By Genevieve Cua
10 Dec 2018
SOURCE: The Business Times © Singapore Press Holdings Limited.
THERE is a wealth of literature and products to help you save for retirement, but what happens when you are in retirement is something of a void.
How will you invest your assets for the years when income from work ceases? How much can you withdraw to ensure you don't outlive your savings? What happens if there is a major downturn just as retirement begins?
Large fund houses in the US such as JP Morgan Asset Management have begun to offer products that cater for the "decumulation'' phase - that is, when the portfolio still needs to be invested, but investors withdraw an income at the same time.
BlackRock expects to launch a product in the US next year, "but the technology and framework will work in Singapore too'', the group's chairman and chief executive Larry Fink told BT when he was in Singapore last month. "As people live longer, the fact that we historically thought we should only be in bonds when we retire is crazy. But the key is not just asset allocation. Wouldn't you feel better if we can tell you how much money you'd earn every month in decumulation phase?''
In Singapore, unit trusts are generally designed for the accumulation phase, although there are funds with an income objective. Some funds indicate a yield objective such as 4 or 5 per cent, and distributions are made accordingly even if it means dipping into capital to fulfil the distribution objective.
The insurance sector does offer a number of options for those who want to plan for an income withdrawal in retirement. These are generally structured as endowments, where you can choose the premium payment period and the age at which withdrawals begin. You can choose the duration of income withdrawal. The endowments are par or participating products, which means the funds are collectively invested by the insurer, and policyholders typically receive a combination of guaranteed and non-guaranteed returns.
The attractions of an endowment are that the policy's mechanism of smoothed returns shields investors from volatility, and there is the comfort of a guaranteed component of returns. It will be costly, however, to use endowments for the bulk of retirement income needs.
Here are some risks to plan for:
Longevity
As Singaporeans live longer, how many years in retirement should you plan for? JPAM's research on Singapore retirement says there is a 56 per cent chance that a 65-year-old couple could live past 90 and a 7 per cent chance of living past 100. It says if you have a family history of longevity, you should conservatively plan for 30 years or more of living expenses.
There is a silver lining, however. Wina Appleton, JPAM Asia Pacific retirement strategist, says the typical rule of thumb of planning to replace 70 per cent of your last drawn pay is simply "not true''. Drawing from the Department of Statistics' Household Expenditure Survey, it finds that household expenditure peaks at around 50 and begins to decline at a faster pace at 55.
"The spending needs are very different in retirement. The good news is people spend less,'' she says. This is partly because children become financially independent, and the household size becomes smaller.
In the accompanying chart (Income replacement rate methodology), the light blue portions of the bars represent the annuity expected from CPF Life. The darker blue represents the actual income replacement proportion needed. It says CPF Life alone is not sufficient to maintain your lifestyle in retirement. Hence, private savings are needed.
The higher one's household income, the lower the income replacement ratio, although the absolute amount to be replaced is higher. Based on JPAM's analysis at around age 60, the household expenditure is estimated at roughly S$4,000 a month.
JPAM has come up with an indication of how much savings you should have built up at your current age, in order to maintain a similar lifestyle in retirement. The calculations assume 2 per cent inflation a year, annual returns of 5.5 per cent, annual contribution to savings of 10 per cent, and a 30-year withdrawal period.
For example, a 40-year-old couple today with household income of S$10,000 will need to have capital of S$410,000. The capital sum at age 65 is estimated at about S$1.4 million, which assumes a monthly withdrawal for the next 30 years at a 60 per cent income replacement ratio, discounted back to age 65. The actual accumulated sum at 65 should be around S$2 million when inflation is taken into account.
Providend chief Christopher Tan uses a proprietary framework RetireWell to calculate retirement needs. In its system, funds are invested into buckets. There is an income bucket for immediate income needs which is invested conservatively. Other buckets have progressively longer horizons and can take on more risk.
"What all this means is that with a higher return on investment at retirement age, and lower income needed in later years, the lump sum needed at retirement is lower… But in our experience most clients prefer a higher income stream in the early years of retirement while they are strong and healthy, so they can do what they always wanted to do, such as travel, while opting for a lower income later.''
Investment risk/Sequence of return risk
This is the risk that you are hit with poor returns in the first few years of retirement. Based on calculations by the Capital Group, assuming an investment of US$500,000 in the S&P500 and monthly withdrawals of US$20,000, the actual chronological order of return between 1999 and 2014 would result in a relatively poorer outcome, as the investor was hit with a market downturn in 2000 -2002 from which the portfolio never recovered.
