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First, the good news:
Unlike many others, your parents are actually prepared for the future, financially. They worked hard, saved, and cut you out of their retirement plan. Nice.
Now here’s the bad news.
They don’t exactly know what to do with their hard-earned money.
Maybe it’s sitting in some fixed deposit somewhere, earning them 1% a year (or worse, 0.05% annually in their savings account).
Perhaps they’re intending to buy a second property and become a landlord.
Or maybe they’re about to hand it over to some scammer who’ll get rich off their life savings. Big yikes.
After doing some research, and talking to the folks at Endowus, this is what we came up with: a list of options for your parents to park their retirement money, as ranked by risk. We discuss each of their strengths, their weaknesses, and their tradeoffs.
Low risk: CPF LIFE
If you’re younger, you’d be familiar with the three key CPF accounts: CPF Ordinary Account, CPF Special Account, and Medisave. We’ve talked about investing your CPF with Endowus previously as well.
But when talking to your retiring parents, the only account you’ll need to bring up is the CPF Retirement account (that makes up a part of CPF LIFE).
The payouts range from $800 to $2200, depending on how much money you have.
The good:
Compared with private retirement plan providers, CPF LIFE will generally give you more returns per dollar. To get $2,000 a month for life, all you need is to have $288,000 in your Retirement Account by 55 years old, with payouts starting at 65.
For a private annuity that provides (~2% p.a), to get the same $2,000 payout, you’d need about $1,200,000!
Safe and good returns: CPF LIFE provides almost negligible risk, and its returns are higher than other ‘risk-free’ retirement products.
Illiquidity has its benefits: CPF is clear on its rule that prevents full withdrawal unless there are extraordinary circumstances.
While this ruffles some feathers, the design creates a regular payout schedule, which helps with day-to-day expenses planning. Another accidental perk: keeping the money away from scammers. For these reasons, CPF LIFE is worth serious consideration.
The bad:
Illiquidity: It is by design, more restrictive.
Doesn’t cover for retirement plans before 65: CPF LIFE only kicks in at 65, so it won’t be providing income anytime before that.
To understand how much your parents can get from CPF LIFE, check out these links:
CPF LIFE estimator if your parents are between 55 to 79 years old
Endowus CPF calculator if your parents are below 55
Low to moderate risk: Private-sector retirement products
These plans often have many labels attached to their ‘retirement’ or ‘savings’ plans, but they all work the same way:
You pay for the plan for x number of years, before getting your money back, now with y% returns.
Similar to CPF LIFE, these generally contain safe assets that won’t result in a loss of capital, with some returns guaranteed as well.
The good:
Compared with CPF, there is more flexibility on when you can access your money. For example, you can choose to receive your retirement funds 5, 10, 15, or 20 years after you first start paying for premiums.
The bad:
Generally, in terms of pure return, most of these companies provide a lower return to CPF LIFE. To add, there is the risk that the returns are too low for a retiree to keep up with inflation if we enter a high-interest rate environment in the next 20 to 30 years.
With the current interest rate environment and their low-risk appetite, these retirement plans may not be a suitable option.
That said, if your parents have put aside some money in annuity or endowment plans earlier, then these plans may work because the money has a longer runway for growth.
They are rather illiquid, with hefty termination fees. These plans are more flexible compared with CPF, but they still lock you in.
Customisable risk: Income/dividend products (Funds/ETFs + REITS + Stocks + Bonds)
Building an income portfolio is a strategy that often gets the scorn of aggressive finance-bro types, but they’re worth serious consideration for your parents or people preferring passive income over chasing a growth strategy.
Your parents may be more familiar with buying blue-chips stocks that regularly distribute dividends or income, such as Singtel, DBS or REITs. What would also be worth considering are funds that offer instant diversification.
Typically, you can purchase these funds via a bank or financial advisor. Today, a robo advisor can offer the same, with highly customisable options to boot.
The good:
Inexpensive to own: Compared with physical property (skyrocketing right now), dividend stocks/funds or REITS are relatively affordable to own and acquire.
Easy to maintain: Receiving dividends in your bank account takes little physical effort, compared to being a landlord.
Instant diversification: If you’re investing in funds, it’s easier to diversify across various industries, companies or geographical regions. This can make for a more resilient portfolio in the case of an economic downturn.
Liquidity: In the event of any emergency, you will be able to access your retirement funds easily.
Risk allocation: With a fund, you can build the exact proportion of bonds (low risk), stocks and REITS (mid risk) that matches your risk appetite.
The bad:
Need for oversight: Be it investing in single stocks/REITs, or single funds, there are varying needs for monitoring and management. Imagine having to manage your parents’ stock picks when you have never read through a corporate announcement before.
(Also) liquidity: As mentioned earlier, funds are susceptible to a panic sell.
Moderate to high risk: Buy more property
Older Singaporeans have been in love with property for a looooong time. Earlier generations of Singaporeans built their wealth on real estate.
The good
Relatively stable asset
The Singapore government is very invested in ensuring no property bubbles develop, prioritising sustainable and stable growth in the property market.
