Saving for retirement can often be an anxiety-inducing topic. With 14% of Singapore's labor force reported to be self-employed in 2020 (World Bank), the question about how to save for retirement as a freelancer could not be more relevant than it is now. While the most obvious answer to the above question is to put money aside, there are many ways of doing it. You can simply decide to set aside a percentage of your monthly income, to invest it, or to put it in a savings account. Each option, however, largely depends on your income, retirement age, and current financial situation.
Set Up a Retirement Plan
In order to set up a retirement plan, you need to answer the following questions:
- How old are you now?
- When do you plan to retire?
- What is your monthly income?
- What are your monthly expenses?
- How much does your income vary month-to-month?
After answering these questions, you will get an idea as to how much you need to save. The current retirement age in Singapore is 62 years, and will increase to 63 years in 2022. While this may not affect your retirement age as a freelancer, for the sake of retirement planning we will use the official retirement age.
|Current Age||Years Until Retirement||Overall Spend in Retirement||Monthly Save Required|
|25 yo||37 years||S$451,836||S$1,017|
|30 yo||32 years||S$451,836||S$1,176|
|35 yo||27 years||S$451,836||S$1,394|
|40 yo||22 years||S$451,836||S$1,711|
The table above assumes individual monthly expenses in retirement to be S$1,793 (Singstat). Overall spend in retirement is also based on a life expectancy of 83 years. An additional factor we need to consider are healthcare expenses. All self-employed Singapore citizens and permanent residents need to make compulsory contributions to their Medisave Account if they are making more than S$6,000.
|Annual net income||Below 35 yo||35-45||45-50||50+|
In addition to making compulsory contributions to your Medisave Account, you can choose to make voluntary contributions. The great benefit of voluntary contributions is that you can claim tax reliefs for those contributions to lower your overall tax expense.
Set a Goal and Save
The simplest way to save for retirement is to calculate your monthly income and monthly expenses and decide on a realistic amount you can set aside for retirement monthly. This should typically be a certain percentage of your monthly income rather than a fixed amount. Calculate when you want to retire and how much you would spend on average monthly after you retire. Average household monthly expenses in Singapore are S$3,586 (Singstat), assuming the household size is two people. This implies individual monthly expenses of S$1,793.
It is also important to remember that there will be several expenses you will no longer have to worry about in retirement, such as your tax expense, your Medisave Account contributions, health insurance, children's tuition costs, work-related expenses and possibly even life insurance premiums. This method of saving for retirement has many downsides: you are not earning interest on your savings to offset inflation, you're not getting tax breaks on your savings.
Central Provident Fund is a social security savings plan providing Singaporeans with a plan for a secure retirement. While making contributions to your Medisave Account is mandatory, you can also make voluntary contributions to your CPF Ordinary Account (OA), Special Account (SA) and Medisave Account (MA).
Ordinary Account contributions can be used for housing, insurance, investment and education needs. Special Account can be used for retirement income and retirement-related investments. As previously mentioned, Medisave Account is intended to be used for hospitalisation expenses, approved outpatient medical care, and approved medical insurance. While typically CPF contributions are made both by the employer and the employee, as a freelancer, you are only required to contribute to your Medisave Account.
Making voluntary contributions to your CPF Special Account as a way to save for your retirement has many benefits. First, the interest you will receive is higher than the inflation rate. Current interest on SA contributions is 4% per annum, reviewed quarterly. Second, your contributions can be used to make investments in the future. Lastly, your investment is safe in comparison to other investments that would be pegged to indices that fluctuate with the markets. The interest rates for Medisave and Special Account are calculated based on the 12-month average 10-year yield of Singapore Government Securities plus 1%. Additionally, this investment is guaranteed by the Singapore government, which makes it safer than investments in the stock market.
Fixed Deposit & Savings Account
Two great options when it comes to saving for retirement are a fixed deposit or a savings account. A fixed deposit is a type of investment which gives you a higher interest rate than a regular savings account. At the time of account opening, you agree to deposit money at a financial institution for a fixed time period and interest rate.
Unlike a savings account, you cannot withdraw a fixed deposit before the date of maturity. In return, however, you receive a higher interest rate on a fixed deposit than you would on your savings account. If you are looking for more flexibility regarding your investment, then a savings account might be the right choice for you.
Both fixed deposits and savings accounts are a low-risk investment with a guaranteed rate of return. One key feature of both investments that you need to consider is the interest rate offered on your deposit. In order to make sure you are not losing money, the interest rate on your deposit should not be lower than the current rate of inflation. Therefore, in order to make money, the interest rate has to be higher than the inflation rate.
Current rate of inflation in Singapore is 0.34% according to Statista. This explains why so many commercial banks offer interest rates on savings and fixed deposits below 1% p.a., with most offering around 0.5%. Banks typically pay higher interest on deposits with longer tenures. For example, 24 and 36 month periods, on average, yield higher interest, irrespective of the amount deposited. Maybank currently offers one of the best rates for fixed deposits, which is 0.6% on 36-month tenure with a minimum deposit of S$5,000.
While there are many ways to save for your retirement as a freelancer, the best path to take is some type of combination of the above-mentioned options. Ideally, you should invest some portion of your income in a fixed deposit account. Since the longer the tenure, the higher the interest earned, this investment can be locked in for several years. Therefore, you also need to put some money aside that you can access in case of emergency, which would be a savings account. This would also be a liquid asset, since you can readily access it, unlike a fixed deposit.