Everyone aspires to retire one day, hopefully sooner than later. Retirement represents a phase where we no longer have to work for money, but instead have extended time to pursue personal interests, deepening relationships or simply to enjoy the fruits of decades of labour.  

However, one of the most pressing questions many individuals face as they approach retirement is: “How much do I need to retire comfortably?” This article highlights two key aspects: estimating monthly expenses during retirement and outlining approaches to generate the required retirement income. 

Monthly Expenses of a Retiree 

The first step in determining how much you need to retire is understanding your expected monthly expenses.  

Retirement spending differs from pre-retirement spending, as certain costs—such as work-related expenses—may decrease, while others, like healthcare costs, may increase. 

Key Categories of Monthly Expenses 

Estimating Monthly Spending 

To create a realistic budget, begin by analysing your current expenses and reflecting on how these might change during retirement. Ask clarifying questions like: 

• Would I still want to drive in retirement, if so, the type of car and how much are the running and replacement cost?  

• Traveling: How often, where to, and with what budget? 

• Provision for housing maintenance and repairs, and periodic renovations  

• How much is needed to fund increasing medical insurance premiums? 

As you work through the budget, identify which items are the essential “NEEDS” or “WANTS” (i.e. discretionary spending). Having trips to neighbouring countries could be a “need” while travelling round-the-world might be a “want”. 

And do not forget to factor inflation, especially if retirement is still a long way off.  

Illustration 

Peter, aged 45, is currently earning $10,000 monthly and spends $7,000. He estimates he would need to spend $5,000 monthly (in today’s dollars) for retirement. Using 3% inflation rate, Peter will need to be able to spend $6,720 monthly if he retires at age 55, or $9,031 monthly if he retires later, at age 65. 

Developing A Retirement Income Plan 

After determining your retirement income expectation, the next step is developing a plan to generate the required retirement income. There are various retirement income strategies catering to individuals with differing risk tolerance, each with its own pros and cons.  

(A) The Conservative Approach 

At one extreme is what I call the conservative approach. its proponents are individuals who prioritise stability and security. Being risk-averse, they are uncomfortable with instruments that do not guarantee its returns.  

Instruments that are preferred are usually not complicated and require minimal effort to manage. Typical instruments are bank deposit, CPF accounts, CPF-LIFE, Singapore Saving Bonds (SSBs), and Treasury Bills.  

Some Thoughts on the Pros: 

1. It makes sense to want stability in your retirement income. It offers certainty and peace of mind. After all, such income is necessary to fund a desired retirement lifestyle. Naturally, retirees dislike the anxiety of having to cut back or even delay essential expenses if their retirement assets suddenly lose value.  
2. The instruments are not complicated and usually require little management, so more time can be devoted to enjoying retirement. 

Some Thoughts on the Trade-Offs 

1. Lower returns from safer instruments means more retirement assets are needed to fund your desired retirement income. 
2. If retirement assets are insufficient, you will have to lower your retirement income expectation. 

(B) The Investment Approach 

On the other extreme, the investment approach leverages on risk to generate higher potential returns, hence requiring fewer retirement assets to fund retirement.  

Such proponents are typically knowledgeable about investing and are comfortable with market fluctuations. Depending on the investment instruments used, a considerable level of monitoring and management is often required.  

Typical investment assets range from equities, bonds, exchange-traded funds (ETFs), and rental income, to even cryptocurrency. 

Some Thoughts on the Pros: 

1. Key advantage is that as investment could potentially yield higher returns, lesser retirement assets might be required. 
2. Getting higher returns can support an enhanced lifestyle as more potential income can be expected.  

Some Thoughts on the Trade-Offs 

1. Higher return requires higher risk. Depending on the types of investments, such risks could come from market volatility, currency risk, interest rate risk, and even default risk. This means that the income yield and the asset capital are not certain but volatile. 
2. Market turbulence can lead to heightened anxiety and stress, often prompting decisions to cut costs or postpone expenditures. Additionally, consistent withdrawals during periods of falling asset prices may increase the risk of prematurely depleting investment assets, which can be troubling for retirees seeking peace of mind.  
3. Investing often requires active monitoring and management, which retirees may not be keen to devote as much time to as before. 

