Retirement costs are harder to predict than most of us imagine. Blame that on “coffee and eggs” planning, where we tend to create modest lists like $2 breakfasts, and little beyond three meals a day and an occasional $50 splurge. In reality, it’s possible to end up spending more during our retirement than during our working years. Here are the most common surprise expenses:
1. Condo maintenance fees
Single-digit millionaires are a bit more likely to be living in private homes, and that’s where condo maintenance becomes an issue.
Most of us dismiss costs such as the mortgage, as these are likely paid off by the time we retire (or soon after). However, don’t forget that maintenance fees for condos are ongoing, even after the mortgage is long paid off.
In most condos today, maintenance will come to around $400 per month; but they can be even higher for larger or more luxurious homes. What’s often overlooked is that over time, these maintenance fees can rise. In fact, older buildings tend to be even pricier to maintain. In addition, inflation means the cost of hiring workers – such as cleaners, security guards, gardeners, etc. – will also go up over time.
If your post-retirement income is static, maintenance fees can become unmanageable over time. This may force you to sell your home and downgrade (a tough thing to do when you’re older), or to compromise on your lifestyle.
2. A collective sale of your home
For condo dwellers, this may take the form of an en-bloc sale to private developers. Historically, few condos in Singapore make it past the age of 40 without redevelopment kicking in.
Now most Singaporeans assume an en-bloc is a huge windfall; and it’s true that you may get generous compensation.
However, it can cause serious cashflow disruptions to retirees; especially if you have a tight fixed income (e.g., annuities or CPF pay outs).
This is because the sale proceeds from an en-bloc may not come right away. It could take up to six months before you see the first dollar, or it could take up to 12 months. If you need to find a new home during this time, you may struggle to cover the initial payments; and it’s quite difficult to find financing options when you’re at retirement age or older.
Even if you can get a bridging loan, which is typically used for transitioning between homes, the loan tenure is just six months. If it takes longer than this to receive your sale proceeds, you may end up having to liquidate assets to cover costs. This can have a negative impact on your retirement portfolio.
3. A cheaper country may have a higher inflation rate
Many Singaporeans consider retirement in a “cheaper country” to be a solution. That’s often viable, but keep this in mind:
Developing countries tend to have a higher inflation rate than developed ones.
Most developed countries keep inflation at around three per cent; but a fast-emerging economy can see inflation well into the double digits, as new jobs and industries create an influx of wealth.
Let’s consider a localised example:
Between 1970 to 1990, Singapore saw a transition from developing nation to first-world status. Using the MAS inflation calculator, we can see the effects on the price of food:
A $3 meal in the year 1970 would have cost around $7.27 in the year 1990. This is an increase of around 142.4 per cent in 20 years, or a compound annual rate of about 4.53 per cent.
Conversely, let’s look at inflation after Singapore became a developed country. We’ll use a similar 20-year period, closer to today:
A $3 meal in the year 2000 would have cost $4.49 in the year 2020. This is an increase of just 49.57 per cent, or a compound annual rate of about 2.03 per cent.
Most of the “growth spurt” has already ended, and the economy has reached a certain plateau (which is not great for younger Singaporeans, but that’s another topic altogether).
So life may be cheaper in an emerging economy right now – but 20 odd years into retirement, you don’t know if that country’s growth spurt could make it far less affordable.
Many such high-growth countries are in the Asia Pacific region, ranging from Thailand to Indonesia. While these countries may be cheaper places to live right now, their economies are also growing faster than Singapore’s* – and they could be much less affordable in the next two decades.
*Here’s the latest outlook, where you can see that as the most developed country in the region, our economic growth is also the smallest.
4. Healthcare inflation
In Singapore, healthcare inflation is a key risk to retirees. Due to our ageing population, Singaporeans use up a greater portion of healthcare resources, from simple consultation time to hospital beds and medicine.
Besides this, having to open more clinics for the ageing population piles on the costs: we need to train and pay more doctors and nurses, buy more medical equipment, etc.
For the year 2023, healthcare costs in Singapore are expected to grow by 9.8 per cent, far higher than the core inflation rate of three per cent.
Also, health insurance premiums tend to rise as we get older, and need higher coverage.
There’s a key difference between health and life insurance, and general insurance (coverage for your house, car, etc.):
The chances of you getting sick, injured, or dying at some point are 100 per cent.
Everyone claims a payout one day from their health and life insurance policies. It’s not like car insurance, where only the minority of bad drivers might make claims. That’s why the premiums are so expensive, and can only rise with time.
5. Your children or grandchildren end up needing support
Even if your good luck holds, it may not for your children (quick, touch wood). While we hate to be negative, children do get into trouble even after they’re grown adults.
They may get into business difficulties, face legal tangles, become disabled and unable to work, etc. In many of these circumstances, grandchildren also end up in the care of the grandparents.
These unexpected costs can quickly derail even the most robust portfolio. Having to feed, shelter, and raise a whole other human being is tough when you’re a working adult; it can be nigh-impossible on a retiree’s income.
Nonetheless, some retirees do find themselves called upon to pay for a grandchild’s school fees, or provide interest-free loans to a financially strapped child. These situations can quickly drain emergency savings, or end up requiring drastic portfolio rebalancing.
6. Living longer than expected
This is, we hope, something that you consider a good problem. Singaporeans have rather long life expectancies; the highest in our region at around 83 years (a little longer for women than for men).
It gets a bit problematic if your portfolio covers you till you’re 80, but you’re facing your 92nd birthday in a while. Having enough money may be challenging then, given you’ve already faced an additional decade of rising inflation.
Many fixed income securities, such as perpetual income bonds or CPF payouts, may not rise with said inflation – so your payouts in the last few years may diminish to near insignificance. For all we know, $2,000 may cover a month of necessities by the year 2060; no one has perfected that crystal ball yet.
Some types of assets that can still rise with the current cost of living, such as rental income or royalties, may help with this.
How do you prepare for these?
The answer is simple, but inconvenient:
Ensure your financial planning never stops.
There is no true end to the constant rebalancing and realigning of portfolios; and there are always new financial goals and needs as long we’re alive. Likewise, the nature of financial products and assets will also change. The payouts they have today may not resemble what you see tomorrow, or in a few years from now.
This is the reason you want to cultivate long-term relationships with the financial experts you work with (and why the wealthiest among us set up family offices, with employees who may work with the family their entire careers).
Find someone who understands your changing life circumstances, and the way your portfolio needs to adapt accordingly. If you need help with this, reach out to us at Single Digit Millionaire with your questions.
