How much will I spend in Retirement? (2) Where does the money come from, and where does it go?

Retirement means giving up a regular salary or paycheck. At the same time, the household will change too, as the children leave the home to start their own families. So, where does money for retirement come from, and where does it go? We find that there is a growing reliance on income from financial investments and CPF, and less on rental property investments and insurance. For spending, healthcare and health insurance are amongst the largest expenditures and likely to increase quickly as the retiree ages as well.

---

In our previous post How much will I spend in Retirement, we dispel the common belief that a person’s spending will fall after retirement. In fact, the opposite is true. Not only does spending not fall, but it continues to increase at roughly the rate of inflation. But clearly, financial matters are not the same after retirement. Where does money for retirement come from, and where does it go? Even if the overall level of income and spending does not change, the sources of income and patterns of spending will. Here, we look at these two questions, using the Department of Statistics’ Household Expenditure Survey 2017/18. Again, looking at the income and spending patterns of our fellow countrymen over time does yield some interesting perspectives.

Where does the money for retirement come from?

Let’s look at the first question to start off: Where does the money comes form? Money, in this case, refers to post-retirement income. Retirement means giving up a regular salary or paycheck. It also means living off our savings or other earnings. These earnings can come from:

• Interest on bank savings accounts
• Coupons from bonds
• Dividends from stocks (see here)
• Payments from annuities (like CPF Life discussed here and here)
• Rent from properties
• A combination of the various sources mentioned above (see here)

That’s all fine in theory, but what do people in Singapore actually live off in retirement? Well the Household Expenditure Survey tells us the answer, depending on the type of property the retiree household stays in.

Here’s where retired households got their income in 2012:

Sources of income for retired households in 2012/13 by type of residence

Source: Department of Statistics Singapore

And here are the sources of income for retired households in 2017:

Sources of income for retired households in 2017/18 by type of residence

Source: Department of Statistics Singapore

Looking across time through the two charts above, a couple of trends jump out immediately:

• For the lower income households, income comes predominantly from family (aka the sandwiched generation), and social welfare payments. For the higher income households, income comes mainly from investments, both real estate and financial.
• CPF as a source of retirement income has been growing over time, as more and more CPF members meet the Basic Retirement Sum now. A distinct difference amongst the higher income households is that the proportion of income coming from CPF is now higher than from insurance. This shows that CPF Life is probably a better source of annuity income compared with commercial annuities. Note that only half of all retired CPF members were receiving payouts form the CPF back in 2018. So, this can be expected to increase over time.

What is interesting about the changes in the sources of income over time is that, for the better-off retiree households in condominiums and landed property, and deriving most of their income from investments, more and more of the income comes from financial investments rather than real estate investments. In fact, for these households, financial investment income was three times the level of rental income in 2017. So the received wisdom to “invest in properties and live off the rental” is becoming less relevant.

Digging one level deeper, we also find that the difference between rental income for retirees in 2012 versus 2017 may also be due to the sharp fall in the rental index over this period, as we show below:

Rental Index for Landed and Non-Landed Private Singapore Properties

Source: Data.gov.sg

For retirees who still servicing mortgages on rental properties between 2012 to 2017, another reason may have been the sharp increase in the interest rates during this period. This increase in rates from next to nothing to around 1% no doubt reduced the net rental income from these properties.

Interest Rates in Singapore

Source: Monetary Authority of Singapore

Over the same period 2012 to 2017, the benchmark Straits Times Index (STI) of Singapore blue chip stocks remained at roughly the same level. The dividend yield of the STI remained between 3.25% to 4.00% as well. This indicates that the increasing reliance on financial investment income is more likely to be due to the increasing share of financial investments in the better-off retiree’s portfolio, rather than any particular higher investment returns of financial assets. Given the trend of lower and lower net rental yields, it is likely that this trend of increasing reliance on financial investment income for retirement will continue into the future.

Where does the money go?

The other insight from the Household Expenditure Survey is where the retiree’s money goes to. Clearly, post retirement, expenditures such as those for children’s Education, Tuition and so on will fall. But where does the money saved on these expenditures go to?