If the return picture was reversed - that is, the return of 2014 happened in 1999 and so on - the outcome would be much different. The portfolio would end with a value of US$566,000 compared to US$213,000 in the actual chronological order.
Says Capital Group investment director Andy Budden: "The lesson is that a downturn early in retirement can hurt, but good returns early in retirement can really help. The reason is that so much of the person's total portfolio is held in the market at that point and so is subject to market forces… Similarly, very late in retirement, a huge portion of the previous portfolio value has been spent or withdrawn so a market downturn can't affect it.''
The sequence of return risk is one reason when one is near or in retirement, it is prudent to have more assets in lower-risk investments. In any case, a downturn early in portfolio when an investor has begun to withdraw for income means that the portfolio has to make up for both the market decline and withdrawals.
"If a strong upturn doesn't restore the portfolio, subsequent fixed amount withdrawals will represent a greater percentage of the remaining portfolio. Often this is not sustainable and the portfolio begins a downward trend that can be irreversible,'' says Mr Budden.
Still, Bradley Vogt, portfolio manager of the Capital Group, maintains there is a place for equities post-retirement. "We think investors in retirement can't just go into cash, but they need the right types of stocks...'' These include blue chips with stable higher dividends.
Withdrawal rate
Most retirement studies posit a withdrawal rate of 4 or 5 per cent. JPAM advocates a flexible approach taking into account market returns.
In its post-retirement product SmartSpending in the US, Ms Appleton says the firm gives advice annually on how much can be withdrawn. "We have a target spend-down year where the portfolio becomes zero.
Annually we give advice on how much we think can be withdrawn to stay on track.''
Mr Vogt says withdrawal rates will depend on the "total life picture''. "There are fundamentals. One looks at the yield of the portfolio and thinks of an amount that corresponds to the yield. If you take out more than that, you hope capital appreciation will make up for it. In recent times interest rates have been so low; equity markets were high, and dividends low. If you do a 4 per cent programme you need to hope markets keep going up.''
Retirees who are willing to draw down completely on the portfolio should be able to enjoy a higher withdrawal rate.
Showing posts with label Retirement. Show all posts
Showing posts with label Retirement. Show all posts
Monday, December 10, 2018
Tuesday, June 27, 2017
How to fast-track your retirement
21/06/17, 12:18 pm
(June 21): Some people dislike working. They prefer to retire as soon as possible. This article is for them. To fast-track something is not easy. It requires one to take actions that defy conventional wisdom.
First, “Always be a business owner, not a lender”.
The easiest way to own a business is to buy shares in the stock market. If you own a share, it means you are a business owner.
Businesses earn the highest returns. The median return on equity of Singapore listed companies is 9%. If you choose to lend money, fixed deposits give you 1% and risky corporate bonds give you 5%.
You get measly returns from being a lender, so be a business owner. Sometimes, the risk you take from buying poor-quality corporate bonds is as much as being a business owner. To retire early, own a business.
Second, “Put 100% of cash you don’t need into stocks”.
Don’t invest in commodities, gold,land-banking, overseas properties, doughnut shops, hipster cafés, fixed deposits, bonds and flavour-of-the-month unit trusts.
If you do that, your overall portfolio average return will be 2% per year. $100,000 growing at 2% for 10 years is going to be $122,000.
Instead, putting $100,000 into stocks will net you $216,000 over 10 years at an 8% rate of return. The 8% return is the long-term average of the Singapore stock market. $122,000 versus $216,000? You decide.
Third, “Invest only in small capitalisation value stocks”.
Small capitalisation means small companies. Value is short for “value investing”. Value means stocks that have characteristics such as low price-to-earnings ratios, low price-to-book ratios and high dividend yields. Study after study has demonstrated that they give the best returns over the long term.
If you want to achieve returns of 10% or more per annum, buy small capitalisation value stocks.
Fourth, “Be massively diversified. Own at least 100 stocks in different countries and industries”.
Most investors have only 10 to 15 stocks. If you have 10 to 15 stocks, you will form an emotional bond with your stocks. If one of them were sick, you would not be able to sleep at night. When you have an emotional bond, you will make mistakes — such as not cutting losses when something is evidently wrong and holding on to your winners till they become losers.
Instead, have at least 100. Don’t just invest in Singapore stocks. Go regional, or even global. Invest in Hong Kong, China, Thailand, Korea and so on. Go to the country that is having a cheap sale in stocks.
