FREQUENTLY ASKED QUESTIONS
1. WHAT IS RETIREMENT PLANNING?
Retirement planning is the process of determining income goals for retirement, and the necessary actions and decision making to achieve the goals. It is a systematic plan by an individual for setting aside income for his/her future retirement. This includes assessing a person's sources of income, estimating expenses, initiating actions to start saving.
2. WHY IS RETIREMENT PLANNING IMPORTANT?
Spending is inevitable because you still need to cover your expenses during your retirement. It is necessary to ensure that your savings is sufficient for your expenses during your retirement. Retirement planning looks at:
1. The expectation of a post-retirement lifestyle
2. The compounding effect from early savings
3. The need to be aware of inflation
4. Unforeseen expenses such as medical treatment
5. Preparation and management of wealth for the next of kin after passing away (estate planning)
3. HOW DOES RETIREMENT PLANNING WORK?
Retirement planning involves 8 steps:
1. Setting retirement goals
2. Assess current financial position
3. Identify retirement income sources
4. Evaluate retirement income risks
5. Understand healthcare issues
6. Invest retirement assets
7. Manage retirement income
8. Monitor retirement assets
For detailed information on this, please contact our Retirement Planners at 2382800.
4. STARTING RETIREMENT PLANNING : TOO EARLY OR TOO LATE ?
Retirement planning is not only meant for people who are about to retire but also applies to those who have just started working. Early retirement planning can provide clearer retirement certainty instead of relying on fate and uncertain savings or income.
5 . WHAT IS RETIREMENT INCOME?
Retirement income is the amount of money an individual earns after retiring.
6. WHAT ARE THE WAYS TO CALCULATE ONE'S RETIREMENT INCOME?
The simplest way to calculate is to estimate how much is needed per month throughout the expected retirement period. For example, if a person estimates that he will need $500 per month for 20 years (240 months), he will need to accumulate $500 x 240 months = $120,000 by the time he reaches his retirement age.
A more in-depth calculation of one's retirement income can be done using two methods:
i. Income Replacement Ratio Method
ii. Expense Method
7. HOW TO CALCULATE RETIREMENT INCOME USING THE INCOME REPLACEMENT RATION METHOD (IRR) ?
This method helps determine how much an individual's income will be needed during retirement. It looks at a percentage of the pre-retirement income as an agreed basis for the retirement income needed.
i. A person wishes to receive at least 60% of their working income
ii. Period of retirement= 20 years
iii. final projected annual salary=$24,000 ($2,000 a month)
funds needed to accumulate:
60% of $24,000 x 20 years = $288,000
It does not stop here, as he will then need to look at his current retirement savings and the remaining time before his retirement;
iv. Current retirement savings = $30,000 (savings from TAP, SCP and other savings).
v. Remaining period before retirement: 15 years
Actual funds needed to accumulate:
$288,000-$30,000 = $258,000
Savings needed every month before retirement:
$258,000 ÷ (15 years x 12 months) = $1,434 per month
Other things that can affect the required savings amount includes: TAP & SCP from the employer side, dividends for TAP, SCP and other savings / investment.
8. HOW TO CALCULATE RETIREMENT INCOME USING THE EXPENSE METHOD?
The Expense method helps to determine the estimated retirement income by looking at the pre-retirement expenses.
i. Monthly salary: $2,000
ii. Monthly household expenses: $850
iii. Expected Retirement period: 20 years
Total expenses for the entire retirement period:
$850 x 20 years x 12 months = $204,000
Next, you need to look at his current retirement savings and the remaining time before he retires;
iv. Current retirement savings: $30,000 (savings from TAP, SCP and other savings),
v. Remaining time before retirement: 15 years
- Remaining funds needed to accumulate to accommodate the expenses:
$204,000-$30,000 = $174,000
- Savings needed before retirement every month:
$174,000 ÷ (15 years x 12 months) = $967 per month
Other things that can affect the required savings amount includes: TAP & SCP from the employer side, dividends for TAP, SCP, VC and other savings / investment, and inflation.
9. WHAT IS INFLATION?
The rate at which the prices of goods and services increase in an economy over a period of time. The higher the inflation rate the less purchasing power you have to buy goods and services.
For example: $1.00 pack of candy bar today will cost $1.02 in a year if the inflation is at 2%.
10. WHY DO I NEED TO INCORPORATE INFLATION INTO MY RETIREMENT SAVINGS GOALS ?
As retirement savings are long term, inflation can have an impact to the value of your current savings in the future. Therefore, it is important to consider inflation when calculating your retirement income. For example, if you need $100,000 in today's value in the next 20 years with the inflation rate at 2%, the future value that you will need will be approximately $148,600.00. Thus, you will need to adjust your savings according to the expected fund.
11. WHAT DOES TAP HAVE ANYTHING TO DO WITH RETIREMENT PLANNING?
TAP was established in 1993 to accommodate the retirement needs of citizens and permanent residents of the country through mandatory savings. According to the Employee Trust Act, it is mandatory for every employee who is a citizen or a permanent resident of Brunei under the age of 55 (TAP Scheme) and 60 (SCP Scheme) to be registered and contribute to TAP.
