Why do you save money? Why can’t we live paycheck-to-paycheck, splurging on food, entertainment and shopping since we’ve put in so much hard work to earn that money?
Perhaps one of the most obvious reasons for saving money is to be able to afford a roof over your head one day, or to prevent yourself from being stuck when a medical crisis hits. But you’ve got your CPF, Medishield and health insurance for that, right? What about retirement?
You may say that well, “my CPF takes care of my retirement”, but wait, do you know how much you’d get from your CPF monthly payout? Let’s take a look:
Do you think you will be able to live comfortably on $700 a month, or even $1,380 for that matter?
According to a survey from HSBC conducted in 2016, current Singaporeans are expected to save for nine years longer than the previous generation. The report shows that Singaporeans today are starting to save earlier but are retiring later in order to fund a comfortable retirement. Despite starting to save earlier and longer, 38% of the current working age Singaporeans have stopped saving due to various difficulties.
The report also said that Singaporeans rely on cash savings and property downsizing to fund their retirements. Herein we guess, lies the problem – cash savings actually lose value over time due to the effects of inflation. In fact, anyone here with a regular savings account will know about the paltry interests paid, and fixed deposit might be your better bet, although we think there are definitely better alternatives.
Before we show you the alternatives, we want to emphasise that there is always a place for the savings account, since it is an account where you can draw on when you need cash on a daily basis. Here, we want you to consider 3 factors first:
1. Savings Goal
Why do you save? This is probably the most-straightforward question you need to ask yourself before embarking on your savings strategy. Are you looking to save for a rainy day, such as in case of a retrenchment or an economic downturn? Or are you thinking of buying a car, having enough money for a 6-months sabbatical or putting aside money to supplement your retirement sum from the CPF?
Do not worry if you find yourself listing multiple savings goal, because this is what this exercise is for! You will most likely find that you have some short-term goals and long-term ones.
Next, beside each savings goal, write down the estimated amount you need for each goal.
2. Short-term savings goal
So let’s work on your short term savings goal first. This should be a target you achieve in the next 2 years. For short-term savings, you may want to consider a higher interest deposit account or a fixed deposit account if you have the full sum of money. Tenures for these accounts tend to be shorter and allow you more flexibility for withdrawals when you need the money.
Moreover, the penalties for withdrawals are also lower, although you might already notice that the interest rates you are getting ain’t great. Current fixed deposit rates stand at around 1% for a 24-month deposit, up to $50,000. That’s an earn rate of around $21 a month for $50,000.
3. Long-term savings goal
You’d actually have more choices of savings products for your long-term savings goal, and a chance to earn much higher interest with these alternative products:
Many people link endowment policies to insurance, which isn’t exactly wrong. But the benefit of using an endowment for long term savings is that it helps you to it in a disciplined manner. Other than that, its cash values are usually made up of both guaranteed and non-guaranteed components, which offer policy-holders the possibility of higher returns.rate. With a minimum tenure of 10 years, endowment policies are commonly used for long term saving goals- retirement, child’s future education or even wealth-building.
With the cost of living set to double in the next 30 years, you definitely need a higher returns rate to minimise the erosion of value if your money is just sitting in a regular savings account. Other than savings, endowment plans come with the added insurance component which can also provide an additional peace of mind.
Yes, many people know that CPF gives us one of the best interest rates in a risk-free environment. Since you get monthly payouts from your CPF account when you retire, does it then make sense to treat your CPF account as a type of fixed deposit and actively top-up your CPF retirement sum every year?
Well, we must confess the interest rates are rather attractive – the 4% interest rate given to our CPF Special Account (SA) with an additional 1% on our first combined S$60,000 can easily compound to give us a sizeable sum nearing our retirement age. It is perhaps one of the safest ways to ensure your money retains its value!
Yet, we all know that there is obviously some huge downsides to this – CPF top-ups are irreversible, and the money in your Special Account is locked up till your retirement age, leaving you with zero liquidity.
Compared to an endowment plan, you can still make redemptions if you need emergency cash although you will not get the full benefits of the plan.
Need more advice on how best to save and how to choose a suitable endowment plan? Answer a few questions here and you’ll find out!