From the above approaches, it is fair to say that there is no right or wrong, as each approach has its merits and trade-offs.  

Also, one thing worth noting is the significant difference in attitude towards risk between working adults and retirees.  

Market corrections are less emotionally impactful to working adults because they still have working income to cover living expenses and they have the time horizon to ride out the market turbulence. However, to a retiree without a steady (work) income, withdrawing from investments when their value drops can be very stressful. As a result, people tend to under-spend, hence affecting their quality of retirement.  

Hence, as we transit from working years into retirement, our tolerance for risk would likely change.  

(C) The Balanced Approach: Creating a Reliable Income Floor for Essential Spending  

Let’s go back to our illustration of Peter. His retirement income goal of $5,000 per month (in today’s dollars), can be broken down into Essential Spending (needs) and Discretionary Spending (wants).  

Essential Spending – This refers to his basic necessities, or colloquially his “die-die must have” expenses. This is not referring to being in survival mode, but rather what he considers essential to his retirement lifestyle, which could include occasional dining out, short-haul travels or small splurges. Peter thinks his essential spending need is about $3,000 monthly. 

Discretionary Spending – This is the enhanced yet optional portion of his retirement lifestyle. When times are good (i.e. good investment return) he can spend on these discretionary expenses. But in less-good times, not spending on these does not compromise his retirement because his essential expenses are already provided for. Peter’s discretionary spending need is $2,000 monthly. 

When we consider retirement income this way, the planning approach becomes different and more liberating. Instead of swinging to either side of Conservative or Investment approaches, you can find a balanced approach and creating a reliable income floor to first secure your essential spending.  

At Havend, we offer a retirement planning service called the CPF-Optimised Retirement Essentials (CORE) Assessment, based on this approach.  

As an overview, we look at what and how retirement assets should be structured to fund your Essential and Discretionary Spending.  

Essential Spending  

• The key focus is to create a safe and reliable income floor to fund your “die-die-must-have” expenses.  

• The foundation is the CPF-LIFE. Building up your CPF-Retirement Account and selecting the suitable CPF LIFE plan helps provide a firm base for your retirement income floor.  

• Retirement annuities by insurers provide flexibility and certain guarantees on the income payouts. They are a good supplement to form the reliable income floor. 

• The CPF Ordinary Account, SSBs and Treasury Bills can be considered here, though their returns are lower but certain.  

Discretionary Spending 

• Those with investment assets can be positioned here. This ensures that in periods of poor performance, you can choose not to withdraw. 

• Investment assets can include investment portfolios, rental income, dividend income and cryptocurrency. 

Beyond cratering to your needs and wants of retirement spending, you should also consider contingency expenses in your retirement plan. These are the medical and long-term care expenses retirees likely to incur. As it is hard to quantify and fully provide for the financial exposure solely from retirement assets, getting appropriate insurance coverage is a better and more cost-effective way to create your medical safety net. Premiums for such insurance should be in addition to the Essential Spending. As premiums for medical insurance increase with age, do ensure there is always sufficient cash and CPF MediSave savings to fund them in your later years.  

Structuring your retirement income approach this way offers peace of mind for your retirement, knowing that you always have a reliable income stream to meet all your essential spending needs, enjoy an enhanced retirement when your investment perform well, and have a medical safety net in case of any unexpected medical crisis. 

At Havend, our goal is to help you build that balance with clarity and confidence. Through our CPF-Optimised Retirement Essentials (CORE) Assessment, we work with you to design a retirement income plan that meets your needs, honours your wants, and protects against life’s uncertainties. 

Because retirement isn’t just about having enough. It’s about knowing you’re covered, come what may.  

This is an original article written by Eddy Cheong, CEO of Havend.

At Havend, if we are found to have oversold you, we have put in place a Money Back Guarantee (MBG) scheme, so you can trust that we will always prioritise your interests first. Unprecedented in Singapore, learn more about our Money Back Guarantee scheme here.