Treat your stocks like a farmer treatshis 100 chickens. When they are fattened, slaughter them and bring them to the market. Do not ever give a name to your chickens, or stocks; they are not your pets.
Fifth, “To master risk, change the way you think about risk”.
When you see your share price drop, it does not mean that you participated in a risky activity and you are now paying the price. It just means that some dummy who does not understand the true value of the stock sold it, and someone smarter on the other side of the transaction who understands fair value bought it. The seller probably sold it because he is a nervous chap and he is very worried about The Donald, May, North Korea, Global Warming and the Monster Under His Bed.
Sixth, “The Way to Wealth: Value Investing”.
Value investing means buying a stock for 50 cents when its true value is one dollar. Why would anyone sell to you for 50 cents? Either they are mad, scared, or both. Humans go berserk from time to time. When that happens, relieve their anxiety and pay them their 50 cents for a dollar’s worth of stock.
Seventh, “Penny pinch. Use that money to buy stocks”.
You don’t need that German car. Buy stocks instead.
Link:
http://www.theedgemarkets.com.sg/native-adhomepage-carousel/how-fast-track-your-retirement
(June 21): Some people dislike working. They prefer to retire as soon as possible. This article is for them. To fast-track something is not easy. It requires one to take actions that defy conventional wisdom.
First, “Always be a business owner, not a lender”.
The easiest way to own a business is to buy shares in the stock market. If you own a share, it means you are a business owner.
Businesses earn the highest returns. The median return on equity of Singapore listed companies is 9%. If you choose to lend money, fixed deposits give you 1% and risky corporate bonds give you 5%.
You get measly returns from being a lender, so be a business owner. Sometimes, the risk you take from buying poor-quality corporate bonds is as much as being a business owner. To retire early, own a business.
Second, “Put 100% of cash you don’t need into stocks”.
Don’t invest in commodities, gold,land-banking, overseas properties, doughnut shops, hipster cafés, fixed deposits, bonds and flavour-of-the-month unit trusts.
If you do that, your overall portfolio average return will be 2% per year. $100,000 growing at 2% for 10 years is going to be $122,000.
Instead, putting $100,000 into stocks will net you $216,000 over 10 years at an 8% rate of return. The 8% return is the long-term average of the Singapore stock market. $122,000 versus $216,000? You decide.
Third, “Invest only in small capitalisation value stocks”.
Small capitalisation means small companies. Value is short for “value investing”. Value means stocks that have characteristics such as low price-to-earnings ratios, low price-to-book ratios and high dividend yields. Study after study has demonstrated that they give the best returns over the long term.
If you want to achieve returns of 10% or more per annum, buy small capitalisation value stocks.
Fourth, “Be massively diversified. Own at least 100 stocks in different countries and industries”.
Most investors have only 10 to 15 stocks. If you have 10 to 15 stocks, you will form an emotional bond with your stocks. If one of them were sick, you would not be able to sleep at night. When you have an emotional bond, you will make mistakes — such as not cutting losses when something is evidently wrong and holding on to your winners till they become losers.
Instead, have at least 100. Don’t just invest in Singapore stocks. Go regional, or even global. Invest in Hong Kong, China, Thailand, Korea and so on. Go to the country that is having a cheap sale in stocks.
Treat your stocks like a farmer treatshis 100 chickens. When they are fattened, slaughter them and bring them to the market. Do not ever give a name to your chickens, or stocks; they are not your pets.
Fifth, “To master risk, change the way you think about risk”.
When you see your share price drop, it does not mean that you participated in a risky activity and you are now paying the price. It just means that some dummy who does not understand the true value of the stock sold it, and someone smarter on the other side of the transaction who understands fair value bought it. The seller probably sold it because he is a nervous chap and he is very worried about The Donald, May, North Korea, Global Warming and the Monster Under His Bed.
Sixth, “The Way to Wealth: Value Investing”.
Value investing means buying a stock for 50 cents when its true value is one dollar. Why would anyone sell to you for 50 cents? Either they are mad, scared, or both. Humans go berserk from time to time. When that happens, relieve their anxiety and pay them their 50 cents for a dollar’s worth of stock.
Seventh, “Penny pinch. Use that money to buy stocks”.
You don’t need that German car. Buy stocks instead.
