Retirement: 4 Practical Tips To Help You Reduce Your Retirement Shortfall

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Have you found yourself constantly chasing that elusive retirement dream?

It’s never too early to start taking actions to reach your financial goal to retire on your own terms.

Here’s a checklist.

  • Recalibrate your spending – take stock of your expenditure and review your “needs” and “wants”. Practice delay gratification as you manage your expenses and save for the long haul
  • Rein in your bills- make the most of merchant discounts as you spend and make sure you pay your credit card bills on time to avoid interest and late charges
  • Pay yourself first – when you receive your monthly paycheque, start setting aside a certain amount for emergency or opportunity fund. This is to tie you over the rainy days or position yourself for investing opportunities to grow your wealth
  • Refinance your home loan – if your mortgage is out of lock-in period, check out the latest interest rates to refinance your property. With a falling SIBOR, you will free up some cash which you can invest

We all work hard in the hope to achieving financial independence and retire early. But somehow, it seems that it’s never enough. Every financial calculator you go to tells you there is a retirement shortfall, and banks would be up-selling products to help you bridge the shortfall.

However, we should start reviewing what we have control over and what we can do to reduce the shortfall.

Here’s some tips to help you get started.

(1) Recalibrate Your Spending

Firstly, always prioritise spending on your needs over your wants.

To quickly determine the difference between a want and a need, think of a need being something required for survival. Needs are water for drinking, food to eat, clothing to keep you warm, and shelter to live in. On the other hand, a want is everything else. Wants are there to make life a little more enjoyable. And yes, we all should be enjoying our lives.

It is normal to want things, and it’s not a bad thing. You may want to take a trip around the world, get the latest iPhone, and so on, try to prioritise your wants and start saving up so that you can reward yourself with something you like. But always weigh this with what you need in the longer term and what is more important.

Learning to make better choices and to differentiate between wants and needs will help you stay out of debt and reach financial freedom sooner. Learning how to control your spending will help you for years into the future, even as your income grows. By realising what are wants and what are needs, you'll be able to cut some unnecessary spending and improve your financial situation.

(2) Repay Yourself First

Pay Yourself First is a personal finance strategy of increased and consistent savings and investment while also promoting frugality. The goal is to make sure that enough income is first saved or invested before monthly expenses or discretionary purchases are made.

This finance strategy can boost your net worth in the long term.

If you are currently holding a job, park aside a comfortable amount of money into an account where you could designate as emergency funds or opportunity funds. This is especially important in today’s volatile world. You could have savings equivalent to 6 months of your current salary to be designated as your emergency funds. These funds is to tie you over should you lose your job temporary. Then next start building an opportunity fund. As mentioned earlier, consider diverting your spend on your “wants” into an opportunity fund. This fund would position you to buy into the market when the time is right so that you could ride on the waves to get a better return in the long term,

Let’s start by applying the 50/30/20 rule in your financial plan

At its basic level, the 50-30-20 budget divides your after-tax, take-home pay into three buckets.

The first 50% of your budget goes towards Needs (necessities), including shelter, food, utilities, transportation, clothing. These are the things you need to get by day to day. It also includes minimum payments you need to make on your debts; your car loan, credit cards, student loans etc. goes into this bucket

The 30% bucket is for your Wants (lifestyle choices). It includes things like vacations, entertainment, gym fees, hobbies, pets, eating out and cell-phone plans. These are things you don’t really need to get by.

The 20% bucket is for your Financial Priorities — your savings (includes emergency fund) and investments for the future e.g. a Regular Savings Plan (RSP). Savings can also include debt repayment. While minimum payments are part of the "needs" category, any extra payments reduce principal and future interest owed, so they are savings.

This is the perfect time to divert your funds set aside for “wants” to build up your emergency and opportunity funds

Letting Your Money Compound and Grow

- To give you a better idea of how the 50-30-20 Rule helps in ‘paying yourself’, let’s see how much you can

grow your money. Here’re some assumptions for this exercise:

Monthly take-home salary: $2,000 (with no increment and no bonuses factored in), consolidating all expenses and “spending” the 30% bucket into investments instead:

• Expenses Account: $1,000

• Emergency/Opportunity Fund account: $600

• Savings Account: $400

• Savings Account starting balance: $0

• Savings Account interest: 1.8%

• Wealth Account returns: 6.3% (based on the 3 year dollar cost average returns on the STI ETF)

How the respective accounts will look like:

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The breakdown: Savings Account: $9,782 : Emergency/Opportunity Account: $15,380

Within a span of 24 months, you would have amassed A TOTAL OF $25,162!