Psychological comfort
Some older folks have a bad impression of the stock market, making property the only asset class they trust.
Leverage to maximise returns
We don’t often encourage leverage, but when you take a loan for your property, that’s effectively what you’re doing.
Illiquid
Like CPF, property is relatively illiquid. Not being able to access your funds easily is often viewed negatively. However, it also means they’re most likely to stay invested.
Property market boom
If your parents were property investors before, then they’ve several options to reap their rewards.
- Moving from private property to public housing to unlock funds
- Renting out property for extra income
- Renting out part of a property for extra income
- Unlocking the value of a property via a cash equity loan, or a HDB lease buyback
However, if they’re thinking of acquiring additional property, then there are several reasons why it might not be the best choice.
The bad
17% ABSD + cost of ownership
This vastly reduces the viability of a second residential property as an investment. You could have been better served putting your money elsewhere.
Not exactly passive income
Being a landlord is often advertised as passive income. Except it’s not. Dealing with difficult tenants, or repairing stuff around the property – all of these take substantial effort. Being a landlord is best viewed as being in a part-time job.
High barrier to entry, low liquidity
Unlike stocks or funds that can be purchased in smaller amounts, property often requires investors to lock up huge amounts of liquidity, leaving them little for anything else.
Overconcentration
Because the price of property is so high, it’s easy for it to dominate one’s portfolio entirely. For example, a person with $1 million can only afford a $1 million property, leaving little room for diversification. This means that your retirement is riding on the success of a single physical property.
As such, to not over diversify in property, you’d need a higher net worth. (Our estimate is in excess of 2 million.)
Extremely high risk: farming crypto yield
Just to be clear: We don’t recommend crypto yield farming for the vast majority of retirees. Nor is it a tried-and-tested retirement product.
This extremely high-risk option is only worth a look if your parents are multi-millionaires who can stomach a $100,000 loss.
Basically, the idea is this. You buy a bunch of cryptos, lend it out to others, then earn interest based on that.
The good:
High returns unheard of in traditional finance: One of the most popular farming projects is offering yields in excess of 19% APY. For reference, Warren Buffet’s rate of return since 1965 is 20%. This means that with $100,000, you can potentially generate $1,583 monthly income.
Flexibility, you can decide the lock-up: Unless you’ve decided to lock yourself in (to earn higher rewards), you can generally exit with little or no penalty.
The bad:
Loss of capital is entirely possible: The DeFi space is extremely new, and you should give up any notion that any project is ‘safe’. There are multiple risks associated with yield farming, ranging from volatility and fraud, to regulatory crackdowns.
Even for the safest and more established Defi projects, we would not be putting any essential money here.
No recourse: An equally important point is there is no one that can be held accountable if such projects go bust.
Here’s how I’d help my parents plan (if they asked me, lol)
Stability of assets is important for my parents, so we’d personally first use CPF LIFE and CPF to secure a basic standard of living.
Once that is settled, we’d pick the remaining options based on risk appetite and income needs.
In a best-case scenario, you should be able to diversify to get multiple sources of income. However, how much you can diversify also depends on what your parents have on hand.
To put it simply, the ranking by risk goes like this:
First priority: CPF LIFE, CPF
Second priority: Income/dividend products/funds, retirement plans (if they don’t already have it)
Very nice to have: Property
Probably should not have: Crypto yield farming
A parting note:
Everything that is written here is what we’d do for OUR own parents, but in practice, your parents will probably have their own ideas on how to handle their money.
That’s perfectly ok. People should be able to make their own choices.
Your job as their child? Remind them of the investment risks, and advise them to the best of your ability. Seeing that money is such a prickly topic, this won’t always be the easiest thing.
That said, with an increasing number of elderly getting scammed, or mismanaging money, this is not the time to let up or be complacent, even if it seems like they’re at the end of their financial journey.
Stay woke, salaryman
If your parents are looking to supplement their retirement with passive income, consider Endowus’ income solutions
Look, we get that investing can be a daunting game for most retirees. That’s why outsourcing this to Endowus, which offers tailored solutions for different risk appetites and life stages, with no transaction and withdrawal costs as well as lock-in fees, is something worth considering. Minimum investment amount for its income solutions starts at $10,000.
Their 3 solutions are:
- Stable Income: 100% fixed income
A lower risk portfolio that focuses on capital preservation and regular income through coupons as well as capital gains of underlying bonds.
- Higher Income: 20%/80% equity/fixed income
A higher risk portfolio that focuses on higher yield and long-term capital appreciation. Designed to maximise payouts through a mix of higher-yielding income funds and high dividend equity funds, and great for working adults with higher living expenses.
- Future Income: 40%/60% equity/fixed income
A relatively higher risk portfolio that focuses on capital appreciation through a diversified mix of higher yielding income funds, high dividend funds and globally diversified equity funds. Also suitable for younger working adults that want both growth and income.
To find out more about Endowus’ income solutions, click here to find out more.
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