Here’s how insurance and investing can help you better prepare for retirement

Coin jar with plant

Many people worry about their retirement.

A recent survey released by insurance company Prudential found that 20% of Singaporeans plan to raise their retirement age to 64.

Out of 1,000 respondents, nearly half of 25-34 year olds felt unprepared.

While it’s natural to rely heavily on your Central Provident Fund (CPF) to fund your golden years, it’s also crucial to consider other sources of income.

For context, CPF Life, a plan that pays regular income, pays around S$790 to S$850 per month if you set aside nearly S$150,000 in your retirement account at age 65.

But with the cost of living escalating due to the highest underlying inflation in 13 years, you’ll have to tap into other sources of income once you stop working.

The Prudential survey highlighted an important fact: about two-thirds of those confident of retirement invested in a combination of stocks, bonds and exchange-traded funds, while slightly fewer half had insurance.

In other words, investment and insurance are the foundation for a secure financial future.

Coupled with your active income while you can still work, these three elements make up the Three I’s philosophy that can be used to strengthen your finances.

Grow your retirement account

When it comes to building a retirement nest egg, you shouldn’t underestimate the power of your earned income.

We are fortunate to have the CPF scheme where compulsory savings allow us to store part of our salaries and bonuses in ordinary and special accounts.

At age 55, these two accounts will be merged into the Retirement account which will then form the basis of the CPF Vie system which pays you a monthly pension from the age of 65.

Salaried employees can choose to work until age 65 to continue contributing to their retirement accounts so they can qualify for a larger payout once CPF Life takes effect.

The more money you have in your CPF Retraite account, the less you will need to resort to investments to fill the void.

Therefore, earned income is a key part of how you can better prepare for your retirement.

Protect your assets

Interestingly, the Prudential survey also highlighted the importance of insurance.

After all, there is no point in having a lot of money and investments if these are being eroded by health costs related to an accident or serious illness.

I firmly believe in the importance of having adequate insurance to protect my family’s assets against unfortunate events.

As the primary breadwinner, I am covered for half a million dollars for Total and Permanent Disability (TPD) and Critical Illness.

In addition, I also have a hospitalization and surgery (H&S) plan that covers any hospital stay or operations in the event of an emergency or an unforeseen accident.

And let’s not forget the value of fire insurance as we have witnessed a series of fires occurring in HDB apartments over the past few months.

Fire insurance covers the cost of repairs and restoration of damaged internal structures and fixtures, and could save you a significant amount of money.

Once you have adequately protected your assets, you can then invest to further grow your retirement funds.

Invest to beat inflation

Investing not only helps you retire comfortably, but also helps you fight inflation.

Investing has two key elements: growing your retirement fund reserve and increasing your source of passive income.

The former relies on the consistent long-term capital appreciation of your investment portfolio, while the latter focuses on the dividends paid by your investments.

By putting your money in strong, well-run businesses, you can grow your portfolio at a steady rate over years and decades.

Stock price volatility, however, is one aspect of investing that you have to deal with.

Stock prices never rise in a straight line and are affected by a myriad of factors such as macroeconomic policies, interest rates and investor sentiment.

Over the long term, stock prices track underlying business performance, which is why it’s important to buy and own companies with strong competitive moats that can continue to grow revenue and profits.

Take Adobe (NASDAQ: ADBE) for example.

The company, famous for its portable document format (PDF) used by organizations and individuals, has seen its stock price nearly 14 times over the past 13 years.

Starting at $28 in June 2009, the software-as-a-service provider last closed at $387.72, for a compound annual growth rate (CAGR) of 22.4%.

Adobe’s net income has increased more than 13 times, from US$386.5 million in 2009 to US$4.8 billion in 2021.

Visa (NYSE: V), the payments company with approximately 3.9 billion cards in circulation, has also grown its business significantly over the years.

Over the past decade, net profit has more than tripled from US$3.65 billion to US$12.3 billion.

Visa’s stock price increased nearly sevenfold over the same period, recording a CAGR of nearly 21%.

Closer to home, supermarket operator Sheng Siong Group Ltd (SGX: OV8) saw its share price rise from S$0.42 in June 2012 to S$1.55 at a CAGR of 13.9% (excluding dividends).

This result is not surprising considering that the retailer increased its number of stores from 33 in 2012 to 64 last year, with net profit rising from S$41.7 million in 2012 to 133, 1 million Singapore dollars in 2021.

From the examples above, it’s clear that investing in the right companies can yield superb financial benefits and help you accelerate the growth of your retirement funds.

Build a comfortable nest egg

Along with increasing the value of your portfolio, growing your dividend stream is an equally important aspect of building a strong retirement nest egg.

REITs are a popular option for investors seeking income.

It’s a good idea to stick with more established names that have proven time and time again that they can deliver.

Both Parkway Life REIT (SGX: C2PU) and Mapletree Industrial Trust (SGX: ME8U) have seen their base distributions rise flawlessly since their IPOs.

Mapletree Industrial Trust’s distribution per unit (DPU) has increased from S$0.0841 for fiscal year 2011/2012 to S$0.138 for fiscal year 2021/2022.

For Parkway Life REIT, its DPU more than doubled from S$0.0683 in 2008 to S$0.1408 in 2021.

Under these circumstances, it makes sense to reinvest those dividends to get more units as you get a double benefit – more units attract more distributions while the increased DPU also helps increase your passive income stream again.

The compounding process can accelerate the flow of your dividends and can be applied to any company that has a proven track record of steady dividend growth.

Your financial future is in your control

Always remember that life is a marathon not a sprint.

You can start by taking small steps – finding a reliable financial planner, honing your skills to stay relevant in your job, and investing small amounts of money in the stock market.

Over time, you slowly gain the skills and knowledge to grow your finances.

Your financial future is entirely in your control; all it takes is that first step.

To note: An earlier version of this article appeared in The Business Times.

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Disclaimer: Royston Yang owns shares of Adobe, Visa and Mapletree Industrial Trust.

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