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Thinking of retiring early? You need to answer these 8 questions first

21 August 2024 dot 10 min read
Healthy Finance
Thinking of retiring early
Seeing so many success stories on social media, many Singaporeans fantasize about early retirement. Here are 8 questions you need to answer to ready yourself for early retirement.
 
If you're daydreaming about an early retirement, you aren't alone. The idea of spending time pursuing your interests and passions might sound attractive now, but before you decide to hand in the last resignation letter in your career, you need to ensure you have a retirement plan that will hold up throughout your retirement.
 
To work towards an early retirement, you need to start planning early. This is because you're going to need to be more prudent and productive during the earlier years of your working life in order to achieve an early retirement in Singapore, one of the most expensive real estate markets[1] and countries to live in[2].
 
To prepare for one of the biggest life changing decisions you'll make, here are eight questions you need good answers to before taking the plunge.

1. What will I be doing in retirement?

This is one of most important questions to ask yourself. A lot of people aspire to retire early only to realise that they are bored after a while, or worse, don't have sufficient funds to sustain the "dream" lifestyles they thought they would be living.
 
Life is not going to be the same when you retire, your circle of friends will change, your mobile phone will stop ringing and you won't have tight deadlines to meet anymore. While you dreaded some of these things when you were working, they kept you going. Now you need to create your own purpose to get out of bed each day.

2. What am I willing to give up today?

After working hard for close to 40 years, most people then spend about 20 years in retirement. If you want to retire earlier in life, you will naturally be spending much less years working and much more years in retirement.
 
You can't have your cake and eat it too – you need to make up for the shortfall of working years you could have been earning and saving money. This leads to the pertinent question of what you're willing to forego today so that you can save up more for a longer retirement.
 
While your peers may be upgrading their homes, purchasing new cars and shiny gadgets or going for #YOLO holidays around the world, you should aim to limit these unnecessary expenses if you truly want to retire earlier.

3. Will I have enough to retire early?

Retiring is a major decision. Once out of the workforce, you quickly lose your value as an employee. This is why this question is so important – you cannot afford to live 10 to 15 years in retirement only to realise you need to re-enter the workforce because you ran out of money.
 
Carefully crunch your numbers and veer towards a range you would likely need rather than get down to a detailed amount. There will likely be unexpected expenses in your retirement so it will make sense to overestimate how much you will need as well.  
 
Contributing to this question, you have to decide the kind of lifestyle you want to live during your retirement for your savings to work. A practical estimate for how much you will spend in retirement is slightly under your current level of expenditure, but if you want you go on holidays and spend on luxury, this will need to be added to the equation from the start. 

4. CPF Life – How much can I depend on it?

In Singapore, the CPF Lifelong Income For the Elderly (LIFE) acts as an annuity plan providing Citizens and Permanent Residents (PRs) a monthly payout in their retirement. The exact amount depends on your Retirement Account (RA) balances.
 
If you're planning for an early retirement, you will not be able to rely on it from the outset as it only begins paying out once you turn 65. You also have to note that while everyone is still working and contributing to their CPF Special Account (SA) and Retirement Account to grow this sum, you will not be doing so.
 
After turning 65, you can opt to go with the Basic Plan (providing between $1,185 and $1,309) or the Standard Plan (providing between $1,301 and $1,435). From 2018, there will be a third plan – Escalating Plan – that will provide an increasing monthly payout.

5. Where else can I look to supplement my nest egg/retirement income?

Since CPF LIFE is not on the cards until you turn 65, you may need to cater for other sources of cashflow to support yourself in retirement. One of Singaporeans' favourite investment is properties, which generate a passive monthly rental income while enabling investors to also realise capital gains when the market performs well.
 
Younger investors are increasingly turning to stock investments. Companies and Real Estate Investment Trusts (REITs) that provide regular dividends can also supplement your retirement income.
 
However, during economic downturns, these two asset classes may be affected by market forces. This could strip you of passive income or a force you to realise a loss in asset value. You need to be ready for these scenarios as an early retirement will likely mean spending over 30 years in it, and facing one or more economic downturns.
 
Another way you can add an income stream in your retirement is by purchasing a retirement product such as AIA Retirement Saver (IV), which provides a regular stream of guaranteed monthly income from ages 55, 60 or 65 for a period of 15 or 20 years with the potential to receive non-guaranteed dividends. 

6. Do I need to relook my healthcare plan?

Another area you need to carefully plan is your healthcare requirements. While you were working, you had regular Medisave contributions, both from your salary and your employer. This is going to dry up once you stop working.
 
Singaporeans and PRs can use a portion of their Medisave to pay for their MediShield Life premiums as well as their Integrated Shield premiums for private care. Once you retire, you may want to relook your coverage levels, especially if you have to fork out a hefty cash component for private medical coverage.
 
Read about the AIA HealthShield Gold Max to find out more about your protection requirements.

7. How will retirement affect my investment portfolio?

Regardless of your age, you need to take on less risky investments during your retirement. This is because you no longer have a salary to offset your losses. Moreover, when you're in retirement, you will likely depend on your investments to provide a regular cashflow to fund your monthly expenses.
 
You may consider gradually shifting your investments to blue chip equities or bonds. Relying solely on monthly rental income from a single property can also be risky as economic downcycles can impact certain asset classes more heavily than others. As much as possible, you should try to diversify your portfolio to mitigate this risk.
 
You could also start investing through AIA Pro Achiever 3.0 , where you can make your money work even harder for your retirement, with 100% of your premium invested from the start. With expert guidance from Mercer (a leading global investment consultant) you get exclusive access to three portfolios designed to optimise your returns while minimising risk. By investing regularly, you can also make use of dollar cost averaging to even out market volatility.

8. How will retirement affect my family?

Your retirement may also have an impact on your family. Your spouse may want to continue working or you could consider unlocking some of the value in your property by downsizing, which could affect your children if they're still living with you.
 
A proactive approach to planning will ensure that all family members are not taken by surprise and that children can be prepared to chip in to household expenses when required.
 
If you're retiring before your children have completed school, you may have to consider the cost of their education or prepare them to take on a loan to complete their education. Planning in advanced will prevent family members from having to make unexpected decisions and allow them more time to plan for their futures as well.

Start committing to a plan today

If you want to retire early, what you do with your money in the earlier years matter much more. You need to commit to a plan that will allow you to accumulate sufficient funds for an early retirement.
 
The reason many people desire to retire early is so they can lead a better quality or more fulfilling life. This is only possible if you have your health to go with your early retirement plan. AIA Vitality encourages policyholders to live healthily by offering incentives to join gyms and yoga classes, eating right, quit smoking and tracking your health and fitness through devices.
 
By putting in place a plan for both your wealth and health, you will be setting yourself up for a longer, healthier and better life. Even if your early retirement plan does not fully pan out, you'll be fit enough to continue working and likely accumulated enough savings to take on a less stressful job.
Thinking to retire early
 
This article was originally published on 21 September 2020 and updated with new information.

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