Can Singaporean Create a Retirement Nest by The Age of 65?
By the year 2030, the number of Singaporeans aged 65 and above is expected to double to 900,000.
Singaporeans mortality rate has gone down and they are healthier with average life expectancy for males and females higher than before.
It is therefore important to plan for retirement in our early years well ahead.
Why Singaporeans loves to own additional properties on top of their own HDB flats as a form of investment.
I am going to explain the 3 benefits why many Singaporeans wants to possess an additional property as a form of investment whether is it a rental investment strategy or is it a momentum investment strategy for capital appreciation.
Foremost let’s take a look at some assumptions before I showing you 3 benefits of doing so.
In Singapore, owning additional properties is like running an extra part-time business because it is really like setting up another business which requires you to manage it like the rental etc.
You need to manage the purchase and you got to manage the holding onto the property on your own, like your annual property tax that you have to pay and your MCST fees every quarterly ,you also have to take care of the repairs if you rent out a property to your tenant, you have to look after the tenancy and of course it is more like an additional set of business that you actually self-created the moment you want to invest in a property to enjoy the kind of leverage that you want to have so the crucial first thing to assume is that you want this so you basically want to have another set of investment arm in your portfolio and that would be your investment arm.
You have to take note that more or less sometimes it becomes a little bit like a part-time business that you must run it well and managed it right so let’s assume that if you do buy a property today at 1.2 million dollars then I want to send in some assumptions now.
The first assumption, is that your when you are now at age 35 and you can get a bank loan up to a maximum of 10 or 30 years and you decide to go for 30 years tenure loan, meaning that by the age of 65 years old you have fully pay off the property so later you’ll find why we want to have these assumptions this is because it is for your understanding benefit.
In the meantime you decide to rent out this brand new property which you have bought and now two years later after completing TOP you rent out immediately. Let’s just assume that you are able to rent this 1.2 million dollars property at $3, 000 and it is located in the city fringe area right beside the MRT station with full condo facilities etc.
$3,000 monthly rental from a S$1.2 million dollar property and the instalment based is on 2.4 percent interest rate for 30 years will be at $3,500 per month and now at this point,
I would like to have it to break down instalment to the two components and to clearly show you the concept of the principal and the interest component of your money installment if your monthly instalment is S$3,500 based on 2.4 percent interest rate the starting principal is actually about S$1700 and then the interest portion that the bank needs to earn from you is a S$1800.
The principal and the interest will change along the way of the tenor but the simplify for you right now let’s assume that it stays constant at S$1700 for principal and S$1800 for interest.
Why is there an interest component? Well it is because you leverage to buy a 1.2 million dollars property you come up with a 25 percent for down payment five percent cash 20 percent CPF or cash and then the buyer stamp duty which the calculations is 4 percent less S$15,400 and that will bring it to be about S$300K and you loan S$900K from the bank.
As you wanted to leverage and own a property right now rather than saving up to S$1.2 million dollars by the time you’re already old so you don’t need to wait for that to happen, you can actually own the property right now if your income can loan a $900k loan from the bank so the very first benefit that you have is that this then gives birth to a rental strategy you now have an asset that can help you to earn rental as a form of income.
Let’s term this first benefit as rental strategy , as we go back to earlier where we discussed about installment hence technically speaking you can use a $3,000 to take care of all the interests that is used to pay to the bank so S$3,000 less S$1,800 and you still have a balance of S$1,200 which you should then contribute to your principal;
Hence, if your monthly installment being at S$3,500 and your rent is S$3,000 there’s a short fall of S$500 that you need to fulfill and that actually goes to the principal portion, this S$500 portion you need to top up for the entire tenure.
Assuming your installment remains the same assuming your rental stays the same and of course your installment will fluctuate as interest rate overtime would increase or decrease but for the sake of calculation purpose now, let’s just keep it constant for now at S$3,500 and rental at S$3,000.
Hence as an investor then you have to top up S$500 every month plus not forgetting you also have to factor in the MCST which is a maintenance fee to which is about S$350 dollars per month, so with that, this brings you to about S$850 and plus you also have a yearly property tax to pay.
