“If you fail to plan, you plan to fail,” Ms Yong told the class of primary six students who were preparing to sit for the PSLE exams. Though my primary school days are long behind me, I will always remember this timeless advice that my form teacher gave us to remind us of the necessity of planning.
Then, it was for minor things like choosing between having more play time and devoting more time for revision. Now, it’s about planning for our future, more specifically, for our retirement.
I believe that with sound financial planning and discipline, we can achieve our retirement goals and live comfortably during our old age. To retire at our desired age, which can be as early as 45, we need detailed plans to accomplish this seemingly impossible feat.
So, to follow the advice of my teacher, I shall share the three steps that I plan to exercise once I step into the working world, which might be applicable to you too.
Principle 1: Saving as much as I can
This may sound relatively simple and rather “duh” to you, yet many may not know exactly how much they can save. Calculating how much you are left with at the end of the month is not a good measure of how much you can save.
You will often be left with next to nothing without a proper budget. Worst still, you might have to dip into your savings to fund that additional dress/shirt that you bought on impulse because it was on sale.
Step 1: List down what are our needs, and wants.
This is an example of my current needs and wants. Of course, this differs for each and every one of us. I am lucky enough to live with my family, which most of us do, and hence, I do not need to pay for utilities, mortgages, etc.
Step 2: Calculate how much you need to spend on each “need”
This will give you a rough idea of how much you need to spend e.g. $500 on food, $100 on transport, $50 phone bill and so on.
Your take home salary – your expenditure on necessities = the highest amount that you can save
That will allow you to find out exactly how much you are capable of saving. Next, consider how much you want to spend on your “wants”.
The leftover amount should be set aside each month as soon as you receive your paycheck to ensure that you will not touch it. Lock it up. Top up your CPF if you must, that’s the safest lock to make sure you will not access it.
Principle 2: Reduce my taxable income
Taxes paid may not be that high initially given our lower income level, but over time it can certainly turn substantial. Lower taxes means more money saved and available for investing, but I am getting ahead of myself.
There are many ways to reduce your taxable income and these are a few examples that every Singaporean can consider.
Top up your CPF special account
We get a dollar-for-dollar tax relief up to $7,000 per year when we top up our CPF SA. Check it out here. The current interest rate for SA is four percent per year, and for the first $60,000 of our combined SA & OA balances (with up to $40,000 from SA), we get an extra one percent interest. That’s five percent interest in your SA each year with close to zero risk!
That’s $65,155.80 after 10 years if we have $40,000 in our SA!
A thing to note: funds in SA are meant for retirement and therefore cannot be used to fund for our housing needs.
Having a Supplementary Retirement Scheme (SRS) account
Basically, the SRS account complements our CPF savings. We also enjoy a dollar for dollar reduction in tax paid when we contribute to SRS account, and only half of the funds inside will be taxed when we withdraw them after reaching the statutory retirement age which is currently at 67. We can also use our SRS funds to invest in a wide range of products. Find out more here.
Principle 3: Invest and let the power of compounding over time help you
Investing may seem daunting and scary, especially with so many horror stories of people getting burned by the stock market.
If you do not know anything about the stock market, a key thing to note is that: you will never be laden with debt if you do not borrow money to invest. (Also, if you do not short the market).
The worst-case scenario is that your stocks’ values turn to zero as the company announces insolvency. Your money will all go down the drain, but if you did not borrow, you are not in debt.
Do not borrow to invest, and invest money that you do not need – the money that you can do without if the stock market crashes tomorrow.
Since we got that out of the way, next question must be: what do I invest in?
You can check out the other article that I wrote here which gave some advice for beginner investors.
Basically: if you want lesser risk and you have minimal knowledge about the stock market, ETFs are probably the most appealing to you. Obviously, there is still risks of the stock markets crashing like they did in 2008 financial crisis, hence your entry point is very important.
However, holding an investment over a long period of time (which is what we plan to do here), we have assurance from the expert investor Warren Buffett that the stock market will definitely rise over the years (despite its ups and downs).
Find a stock with a comfortable margin of safety (i.e. the price should be lower than the intrinsic price you think the stock is worth). Investing rashly is definitely not a good idea.
Trends can be observed over time, and as the Chinese saying goes “路遥知马力”, it’s when you observe the company for a long time that you will know how sustainable it is.
Also, you will be more confident of your investment. With a better understanding of the nature of the business, you will not panic over the ups and downs of the stock market.
Let’s see if I will get to follow my own advice closely when I graduate next year. Now, on a more important topic… what should I have for dinner?