A portion of employees' salary are contributed to TAP and SCP, and it is also mandatory for employers to add to their employees' contributions making it a total of 17% based on employee's salary for retirement:
TAP plays a very significant role in Retirement Planning as it builds up an individual retirement income to be used during the retirement phase. The withdrawals for TAP and SCP are very strict as these accounts are specifically for retirement. The fund is built up by the regular monthly contribution, which is the 17% and dividend (if any) from investment. Click here for information on dividend rates declared by TAP.
12. HOW WILL TAP BE PAID FOR RETIREMENT ?
TAP will be paid when a member reaches the age of 55 and it is paid in lump-sum. All the contributions in the TAP account from the member, his/her employers, and the dividends earned, will be paid to the member ONE TIME only.
13. HOW WILL SCP BE PAID FOR RETIREMENT?
SCP will be paid as ANNUITY when a member reaches the age of 60. This means that all the contributions in the SCP account from the member, his/her employers, and the dividends earned, will be paid MONTHLY to members until they reach the age of 80 years old for a period of 20 years. The annuity amount will depend on the amount of SCP balance at the age of 60, which will be divided into 240 months (20 years). The minimum threshold amount that entitles a member for the annuity payment is $12,000 which gives a minimum payment of $50.00 per month. Lump-sum will be paid to the member if his SCP savings is below $12,000.
For detailed information on this, please contact our Retirement Planners at 2382800.
14. ARE TAP AND SCP CONSIDERED AS RETIREMENT INCOME?
Yes. Funds from TAP and SCP will be used for retirement. Hence, making it a vital part of an individual's retirement income.
15. CAN MY TAP AND SCP CONTRIBUTIONS BE INCREASED?
Yes, members who wish to have more TAP and/or SCP funds when they retire may increase their funds via Voluntary Contribution (VC). A member wishing to have a higher lump-sum when they retire may contribute voluntarily to their TAP savings on top of their mandatory contribution for a minimum of $10 per month with no maximum limit amount. A member wishing to have more annuity pay when they retire may voluntarily contribute to their SCP savings with no minimum or maximum amount.
16. HOW MUCH MONEY DO I NEED TO RETIRE?
There is no one-shoe-fits-all answer as to how much money an individual needs when they retire. When deciding how much you need for retirement, it is important to consider the following:
1. To maintain the standard of living you are familiar with
2. Your activities (example: hobbies that you've been wanting to start, or places you want to visit, and so on)
3. Supporting your loved ones
You may use the Income Replacement Ratio method or the Expense Method to estimate how much money you will need by the time you retire.
17. HOW MUCH SHOULD I BE SAVING EACH MONTH FOR RETIREMENT?
This depends on your retirement income goals. After determining how much you will need when you retire using the Income Replacement Ratio method or the Expense method, you can then estimate your required savings by working the amount backwards.
1. Savings required for retirement = $400,000
2. Current TAP savings = $30,000
3. Current SCP savings = $10,000
4. Other Retirement savings (from other financial institutions) = $5,000
5. Total Retirement savings currently: $45,000
6. Number of years left until reaching 60 years old = 25 years
Hence, Total Required savings Less Current Savings = $355,000 ($400,000 - $30,000-$10,000-$5,000) and;
Savings required per month = $1,183.33 ($355,000 / (25 years x12 months))
Assuming the average dividend for the savings is at 1.5% annually, the savings per month required is $984.05. (calculation is made using Financial Calculator – FV: $355,000, N: 25 years, i: 1.5%, Find PMT)
18. HOW DO I SAVE MORE FOR RETIREMENT?
1. Automatic Saving: The easiest way to save more for retirement is to use similar method as TAP and SCP, ie. automatic contributions to your accounts when you receive your salary. You can set up a separate account with your bank of choice specifically for retirement savings and create a *Standing Instruction (SI) to credit a portion of your salary to the account. *SI between banks may incur additional cost.
2. Voluntary Contributions: You can also increase your contributions to TAP and/or SCP via Voluntary Contribution and contribute consistently. You can start small, for example, you can save 1 percent more, or $10 more, and you may also want to get in the habit of increasing your contributions consistently, either every six months, or when you get a raise.
3. Save cash windfalls: If you receive windfalls of cash (eg. Inheritance, prize money, or so on), make a habit of putting a portion of it aside for retirement.
4. Avoid withdrawals of fund: Avoid early withdrawals of your TAP/SCP funds as this will deplete your savings for retirement.
5. Increase income: One way you can set aside more for retirement is by increasing your income. You can find a part-time job or start a small business that can generate more income.
6. Seek expert advise: Seek advise from Financial Planners as they will assess your financial health in more details, make recommendations for your financial goals, and monitor your financial standings – you may get in touch with Financial Planners who are certified through the Financial Planning Association of Brunei Darussalam (FPAB) or other Financial Institutions.
19. WHAT IS THE SOURCE OF MY RETIREMENT INCOME?
For TAP members, a part of their retirement income comes from their funds in TAP and/or SCP.
Besides TAP and SCP, an individual may also obtain their retirement income from:
1. Separate savings account with banks
4. Part-time job
5. Stocks / Investments