Link:
http://www.theedgemarkets.com.sg/native-adhomepage-carousel/how-fast-track-your-retirement
Monday, March 7, 2016
Putting retirement savings in equities pays off in long run
Teh Hooi Ling
Mar 6, 2016, 5:00 am SGT
By stretching out investment period and making small withdrawals, impact of market volatility is greatly reduced
With the stock markets being so volatile in the past six months or so, people who have their retirement savings in equities must be going through an anxious period.
The most common piece of advice financial advisers have for individuals is to start saving when they are young, and to let the savings compound with time.
With interest rates being so low, putting one's money in fixed deposits is a very inefficient way of achieving the compounding effect. Consider this: It takes 72 years to double your savings from say, $100,000 to $200,000 at an interest rate of 1 per cent a year.
However, if you can find a way to grow your money at 10 per cent a year, your $100,000 would grow to $200,000 in less than eight years. In 24 years, your $100,000 would have grown to some $1 million. That's the magic of compounding.
One way of letting the money compound at a faster rate is via the stock market. However, this route entails significant volatility, as we have witnessed in the last six months and in various episodes in the past, for example, during the global financial crisis, the Sars epidemic and the Asian financial crisis, to name just three.
Now, let's take a look at how market volatility impacts one's retirement savings. Let's assume that the analysis is done using the Straits Times Index (STI), with dividends reinvested. No transaction costs are taken into consideration.
Let's say the retirement savings plan entails putting $10,000 each quarter into the STI for 20 years, with dividends reinvested.
That's $40,000 a year over 20 years. So the principal amounts to $800,000.
The good news is, over a 20-year period, every single person who has consistently put money into the stock market quarterly would have managed to have a pot which is bigger than the capital put in. Most people would end up with a retirement sum of $1.95 million - double the principal they put in.
The not-so-good news is, depending on when one starts investing in the market and when one retires, the outcome at the end of 20 years can vary significantly. It can mean a difference as large as $1.6 million.
The lucky person, let's call her Jane, who started investing, say in the third quarter of 1987, would have had a pot of $2.7 million after her retirement as at the third quarter of 2007. That was the peak of the market just before the global financial crisis.
However, the person who joined the workforce just four years earlier and started investing in the first quarter of 1983, let's call her Mary, would end up with a retirement pot of just $1.1 million as at the first quarter of 2003. That was when the Singapore market was depressed from fears of the Sars epidemic.
SEQUENCE RISK IN RETIREMENT SAVINGS
This is called sequence risk. A saver may earn a different sequence of returns during the accumulation phase and that made a world of difference to the final outcome. In Mary's case, even though she got good returns early in her savings plan, she suffered bad returns near her retirement, when her account balance was higher. Jane, however, was lucky to have caught the bull run from 2004 till 2007.
Here is how the two retirement savings plans grew over time.
Mary would have got very miserable returns for her 20 years of diligent saving had she withdrawn all her money as soon as she retired.
However, if she left the bulk of the money in the market, and took out just 5 per cent, or $55,000, to fund her living expenses that year, and continued to take out just 5 per cent of the portfolio value every year since, her portfolio as of today would be worth much more.
Between 2003 and 2015, Mary would have taken out $1.5 million to spend, and as at Feb 29 this year, her portfolio would be worth $2.1 million. Mind you, this is valued based on rather depressed pricing for the STI currently.
As for Jane, she would have done better had she taken out her entire retirement pot at the peak of the market. But she had to have the courage to reinvest the entire pool back when the market corrected. Had she not, she would most likely be worse off in a few years' time.
Let's assume she had taken out her total pool of $2.7 million and put all the money in a fixed deposit that yielded her 1 per cent a year from 2007 until now, and that she took out 5 per cent from her pool every year. By now, she would have taken out $1.07 million and her pool would be $1.77 million.
The amount she is withdrawing reduces by the year as her pool shrinks since her interest is not compounding as fast as her 5 per cent withdrawal every year.
In comparison, had Jane left the money in the market as Mary had done, she would have taken out a slightly smaller sum of $969,000 between 2007 and now, and her portfolio is worth $1.69 million as at Feb 29 this year.
Again, market valuations as of now are pretty depressed and there is a very high chance that they will recover.
Notice also that Mary's retirement pot today is larger than Jane's. Starting early does pay.
To recap, for retirement savings, end-of-period market valuation makes a difference if one decides to withdraw the entire sum at that point. It is less decisive if it is a piecemeal redemption.
And for a plan of constant investment over a 20-year period, the starting market valuation doesn't really make a big difference either.
