Advances in medical science have resulted in people living longer. This increase in life expectancy makes retirement planning even more crucial. Furthermore, with better affluence, there is also an increase in demand for a better lifestyle during retirement.

The objective of retirement planning varies depending on circumstances, and normally includes:

- Maintaining a self sufficient pre-retirement standard of living
- Coping with increasing health care cost
- Protection of property and against personal liability
- Providing for dependents
- Estate planning

The process for retirement planning:

Step 1: Overcome Obstacles
Step 2: Determine Goals
Step 3: Measurement
Step 4: Reference Point
Step 5: Overall Plan

Overcoming The Road Blocks

There is only a limited period of accumulation and a continuous period of consumption. The first step is to overcome the many obstacles hindering retirement planning. These include spending beyond means, unprepared for unexpected expenses (like repairs), inadequate insurance (like property loss, medical bills), tapping into retirement funds for other purposes (like upgrading house, holidays), etc.

(1) Aim to save at least 10% of income and gradually increase it to 20% when it is nearer to retirement. This accumulates towards the retirement funds and helps to accustom to a retirement lifestyle within financial means.

(2) Establish an emergency fund of at least 6 months of income that is separate from the retirement planning fund. The will be used for risk retention, covering for unexpected expenses without drawing on the retirement funds.

(3) Have sufficient insurance. A major crisis will be a huge drain on all of the savings, it is best to transfer this risk by being adequately covered.

(4) Saving for other specific purposes should be saved for separately. It will derail the retirement plans due to the shortfall.

Determine Retirement Goals

Depending on the circumstances, the goals will vary from individual to individual. Some common areas to consider:

(1) Lifestyle.
- Housing: Same house, mortgage remaining, upgrade, downgrade, migrate.
- Leisure: Pursuit of hobbies like golf, yoga, charity or religious activities.
- Travel: Overseas holidays, car ownership.

(2) Age of retirement.
- The last day to have to work or the last day to want to work.
- Early retirement due to corporate issues, health, care giving concerns, etc.

(3) Health.
- Coping with increasing health care cost.
- Health screening.
- Dental care.

(4) Estate planning.
- Passing on the wealth eventually.

(5) Caring for dependents.
- Physical or medical care for elderly parents.
- Providing for children not yet independent or siblings requiring aid.

Measuring The Finance Required

From the above goals, the required amount needs to be quantified.

(1) Lifestyle and dependent expenses. An estimate is about 60% of pre-retirement income.
(2) Project the retirement age. The statutory retirement age is 62 years old.
(3) Health expenses. Total up the amount of insurance premiums and health screening cost.

In addition, some assumptions need to be made:

(1) Inflation rate. The average historical inflation rate in Singapore is about 1.5%.
(2) Investment returns. Depending on the choice of investment, this varies significantly.
(3) Life expectancy. A reference will be the natural death ages of great-grandparents, grandparents or parents. The average age is 78 for males and 82 for females, and this average is increasing.

Reference Point

The current position needs to be analyzed so as to determine the strategies to achieve the goals.

(1) Current age. Number of years to accumulate funds before retirement.
(2) Current health. Deteriorating health will be more of an immediate concern.
(3) Financial position. Amount of savings, assets, liabilities, current income, expenses.
(4) Existing plans. CPF, SRS, insurance and investments already in place.

Overall Plan

Depending on which stage on the retirement plan, the approach to adopt will be different.

(1) Accumulation Period
The period when one starts to save for retirement until about 10 years prior to retirement. The focus will be on the shortfall of funds required for retirement form the current reference point. The main strategy will be on saving to invest. Investment will be covered in a later topic.

(2) Transition Period
The period about 10 years just prior to retirement. As retirement draws nearer, the goals become clearer. It is important to review if the desired lifestyle can be achieved with the funds or if more savings is required. The funds accumulated earlier will also need to be gradually repositioned into less risky investments.

(3) Retirement Period
This continues throughout since retirement. The funds will be used to generate current income. Some considerations during this period:
- Purchase of Annuities (CPF Life)
To provide a guaranteed income for life. Recommended to purchase to cover for the minimum monthly living expenses required.
- Maximize use of property
Reverse mortgage, downgrading, renting out spare rooms can be considered for additional income.
- Work
To perhaps work on a part time basis, as a consultant or run a business.

As with all plans, it will need to be continuously reviewed when personal circumstances change (like a newborn or divorce), external market conditions affecting investments, or introduction of new policies (like change of statutory retirement age or CPF rules).

Use of the Present Value and Future Value calculations covered earlier will need to be used to give a better estimate of the amount needed. A simple example:

John Doe in good health, age 40, intends to retire at age 60, current income is $60,000 annually.

