Young Working Adults: What You Need To Know To Plan For Your Retirement

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Recently graduated and nailed a permanent job? While you start adding items to your wish list (cue: Gucci handbag, Rolex watch, and iPhone 14), don’t be surprised that your peers have started investing their money and are planning for retirement already.

Retirement takes proper planning and effort to achieve. Especially in Singapore, where the cost of living can be rather high, being prudent with your money isn’t enough. You also need to make your money work harder for you, and one of the ways is to invest smartly and early to have a longer runway to grow your retirement pot.

We share some investing basics you need to know to build towards the retirement you want (and not feel completely overwhelmed when chatting with your financially-woke friends).

The Twin Pillars Of Retirement: Insurance And Investments

Building towards retirement takes time and effort. It is important to focus on the two key pillars of a sustainable retirement so that your major concerns during retirement (such as cost of living and medical costs) are taken care of.

The first pillar is insurance. Among the various types of insurance, you should have at least Health insurance, which provides protection against large bill shocks due to hospitalisation or medical treatment, and life insurance, which typically is meant to provide financial support for your loved ones if you are no longer around to provide for them.

Getting adequate insurance coverage early is important as the premiums are lower when you are younger and presumably healthier. You also receive financial payouts for any sudden or unexpected health events—which can happen at any time—to alleviate your family’s financial burden.

The second pillar of retirement is your investments. Rather than keep your money in a savings account or fixed deposit account, which may not provide adequate returns to beat inflation over the long run, you may choose to invest it.

Over the last ten years, the S&P 500 index, which tracks the 500 largest companies in the United States, has produced an average annualised return of 11.70%. This inflation-beating number underscores the benefits of long-term investing. If you are a new investor, either due to a lack of knowledge or market uncertainty, you might be intimidated about investing.

Rather than picking individual stocks, you could start by investing in products that are managed by professionals, such as exchange traded funds (ETFs), unit trusts, or investment-linked policies. Such investments tend to provide broad diversification, or even more targeted exposure to a specific theme or sector.

Rules Of Thumb For Managing Your Money 

Early in your career, you may find your income far exceeding your basic needs. This should not be a surprise or, worse, an indication that you can inflate your lifestyle. Having fewer financial obligations at this point in your life is why it’s a great time to squirrel away more savings before “life catches up”.

A popular budgeting guide is the 50/30/20 rule of thumb, mentioned by Elizabeth Warren in her book, “All Your Worth: The Ultimate Lifetime Money Plan”:

• Set aside 50% of your monthly income for must-haves, such as food, transport, mobile plans, etc.
• Set aside 30% of your monthly income for your wants, such as your shopping, entertainment, holiday trips, etc.
• Set aside 20% of your monthly income for savings and investments.

Another important rule of thumb you should work towards is setting aside three to six months’ worth of expenses as emergency savings. This safety net gives you a cushion against any financial shock, such as the loss of a job or sudden big-ticket expenses, such as needing a new air-conditioning system.

As mentioned, these are simply some rules of thumb, which can be a useful guide to help you manage your money. Ideally, you would want to have tight control over your budget so that you can save more, which can then be channelled to your investments to meet your retirement goals more quickly.

Identifying Your Investment Objectives

Once you have money set aside for savings and investment, you will then need to deploy it.

There are different approaches to investing. Some people take an active approach to investing if they have the investment know-how and the time to execute regular trades. This may involve stock-picking and active trading. Conversely, some people may prefer to invest via exchange-traded funds (ETFs), unit trusts, and investment-linked policies. You should select an approach that best suits you.

Next, you need to determine the purpose of the investment and your risk appetite so that you can choose the right investments that will potentially generate the returns needed to fulfil your objectives.

For example, if your investment objective is for the short term of one-to-two years and is meant for upcoming expenses like your wedding or home renovation, you may wish to consider products that give higher capital protection than returns. However, if your investment timeframe is longer, say for your retirement or even a child’s education in two decades, then you could consider higher-risk products that potentially give higher long-term returns.

Understanding The Different Investment Options

Once you have decided on your savings level, investment objective, and risk appetite, the next step would be to understand the different investment options that are available.

Some low-risk investment options include fixed deposit accounts, Singapore Government Securities (SGS) bonds, and cash management accounts, to name a few. These products might be suitable for capital protection but may not generate the returns to beat inflation over the long term.

For that, you need to consider investment options like stocks, corporate bonds, or investment-linked policies, which may potentially generate higher returns over the long run, but may be subjected to price volatility and even poor performance and can potentially lose the entire value of your investment. Understanding this will assist you in framing and setting expectations for these investments.

In addition, you could choose to dollar-cost average instead of investing a lump sum in these higher-risk products. This could help you to take advantage of short-term market fluctuations, especially in a bear market, to buy more into the investment without having to time your entry.

Read Also: Guide To Understanding How An Insurance Endowment Plan Works In Singapore

How You Can Design Your Investment Portfolio 

Finally, you need to take early action to compound your wealth, especially if you want to retire earlier or even achieve FIRE (financial independence, retire early).

If you are not in a position to invest in and monitor your individual investments, you can lean on professionals to manage your money. As explained, this can be done by buying into unit trusts, ETFs, and investment-linked policies (ILPs). Even if you start small by starting early on your financial planning journey, you will have a longer runway to compound your wealth.

Taking the example of ILPs, you can invest in Manulife’s ILP as either a single-premium ILP (lump-sum investing) or a regular premium ILP (dollar-cost averaging) to grow your investments and generate potential income in your retirement years.

You can leverage their funds that are curated based on specific levels of risk tolerance (i.e., aggressive, balanced, and growth), which takes away the selection risk from you and passes it on to the professional fund managers to do the heavy-lifting on your behalf.

Unlike other types of investments, with some ILPs you can also get insurance protection in the event of death, terminal illness, or total and permanent disability (TPD). You could also add-on riders to cover for critical illnesses such as cancer, which is the leading cause of death in Singapore.

If you are unsure which type of ILP suits you, you can find out by using Manulife’s Investment Calculator. You simply need to answer four questions based on your age, risk appetite, time horizon, and investment objective.

So, start on your financial planning journey to grow your wealth by investing towards an early retirement today with Manulife!

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