Note: this is a calculation based on the STI ETF, depending on your risk appetite and knowledge there are other instruments out there to consider as well

Challenge yourself by allocating as much as you can towards your Savings and Wealth Accounts. Your Expenses Account should be comfortable but also a tad challenging so as to push yourself constantly to make smarter spending choices. Start with 50-30-20, and see if you can push yourself up to 40-30-30; or even 20-40-40 !

(3) Rein In Your Bills

Consider using cash only or use your debit card - studies have shown people tend to spend less when they use cash, because they get the visceral experience of actually seeing and feeling their money being spent. Second, if you don't use debt, you can't spend above your means. Designate one of your bank account as an operating account that you adhere to strictly to manage your daily living expenses.

Use your credit cards only if you know you can pay off the balance by due date - if you are not able to pay off the total amount charged on the credit card, there is a High Cost of Borrowing which is typically much higher than with a traditional loan. Many come with high annual interest rate charged on borrowed funds, service fees, and penalties for late payments. If you don’t pay your balance off every month, these additional finance charges can quickly grow your existing debt.

Be cognizant that although credit cards are convenient, it’s Easy to Dig Yourself into a Hole - Depending on your credit limit, a credit card may make you feel that you have access to more funds than you’ve had in the past, making it easy to overspend if you are not disciplined.

Look for discounts and use coupons codes - While cutting spending often focuses on eliminating purchases, there are still some things you have to buy. When you do make purchases, your goal should be to ensure they cost as little as possible. To do that, always try to use coupons and look for discount codes.

Avoid grocery shopping or buying food when you are hungry.

Always shop with a list - Another good way to avoid impulse buys is to make a list of items you need to purchase, and then stick to the list and don’t be swayed by other things you see along the way.

Consider the total costs for any purchase - Many of the things we buy probably have ongoing costs to use and maintain. For example, if you buy a costly car, you have to pay for expensive insurance, maintenance, and repairs. The more expensive the car is, the higher will be the costs of insuring and maintaining it.

To make sure your purchases aren't committing you to a lifetime of big spending, consider how much they'll cost to operate or maintain when you make a decision to buy. If you'll be financing, factor in interest charges, too. Unless you're comfortable paying both the upfront cost and the ongoing expense, skip the item or buy a version that's cheaper to maintain.

Tracking spending - if you are one who buys on impulse - If you don't know where your money is going, you may end up spending a few hundred dollars a month on small purchases without even realizing it. But if you track your spending, you can find problem areas -- and you're more likely to consider a purchase carefully if you have to write down the expenditure. Tracking your spending for at least 30 to 60 days is typically the first step in making a budget, because it gives you an indication of where you'll need to cut. But it can also be a good idea to track spending on an ongoing basis if you're trying to get a handle on your money.

(4) Refinance Your Property Loans

People refinance all the time to take advantage of better interest rates, to manage their cashflow (by lowering their monthly repayments), or to change their mortgage type (for example, from a floating rate to a fixed rate package).

In Singapore, most home loan packages are structured in a similar way: interest rates for the first 2 to 3 years are attractively low, followed by a substantial jump on 3rd or 4th year onwards. This structure means that it usually makes financial sense for property owners to refinance every few years

By lowering your monthly mortgage repayment, you can free up cash for your emergency funds. If you have an existing mortgage, it’s time to look into your payment terms.

And if you are unsure of which bank offers you the best interest rate, go back to your existing bank and ask if they have a better refinancing rate for existing customers. Alternatively, you can also approach mortgage advisory platforms out there such as RedBricks Mortgage, Mortgage Masters.

These 4 practical tips can help you better manage your cashflow and reduce your retirement shortfall. To have better clarity on your total net worth (your current assets & liabilities), so that you can track your progress on achieving your retirement goals get on the waitlist for Autumn at www.autumn.sg.