take for granted that it is the only retirement plan that we should have; and 2) think that it will be sufficient for us.

Receiving the median income in our retirement

In the last Singapore household expenditure survey, it was recorded that the average monthly household expenditure of retiree households was $1,700. This was taken in 2012/2013, and was close to a 5.5% per annum increase from the previous survey done five years prior. If we expect that a similar 5.5% per annum increment in the average retiree household expenditure by 2018, this figure will be close to $2,250.

This forms a basis for how much we may need each month for our monthly expenses. If we also assume it will just be us and our spouse living in the household, we will each need $1,125 a month, on average, for our retirement years.

However, as our title promised, we are aiming higher – closer to the median income in Singapore. This is not just to provide for a more comfortable retirement, it is also because investments can be risky and we are not always guaranteed of such returns.

According to the Ministry of Manpower, the median income in Singapore in 2018 was $4,437. This is not our number; we are aiming for the take-home component of the median income. This amounts to $3,000 per person.

What do we do with our CPF LIFE monthly payouts

There are two ways to go about tackling the fact that CPF LIFE exists – 1) we try to see how much we need to put into CPF LIFE to ensure we receive $3,000 in lifelong monthly payouts; or 2) we take into consideration the income stream from CPF LIFE.

In the first scenario, we estimate that we need to contribute $350,000 to our Retirement Account by 55 to receive up to $2,900 in lifelong monthly payouts on the Standard Plan when we turn 65.

In the second scenario, we will assume that everyone is able to contribute only the Basic Retirement Sum. If we achieve this, we would receive up to $800 in lifelong monthly payouts on the Standard Plan during our retirement.

This also means to achieve the take-home proportion of the median income in Singapore, we now need our investments to give us $2,200 (instead of $3,000) a month.

Using assets

One benefit of using assets to supplement our retirement income is that we have hopes that asset prices and returns will increase to track inflation over time. In the end, we will also be able to leave a bequest to our loved ones, either to tide them through or to provide a better life for them.

As stated above, another consideration is that assets are typically considered risky, which means we cannot take for granted that our capital and returns are guaranteed.

With that in mind, we look at how much we need to invest in four common types of investments to receive the remaining $2,200 a month, or $26,400 a year, in lifelong monthly income.

#1 Investment property

This is the one big-ticket investment that all Singaporeans wish to make. Everyone dreams to invest in a freehold condominium that they can rent out to receive lifelong monthly payouts for themselves, and be able to hand it down to the next generation.

We are not going to make recommendations on which properties we should be investing in here. All we will do is to assume a rental return of close to 3.0% per annum, based on what some online research points to.

However, we will never be able to achieve this return because we are required to pay for the maintenance charges on private properties, fork out a commission when we rent the property, pay taxes on the rental income we receive, pay for upgrades and repairs, and many more. This can easily shave over 10% of the rental income.

And the big one – we need to have this investment property paid off in full to enjoy the full rental yield. Otherwise, part of the rental income will be going to the bank in principal and interest repayments. Of course, this only matters if we are able to rent out the property in the first place.

That is not all. We have not taken into consideration any Stamp Duty or Additional Buyer’s Stamp Duty that we need to pay. We are also constrained by the Total Debt Servicing Ratio.

Conservatively, we may receive a return of close to 2.1% on the investment property. This being the case, we may need to invest over $1.2 million in order to receive the full $2,200 in monthly rental income.

Obviously, we may enjoy price appreciation over time, but ultimately, if this does not translate to higher rents, it doesn’t contribute to our monthly income.

#2 Corporate bonds

When we invest in corporate bonds, we are lending money to companies. In return, they have an obligation to pay us a return and repay our principal once the bond matures. The thing about a bond fund, as compared to investing in corporate bonds on our own, is that it does not mature. The bond fund will simply reinvest the proceeds into newer bonds.

There is currently a single listed corporate bond fund in Singapore, which has a yield to maturity of 3.2%. With this yield, we need to invest $825,000 in order to receive a monthly payout of $2,200.

#3 STI ETF

The Straits Times Index (STI) exchange traded fund (ETF) is a fund invested in the 30 largest and most liquid stocks listed in Singapore. Based on track record, the STI ETF delivers a yield of close to 3.7%. Again, we may gain from price appreciation, but this does not help us with any shortfall in our quest to build a lifelong monthly income for ourselves.

Based on a return of 3.7%, we will need to invest $714,000 in the STI ETF to get our $2,200 in monthly income.

#4 REITs

REITs, or real estate investment trusts, are another asset class listed on the Singapore Exchange (SGX) that we can tap on. Typically seen as proxy investments to properties, REITs listed on the SGX are paying out nearly 7.1% in distributions.

This means we need to invest $372,000 in high-yielding REITs to attain the median income in Singapore.

There are risks associated with all the investments mentioned above

One good way to assess how much risk you are taking on is to just look at the returns an investment is giving. The higher the returns, the higher the risks you are taking on.

When it comes to your retirement security, it does not make sense to take on a lot of risk. This is because time is not on your side. You cannot ride out market volatility or readjust your investment portfolio to negate the effects of certain bad investments.

While you can start building your retirement nest egg with these investments, you may want to spread your money into the different asset classes, and gradually shift your portfolio to a less risky one as you get closer to your retirement.

Remember that just because you have less than required for your target monthly income in retirement, does not mean you should take on more risk. You could also choose a lower standard of living, while achieving greater security in the form of taking on lower risk on your investments.

Lastly, we need to understand the impact of inflation on our plans to save up for our retirement. The figures above hold true if we are retiring today. In two to three decades, we can expect to require a significantly larger sum of money to afford a similar standard of living.


This article is written by Dinesh Dayani, Co-Founder of DollarsAndSense

 

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