Now, the figures from the 2017 Household Expenditure Survey are not that easy to interpret because of the inclusion of “imputed rental” as the largest share of expenditures. This is “rent” that households “pay” themselves for staying in their own homes! As this can be as large as 30% of total expenditure, the inclusion of imputed rental distorts the share of all other types of spending. We strip out this imputed rental below, giving a clearer picture of the “cash” spending of a household.

Let’s start by looking at where spending post-retirement decreases relative to a household aged between 50 to 60:

Decreases in household spending post-retirement as a percentage of total expenditure

Source: Department of Statistics Singapore

The main categories of expenditure which decrease post-retirement are Transport, and Education. Oh the joy of not having to foot those expensive tuition fees! Other categories such as personal services (which include financial and insurance services), communications, clothing and accommodation, see decreases as well, but by and large remain roughly the same as pre-retirement shares of expenditure.

Now, let’s look at the types of spending which will go up in retirement:

Increases in household spending post-retirement as a percentage of total expenditure

Source: Department of Statistics Singapore

We see increases in the share of expenditures going to food. Although eating out (Food Service) spending goes down, Food purchases (for home cooking) goes up by more. Household maintenance and Utilities also go up in retirement. Perhaps these households are spending more time at home, and hence either start noticing how run down their homes have become over time, or are embarking on their home renovation ideas now that the children have left the home!

But the most worrying increase in expenditures post retirement is the amount spent on healthcare and health insurance. Let’s start with health insurance. Based on the current premiums for MediShield Life before subsidies, a retiree can expect to pay between $815 to $1,500 per year in premiums as they age. Hence, the proportion of spending on health insurance of 5.3% will only go up over time, perhaps to twice the level here.

The proportion spent on healthcare, at 12.2%, is mainly on hospitalisation expenses and outpatient care. As with health insurance, we know that the chances of hospitalisation will increase as we age. In fact, the table below shows how exactly it increases:

Likelihood of hospitalisation by age

Source: The Straits Times

The chance of someone 85 years or older (half of us will live past this age) being hospitalised is 3 times higher compared to the 65-year old retiree. If healthcare expenses scale up in the same way, we can expect expenditure on healthcare to reach 35% or more of our total expenditures when we reach our 80’s. In a bad year with multiple spells of hospitalisation, this may even go up to 70%.

Taken together, healthcare and health insurance expenses are likely to dominate our spending in retirement. And even worse, these expenditures can be lumpy. In a year with no hospitalisation, they can be quite low. But in a year with a couple of stays in hospital, they can explode! With high and rising healthcare inflation, relying on the various Shield plans and Medisave is insufficient to meet these demands in the future. But the good news is, if you rely on Medishield Life, your Medisave is likely to last you through retirement.

Healthcare and health insurance expenditures can rise from 17.5% of total spending at the start of retirement, to 35% or more after 15 to 20 years

What this means is that retirement income is not just about having a steady stream of income over time, like an annuity or CPF Life. It would also need to be backed by a portfolio of liquid or marketable assets which can be sold off to meet these lumpy expenditures when needed. Locking all your retirement assets into illiquid property, annuities and CPF will not be feasible. Instead, what we should do is to diversify across financial assets as well, something which we discuss here. This is what the better off retirees of 2017 have done, deriving an increasing portion of their income from financial investments.

Ending Thoughts

Where does money for retirement come from, and where does it go? The analysis of where retirees obtain their income and how they spend it has turned out to be rather fruitful. In particular, we glean the following conclusions:

1. Healthcare and health insurance expenditures will dominate retirement spending as we age, potentially accounting for most of our spending.
2. The lumpiness of healthcare expenditures means we cannot only rely on a steady stream of income for retirement. We also need liquid financial assets which can be sold to meet these lumpy expenditures.
3. Interestingly, the better off retirees in 2017 agree with this. They differ from the retirees of 2012 by deriving a much larger portion of their retirement income from more liquid financial investments and less from rental income from illiquid property investments.

Do keep reading this blog for our future post where we shall also look at putting all these findings together to work out how much it costs to retire early in Singapore.

---

References

Department of Statistics Singapore (2019) Report on the Household Expenditure Survey 2017/18