Assumptions: Projected expenses at retirement is 60% of pre-retirement income, income will increase 3% annually, inflation is 2%, investment returns is 7%, life span will be till age 80, will carry on to stay at current residence.CPF contributions mainly used for housing and repayment of loan and has not started any retirement plans.

PV = 60,000, 1/Y = 3%, N = 60 – 40 = 20; FV = 108,367.
Therefore, pre-retirement income needed per year = 60% of FV = $65,020

PMT = 65,020, 1/Y = 7% – 2% = 5%, N = 80 – 60 = 20; PV = $810,293
Total retirement fund needed at point of retirement = $810,293

FV = 810,293, 1/Y = 7%, N = 60 – 40 = 20; PMT = 19,765
Amount needed to save per year is $19,765 or $1,647 per month.

From the point of view of farm estate planners, financial retirement planning requires a concrete strategic and savings plan. In more traditional businesses employees and owners often use an IRA, 401K or other type of investment. When it comes to farmers and agribusiness owners the answer to the questions, how much do you need to save and where will it come from, brings different answers.

For employees of traditional businesses the options often include stocks. bonds, mutual funds etc. that are in no way connected to the farm business itself.

When it comes to farmers facing the financial retirement planning issue their historical perspective results in quite different actions – because their assets are almost all tied up directly or indirectly in the farm. Sure, they need a team of professionals to assist them, but they must be a team that understands the reality that there really is no savings outside the farm business itself.

And if you have made good investments over the years or your farm business has grown in value and have a large net worth, you may also need to plan for trusts and estates for your children, grandchildren or other beneficiaries. Professional financial planners can help. A lawyer is necessary for drawing up trusts and estates. Accountants can provide some information. Basically, you need a team. These are some of the things they will help you figure out.

First, you need to identify who relies on your income, besides yourself. Then, you need to look at how much money it will take to continue to enjoy the lifestyle to which you and your dependents have become accustomed. Unless you want to cut back on your expenses, your goal should be to save enough to allow for annual withdrawals equivalent to or greater than your current earnings.

One of the challenges for financial retirement planning is that no one really knows what will happen in the future. We must assume that the cost of living will increase, as time goes by. The average inflation rate that we normally accept is 3% – what if it’s more, a lot more, or less?

Because of that, we want to make investments that return more than whatever the persistent rate of inflation is – or we are just standing still or falling backwards. Our dollars will have less buying power in the future. So, we will need more of them.

Historically business owners and farmers have believed, and in most instances rightly so – that their organization would grow at a rate of at least that of inflation, so they invested in the business instead of elsewhere. Additionally the tax code encouraged them to invest in the business with such things as depreciation – which allows the gradual or accelerated “write off” of the business assets against their income tax obligation.

The tax code, even though the IRS wants to monkey around with it all the time and the politicians keep their fingers in – has been a tool to achieve government ends, by encouraging or discouraging one sort of behavior or another – has resulted in business owners and farmers investing in themselves rather than in outside investments.

Farm estate planners argue that a balance is needed. In the good years farmers should invest for their financial retirement planning purposes in investments not tied to the business. And these investments, by their nature, should be more liquid than another piece of land or more livestock.

These liquid assets and the traditional illiquid ones become part and parcel to the creation of their trusts and make up the value of their estates.

When it comes to setting up trusts and estates, you need to consider how much money a dependent will need annually and for how many years. If it is a young child, there are college and other education costs to consider. An older child or a spouse may not need as much.

Taxes must always be considered for trusts and estates, regardless that they seem low today – hey, you never know what the government will have put in place by the time there is a death in your family business. Large inheritances, whose definition changes with every administration, are subject to heavy taxes. And farm estate planners can show you how to make annual tax-free gifts can help your beneficiaries avoid those problems as well as sending some of the appreciation in your business – which on its own can trigger taxes at death, along to the next generation.

Taxes are also a consideration for financial retirement planning. It is assumed that your taxes will be lower after you retire, because your income will be lower. But, if you have made good investments, your income might be the same or higher.

And lets face it, no body actually plans to have less money to live on when they retire – that’s when you want to really live!

Financial retirement planning requires a team of professionals who understand you and who have “been there, done that” when it comes to setting up and actually seeing in real life the results of the trusts and estates planning they or their firm has done.

And while a team of professionals is vital – the key information you seek is most likely to come from your peers. These are people who are experiencing what you are experiencing and they have nothing to sell and no advice to protect.

You peer group also provides one of the most important thing any of us can have when trying to make the right decisions. They are your sounding board. From now on you can say, “I’ve got to discuss this with my board” and actually mean it!