ARTICLES
Save and Invest to Build Retirement Funds
For many, EPF is their main source of retirement savings. The key question to ask is whether the EPF funds are adequate to replace our income when we retire. As highlighted in recent media reports, EPF funds may not be adequate to provide the required replacement income to fund our accustomed living standards and lifestyle into our retirement years. As such, we will need to save more voluntarily through a retirement scheme such as the Private Retirement Scheme (PRS), to provide us with the additional funds required to adequately replace and sustain our retirement income.
EPF funds may not be adequate as replacement income in our retirement.
We can take a lesson on saving for our retirement from how we finance our house purchase, through a mortgage loan. The only difference is that saving more with the PRS is to build additional funds for our future retirement, whilst takin a mortgage loan to finance our home is meet our current housing needs. For most of us, when we purchase our home we do not have the capital for an outright purchase and would require a mortgage loan to finance the house purchase.
The longer the loan period, the lower our monthly installments will be and vice versa. At the same time, we would need to pay our monthly installments to repay the mortgage loan over the duration of the loan. Failure to do so will result in facing loan default penalties.
Likewise, accumulating our additional retirement funds with PRS takes time and does not happen overnight. We will need to make regular monthly PRS contributions to ensure that we pay the “installments” required to accumulate the additional funds for our nest egg. Similarly, the number of working years left to our retirement will help us ascertain how long we will need to commit towards saving more with the PRS. The longer the time frame we have before retirement, the lower the savings required whilst shorter time frames require higher savings. The main difference here when saving for retirement is that we can choose the compound growth rate relative to our risk and returns expectations.
Commit regularly towards contributing to your retirement account to achieve your desired nest egg.
Going back to our mortgage loan illustration, one of the main considerations for the loan to be granted is that the borrower can afford to pay the required monthly loan installments. In terms of our retirement funds, saving the minimum 10% in PRS makes it affordable to commit towards the entire saving or accumulating period before retirement. We will need to commit towards regularly contributing to our retirement account to achieve our desired nest egg.
Missing out any contribution or short saving will also have a future consequence of not being able to accumulate our desired retirement funds. Automating our monthly PRS contributions through a scheduled recurring monthly transfer via electronic banking makes it affordable, easy and convenient and an “unconscious and effortless” contribution to our PRS account. Thereafter we can let our savings accumulate and compound growth work for us, giving us more for our retirement.
Retirement should be the best years of our lives as we look forward to enjoy doing what we have always wanted to do with the people that matters the most to us. So, let us start the saving journey to accumulate our retirement funds and enjoy the retirement life that we want.
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