Let’s put that as $2, 400 per year so having this as a leverage investment and giving birth to a rental strategy this asset now helps you to generate rental income and the bulk of the rental that is being received versus the actual amount of money you have to put in monthly is actually more so you actually receive the S$3,000 dollars rental income which is turning out to be a very good strategy indeed. Let’s proceed to the next benefit and I will show you the reason why
The second assumption, Let’s say the worst-case scenario happened , you bought a property at age 35 for S$1.2 million and this property did not appreciate at all and the price stays the same, so by the time you reach age 65 let’s say the property price still remains stagnant at S$1.2 million.
What’s going to happen is the second benefit called forced savings.
Why is there this forced savings component here, let’s break down the numbers, your initial investment the 25% down payment and the buyer stamp duty that brings you to S$332,600.The initial investment S$332,600 ,your bank loan of S$900, 000 and I also add in your ongoing cost from here.
Hence every month you contribute S$500 dollars towards the instalment, S$350 towards the MCST and you paid a total of S$72,000 for 30 years towards property tax.
All in these 3 component plus minus a bit of repairs and of course some agent fees for renting out, your total costing will then be amount to S$400,000. This is like a top-up amount of your on-going investment.
Let’s just put it as a costing amount so that would be S$400,000 and adding back to your initial investment that will bring you to S$732,600 dollars for your total amount that you actually invested over the whole of 30 years.
Of course there are some contributors that we want to add in, that it is always safe to assume that you only managed to rent out your property for eleven months out of a twelve months lease just to stall that one month in case of vacancy and you can reserve that one month in the sense that you need to save some money for repairs and pay your agent fees or somethings like that.
At the end of 30 years technically speaking when you’re age 65 ,your property is already fully paid, so next you proceed to sell your properly, at the age 65 you choose to retire and you tell yourself “I don’t want to manage the property rent anymore, just sell it off, anyway the property didn’t appreciate it all.”
So what happen next ,you sold your property and you collected the sale proceed from your law firm and your law firm pays you the 1.2 million by cheque because there’s no more loan involved you are already age 65 and most of your CPF has already been fulfilled to be withdrawn.
Hence,what is then the net gain from the whole 30 years?
Basically all the monies that you have invested is S$732,600, you got back S$1.2 million dollars and what is a revenue profit that you gain is actually S$467,400 Dollars, this amount came from your rental strategy, from this first benefit you still got back your S$732,600 dollars which is your forced saving amount.
This forced saving amount plus your successful rental strategy both being applied, has ultimately created a retirement nest for you at age of 65 which is at S$1.2 million dollars.
What if you did not take these action when you are younger basically some things changes as you age, your loan tenure becomes lesser , the amount of leverage that you have becomes lesser and not forgetting some people as you age your income changes as you change jobs and factors like that and your ability to leverage becomes lesser.
Nevertheless, now our government has changed their rulings you have to come out 25%, the Bank loan is only a 75% and factoring in things like TDSR and all that, it allows you to actually plan your investment more prudently.
So that is what we call a forced savings strategy. In the event, if your property did not appreciate you actually have a retirement nest of S$1.2 million dollars to benefit from.
After stating the above benefits 1 and 2 and now what is the third benefit?
The third assumption is that what if that property you bought appreciates and it appreciates probably along the years from the day you bought it, like 3 years’ time youit appreciate, 5 years’ time it appreciate or even maybe 10 years’ time it appreciate and you decide to exit from there and then it’s a totally different story or maybe after 30 years for $1.2 million dollars it became S$1.6 million dollars
In conclusion, these are the 3 wonderful components which you must take note” Renter Strategy, Savings Strategy and Appreciation factor” if it does appreciate, which may just bring about your Retirement Nest by age 65.
Felix specializes in real estate exclusive listings, digital sales marketing and leases.
A trusted consultant to many successful property owners, perhaps the most compelling testament to his success is himself – through strategically analyzing the market and well-calculated investments, he already owns local and overseas properties
Today, as a property consultant of one of the largest real estate company in Singapore, Orangetee and Tie Pte Ltd with a reputable track record, I wish to share my strategies for financial freedom with you.
I hope to help you put in place a secure retirement plan and enjoy the lifestyle you have always desired.
To start with, I can help you identify a good value investment in today’s market. Also, I would like to advise you on the best ways of financing your property.
For instance, is paying your bank loan a good or bad debt? Also, I can help my client unlock the maximum loan from the bank even though they have a car loan.
With the proven strategies from my team, I am confident of putting together a customized and exclusive retirement plan that can set you on the road to your Financial Freedom!
I graduated a Diploma in Mass Communications with a passion for video editing and graphic design and website designing.
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