Eryk Lee, CEO of AAM Advisory, a part of Quilter, explains why it is prudent for young people in Singapore to engage with their retirement planning.
Retirement used to be simple. For every post-industrial generation there was a well-trodden path towards retirement: save, work to the age of retirement, claim your pension/CPF funds and live out your life doing something that you actually want to do with enough savings to last to the end.
Things are, unfortunately, not quite so simple for tomorrow’s generation of savers known as Generation Z. Born between 1995 and 2010, Generation Z makes up around 30% of Singapore’s residents and are currently either completing their schooling, studying at university or entering the workplace. They will be living longer with much less favourable retirement prospects so it is essential that their retirement plans are drawn up as early as possible.
Countries all around the world are experiencing considerable demographic changes and Singapore is no exception. The median age in Singapore will rise from 42.2 today to 52.8 years in 2050 and Singaporeans will be living longer, with estimates suggesting that the country will have the third-longest lifespan globally in 2040 with an expected life expectancy of 85.4, compared with 83.53 years today. Prime Minister Lee Hsien Loong announced in 2019 that Singapore is set to increase its retirement age to 65 in 2030.
The old-age dependency ratio, the ratio of economically inactive people compared to those at working age, will rise from 12 today to 59 in 2050. This will provide immense pressure on the Central Provident Fund (CPF), which provides for most social security functions and retirement income security for public and private-sector employees. While the CPF continues to be a fantastic retirement tool, the increased cost of living coupled with rising life expectancy means it can no longer be relied upon as someone’s sole retirement provision.
These trends have increased the need for financial planning around the world, not least in Singapore, as people will be required to take greater personal responsibility for their retirement funding. Worryingly, the OCBC’s Financial Wellbeing Index has found that 73% of Singapore residents are not on track with their retirement plans and 65% are behind with accumulating enough funds to maintain their lifestyle after retirement. The same survey also discovered that those in their 20s are doing well when it comes to savings, but half have not started on retirement planning. Furthermore, half of women in their 20s do not know the best way to grow their money and shy away from investing.
Generation Z will also face an increasingly uncertain future in the face of rapidly changing technological disruption. Increased innovation and the uptake of new technologies will augment jobs, change the nature of work and may push people out of the labour market entirely if they find their skills are now redundant. To manage this uncertainty, Generation Z will need to build up an emergency savings pot to provide income in the event of redundancy. Currently, residents of Singapore are not doing so as only 51% of residents having a savings pot sufficient enough to last for 6 months.
In a similar vein, the increasingly flexible nature of work, characterised as the “gig” economy, will blur the lines between secure employment which allows someone to save regularly into a workplace pension and insecure and irregular work without the safety net of a workplace pension. This trend will only expand in the future and may prevent workers from meeting their retirement goals, and push them into working well into retirement.
Cash-flow modelling by AAM Advisory, charting the average financial life of a resident of Singapore with major lifetime expenditure factored in, shows that even with a monthly salary of $10,000 by the age of 40, without additional financial planning on top of their CPF, someone would exhaust their funds by age 74, well before the current 83.53 years expected.
But there is hope for Generation Z: the earlier you plan, the easier it is to achieve your goals and the more flexibility you have to meet them. By definition, Generation Z are at the greatest advantage as they have much more time to generate the savings they require for retirement and can take a longer-term horizon, therefore taking on more risk when they invest, especially in the earlier years before they have other life commitments. The importance of regular savings and investment as well long-term compounded interest cannot be understated.
The same model shows that with financial planning, and by saving from a young age and gradually increasing personal savings and investments over the course of one’s life, it will be possible for a member of Generation Z to retire early and have sufficient funds to last well into their 80s, in-keeping with the average life expectancy for Singapore residents. But this will be difficult to achieve, despite high wages, without adequate retirement provisioning.
Tomorrow’s generation of workers are facing serious demographic hurdles and detrimental workplace trends that may jeopardise their ability to adequately plan for a longer period spent in work and a later retirement. There is also a myriad of retirement planning choices and investment options for Generation Z. which will empower some, but terrify others. Early planning coupled with regular investments over a long-term horizon, with the assistance of a wealth management professional, will allow tomorrow’s generation to have the kind of retirement they aspire to.
This article was written by Eryk Lee, CEO, AAM Advisory.
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