The takeaway is: Stretching out the investment period and making piecemeal redemptions take the stress out of managing one's retirement fund and one will not be held ransom emotionally and psychologically to market gyrations.
That is from the comfort of knowing that one will never run out of money with 5 per cent redemptions a year from a pool invested in a basket of productive and decently priced companies. So one can tune out the market noise.
•The writer is a partner in Aggregate Asset Management, manager of a no-management-fee Asia value fund, and author of Show Me The Money - Fighting Paralysis In A Market Meltdown.
Mar 6, 2016, 5:00 am SGT
By stretching out investment period and making small withdrawals, impact of market volatility is greatly reduced
With the stock markets being so volatile in the past six months or so, people who have their retirement savings in equities must be going through an anxious period.
The most common piece of advice financial advisers have for individuals is to start saving when they are young, and to let the savings compound with time.
With interest rates being so low, putting one's money in fixed deposits is a very inefficient way of achieving the compounding effect. Consider this: It takes 72 years to double your savings from say, $100,000 to $200,000 at an interest rate of 1 per cent a year.
However, if you can find a way to grow your money at 10 per cent a year, your $100,000 would grow to $200,000 in less than eight years. In 24 years, your $100,000 would have grown to some $1 million. That's the magic of compounding.
One way of letting the money compound at a faster rate is via the stock market. However, this route entails significant volatility, as we have witnessed in the last six months and in various episodes in the past, for example, during the global financial crisis, the Sars epidemic and the Asian financial crisis, to name just three.
Now, let's take a look at how market volatility impacts one's retirement savings. Let's assume that the analysis is done using the Straits Times Index (STI), with dividends reinvested. No transaction costs are taken into consideration.
Let's say the retirement savings plan entails putting $10,000 each quarter into the STI for 20 years, with dividends reinvested.
That's $40,000 a year over 20 years. So the principal amounts to $800,000.
The good news is, over a 20-year period, every single person who has consistently put money into the stock market quarterly would have managed to have a pot which is bigger than the capital put in. Most people would end up with a retirement sum of $1.95 million - double the principal they put in.
The not-so-good news is, depending on when one starts investing in the market and when one retires, the outcome at the end of 20 years can vary significantly. It can mean a difference as large as $1.6 million.
The lucky person, let's call her Jane, who started investing, say in the third quarter of 1987, would have had a pot of $2.7 million after her retirement as at the third quarter of 2007. That was the peak of the market just before the global financial crisis.
However, the person who joined the workforce just four years earlier and started investing in the first quarter of 1983, let's call her Mary, would end up with a retirement pot of just $1.1 million as at the first quarter of 2003. That was when the Singapore market was depressed from fears of the Sars epidemic.
SEQUENCE RISK IN RETIREMENT SAVINGS
This is called sequence risk. A saver may earn a different sequence of returns during the accumulation phase and that made a world of difference to the final outcome. In Mary's case, even though she got good returns early in her savings plan, she suffered bad returns near her retirement, when her account balance was higher. Jane, however, was lucky to have caught the bull run from 2004 till 2007.
Here is how the two retirement savings plans grew over time.
Mary would have got very miserable returns for her 20 years of diligent saving had she withdrawn all her money as soon as she retired.
However, if she left the bulk of the money in the market, and took out just 5 per cent, or $55,000, to fund her living expenses that year, and continued to take out just 5 per cent of the portfolio value every year since, her portfolio as of today would be worth much more.
Between 2003 and 2015, Mary would have taken out $1.5 million to spend, and as at Feb 29 this year, her portfolio would be worth $2.1 million. Mind you, this is valued based on rather depressed pricing for the STI currently.
As for Jane, she would have done better had she taken out her entire retirement pot at the peak of the market. But she had to have the courage to reinvest the entire pool back when the market corrected. Had she not, she would most likely be worse off in a few years' time.
Let's assume she had taken out her total pool of $2.7 million and put all the money in a fixed deposit that yielded her 1 per cent a year from 2007 until now, and that she took out 5 per cent from her pool every year. By now, she would have taken out $1.07 million and her pool would be $1.77 million.
The amount she is withdrawing reduces by the year as her pool shrinks since her interest is not compounding as fast as her 5 per cent withdrawal every year.
In comparison, had Jane left the money in the market as Mary had done, she would have taken out a slightly smaller sum of $969,000 between 2007 and now, and her portfolio is worth $1.69 million as at Feb 29 this year.
Again, market valuations as of now are pretty depressed and there is a very high chance that they will recover.
Notice also that Mary's retirement pot today is larger than Jane's. Starting early does pay.
To recap, for retirement savings, end-of-period market valuation makes a difference if one decides to withdraw the entire sum at that point. It is less decisive if it is a piecemeal redemption.
And for a plan of constant investment over a 20-year period, the starting market valuation doesn't really make a big difference either.
The takeaway is: Stretching out the investment period and making piecemeal redemptions take the stress out of managing one's retirement fund and one will not be held ransom emotionally and psychologically to market gyrations.
That is from the comfort of knowing that one will never run out of money with 5 per cent redemptions a year from a pool invested in a basket of productive and decently priced companies. So one can tune out the market noise.
•The writer is a partner in Aggregate Asset Management, manager of a no-management-fee Asia value fund, and author of Show Me The Money - Fighting Paralysis In A Market Meltdown.
Saturday, March 5, 2016
Why Trading in Retirement Is a Bad Idea
By JOHN F. WASIK
MARCH 4, 2016
You have a significant retirement portfolio, it’s yours to manage and you have time on your hands. You’re a smart person and you’re sure you can beat the market — or at least do better than a boring basket of mutual funds and income investments.
That’s what Elmer Naples, 75, a former utility company engineer in Trenton, said he was thinking when he retired 20 years ago. Then the stock market started doing its trapeze act and he thought better of his plan and switched to a fee-only financial planner 10 years ago.
“I tried everything,” Mr. Naples recalled. “I owned stocks, mutual funds, C.D.s, bonds, diamonds and silver. I was handling all of our finances at first, then I got a little tired of the stock market. I wanted to put things on automatic.”
Like millions of retirees, Mr. Naples used his time to research investments that he hoped would preserve and increase his wealth. And like millions of others, he learned that it’s hard for an individual investor — even a retired one with lots of spare time — to outdo the pros and beat the market’s maddening volatility.
The Achilles’ heel for investors in retirement is a punishing stock market downturn that reduces not only their income stream but also their total wealth. Even the most astute individual investors have a hard time seeing bubbles inflating and knowing when to get out. They may even be part of the bubble inflation.
According to findings by the researchers Terrance Odean, Eduardo Andrade and Shengle Lin, investors naturally get excited by investing during bubbles and are often blinded by emotion. They may not understand how vulnerable they are when the bubble pops.
“Rapid, unexpected increases in wealth during the appreciation phase of asset pricing bubbles can lead investors to experience intense, positive emotions,” the researchers found. If they’re excited about, say, tech stocks, they buy more of them.
When markets turn sour, though, and professional investors are buying stocks whose prices have fallen, many individual investors retreat to the sidelines. For those in retirement, this is a sure way to underperform the market and often lose money. Because no one quite knows when it’s time to leave an inflated market or when to return and shop for bargains, millions of people guess wrong or follow the current trend. Market timing is a mug’s game.
Indeed, in the 2008-9 sell-off, willingness to take “above-average or substantial investment risk” fell to 19 percent in 2009 from 23 percent in mid-2008, according to the Investment Company Institute, a mutual fund trade group. The appetite for risk didn’t return to pre-crash levels until 2013 — and those who stayed out of the market missed most of the rebound in share prices of American stocks.
George A. Akerlof and Robert J. Shiller, Nobel laureates and the authors of “Phishing for Phools: The Economics of Manipulation and Deception,” call the siren call of Wall Street’s latest darlings “phishing.” That’s when a profit can be made off deception, enthusiasm, weakness and greed. Too many investors believe the narrative of the next best thing or easy money, derailing millions of retirement portfolios.
“It’s the world’s oldest story,” said Professor Akerlof, who is now at Georgetown University. “Someone’s always dangling an apple, and that snake decided to be there.”
When it comes to investing, he noted, people love stories. What company will make everyone’s life easier, connect the world and cure disease? “Stories get people to buy,” Professor Akerlof said. “But when the story goes viral — or becomes a New Yorker cartoon — it’s time to sell.”
How many retirees have the discipline to resist compelling narratives, especially when they have a lot of time to think about them? Not many, which builds a case for either studied self-discipline, such as a firm, long-term investment strategy, or employing an outside adviser.
In Mr. Naples’s case, after careful consideration he and his wife hired Len Hayduchok, a fee-based certified financial planner based in Hamilton, N.J., who set them up with a passively managed portfolio and counseled them on their financial and estate goals.
“For some folks, investing might be something they’re qualified to do,” Mr. Hayduchok said. “But many underestimate the expertise needed. The average investor gets returns that are half of the benchmark.”
At the very least, a qualified third party such as a financial planner or a registered investment adviser can take a lot of decisions off the table.
No longer will you have to worry about whether you are buying into a bubble or need to know when to get out. The focus will be on your long-term goals and not short-term headlines or manias. Besides, you stand little chance of success in an age of high-frequency trading and mountains of real-time information being absorbed by big traders every second of the day.
“Most normal buyers should do buy-and-hold,” Professor Akerlof recommended. He said he invested his own retirement money in index mutual funds.
“Adopt a strategy that’s ‘phool-proof’ and go for long-term investing,” he suggested. That means holding wide swaths of global stocks, bonds and real estate through mutual and exchange-traded funds sold by BlackRock (iShares), Dimensional Fund Advisors, Fidelity Investments, State Street Global Advisors (SPDRs), Charles Schwab and the Vanguard Group.
Still, investors might keep their hands in managing if they trade with no more than 10 percent of their portfolio. You may be able to insulate yourself by buying stocks with solid dividends and reinvesting the quarterly payments in new shares commission-free, through dividend reinvestment plans. You can often snag bargains when the market dips, as it did in the first weeks of this year.
For the bulk of your portfolio, how do you find a professional who will shield you from your worst instincts? Seek out a fiduciary — that is, someone legally obligated to put your best interests first. They should not receive a commission from selling you anything. They can charge by the hour, a flat fee or a percentage fee based on annual assets under management.
A financial planner, a chartered financial analyst or a personal financial adviser can draft and maintain a holistic financial plan that takes into account taxes, income,estate planning and other financial considerations. At the very minimum, a financial adviser who identifies, analyzes and respects your long-term goals — and keeps you on track — may be worth the investment.
MARCH 4, 2016
You have a significant retirement portfolio, it’s yours to manage and you have time on your hands. You’re a smart person and you’re sure you can beat the market — or at least do better than a boring basket of mutual funds and income investments.
That’s what Elmer Naples, 75, a former utility company engineer in Trenton, said he was thinking when he retired 20 years ago. Then the stock market started doing its trapeze act and he thought better of his plan and switched to a fee-only financial planner 10 years ago.
“I tried everything,” Mr. Naples recalled. “I owned stocks, mutual funds, C.D.s, bonds, diamonds and silver. I was handling all of our finances at first, then I got a little tired of the stock market. I wanted to put things on automatic.”
Like millions of retirees, Mr. Naples used his time to research investments that he hoped would preserve and increase his wealth. And like millions of others, he learned that it’s hard for an individual investor — even a retired one with lots of spare time — to outdo the pros and beat the market’s maddening volatility.
The Achilles’ heel for investors in retirement is a punishing stock market downturn that reduces not only their income stream but also their total wealth. Even the most astute individual investors have a hard time seeing bubbles inflating and knowing when to get out. They may even be part of the bubble inflation.
According to findings by the researchers Terrance Odean, Eduardo Andrade and Shengle Lin, investors naturally get excited by investing during bubbles and are often blinded by emotion. They may not understand how vulnerable they are when the bubble pops.
“Rapid, unexpected increases in wealth during the appreciation phase of asset pricing bubbles can lead investors to experience intense, positive emotions,” the researchers found. If they’re excited about, say, tech stocks, they buy more of them.
When markets turn sour, though, and professional investors are buying stocks whose prices have fallen, many individual investors retreat to the sidelines. For those in retirement, this is a sure way to underperform the market and often lose money. Because no one quite knows when it’s time to leave an inflated market or when to return and shop for bargains, millions of people guess wrong or follow the current trend. Market timing is a mug’s game.
Indeed, in the 2008-9 sell-off, willingness to take “above-average or substantial investment risk” fell to 19 percent in 2009 from 23 percent in mid-2008, according to the Investment Company Institute, a mutual fund trade group. The appetite for risk didn’t return to pre-crash levels until 2013 — and those who stayed out of the market missed most of the rebound in share prices of American stocks.
George A. Akerlof and Robert J. Shiller, Nobel laureates and the authors of “Phishing for Phools: The Economics of Manipulation and Deception,” call the siren call of Wall Street’s latest darlings “phishing.” That’s when a profit can be made off deception, enthusiasm, weakness and greed. Too many investors believe the narrative of the next best thing or easy money, derailing millions of retirement portfolios.
“It’s the world’s oldest story,” said Professor Akerlof, who is now at Georgetown University. “Someone’s always dangling an apple, and that snake decided to be there.”
When it comes to investing, he noted, people love stories. What company will make everyone’s life easier, connect the world and cure disease? “Stories get people to buy,” Professor Akerlof said. “But when the story goes viral — or becomes a New Yorker cartoon — it’s time to sell.”
How many retirees have the discipline to resist compelling narratives, especially when they have a lot of time to think about them? Not many, which builds a case for either studied self-discipline, such as a firm, long-term investment strategy, or employing an outside adviser.
In Mr. Naples’s case, after careful consideration he and his wife hired Len Hayduchok, a fee-based certified financial planner based in Hamilton, N.J., who set them up with a passively managed portfolio and counseled them on their financial and estate goals.
“For some folks, investing might be something they’re qualified to do,” Mr. Hayduchok said. “But many underestimate the expertise needed. The average investor gets returns that are half of the benchmark.”
At the very least, a qualified third party such as a financial planner or a registered investment adviser can take a lot of decisions off the table.
No longer will you have to worry about whether you are buying into a bubble or need to know when to get out. The focus will be on your long-term goals and not short-term headlines or manias. Besides, you stand little chance of success in an age of high-frequency trading and mountains of real-time information being absorbed by big traders every second of the day.
“Most normal buyers should do buy-and-hold,” Professor Akerlof recommended. He said he invested his own retirement money in index mutual funds.
“Adopt a strategy that’s ‘phool-proof’ and go for long-term investing,” he suggested. That means holding wide swaths of global stocks, bonds and real estate through mutual and exchange-traded funds sold by BlackRock (iShares), Dimensional Fund Advisors, Fidelity Investments, State Street Global Advisors (SPDRs), Charles Schwab and the Vanguard Group.
Still, investors might keep their hands in managing if they trade with no more than 10 percent of their portfolio. You may be able to insulate yourself by buying stocks with solid dividends and reinvesting the quarterly payments in new shares commission-free, through dividend reinvestment plans. You can often snag bargains when the market dips, as it did in the first weeks of this year.
For the bulk of your portfolio, how do you find a professional who will shield you from your worst instincts? Seek out a fiduciary — that is, someone legally obligated to put your best interests first. They should not receive a commission from selling you anything. They can charge by the hour, a flat fee or a percentage fee based on annual assets under management.
A financial planner, a chartered financial analyst or a personal financial adviser can draft and maintain a holistic financial plan that takes into account taxes, income,estate planning and other financial considerations. At the very minimum, a financial adviser who identifies, analyzes and respects your long-term goals — and keeps you on track — may be worth the investment.
Tuesday, March 1, 2016
S$10 a Day, Retire the Smart Way Time To Take Action
According to a study by DBS Bank , a large percentage of Singaporeans have thought about retirement and hope to retire comfortably, but few are taking steps to reach their goals. Over 76% of the 1,000 people surveyed stated retirement as their long-term goal, while only 25% were acting on it(1).
The same study showed that Singaporeans' sentiments towards retirement are that it takes plenty of time, effort and money, yet only pays off far ahead in the future. Furthermore, many Singaporeans lack a proper financial plan.
So what should be your first step towards a comfortable retirement in the future? Just start saving! Even if you have to start small, with just S$10 a day, starting as soon as possible is key.
The Power Of Compounding
Albert Einstein once said that compounding is the eighth wonder of the world. The power behind compounding lies in the snowball effect – it makes your money grow over time.
It is also easy to start doing. Simply start by making regular deposits into a savings account. Imagine that you are a 25-year-old fresh graduate starting your corporate life. You make $3,000 (the average gross monthly salary in Singapore was $3,705 in 2013 ) a month and put aside S$10 a day. Within a month, you would have accumulated $300, and within a year, $3,600. You put that amount into a savings account, which earns you 1%, interest each year, and at the end of 35 years, you would have $151,477 in your account.
What if you invested that same amount in the stock market? The Nikko AM Singapore® Straits Times Index ETF has given returns of approximately 14% since 2009, up till the end of June 2015. Based on this, if you had invested $3,600 in the Singapore Stock Market through the STI-ETF annually for the next 25 years, that would potentially generate a total amount of $746,398 .
Another asset class to consider is real estate through investments in Real Estate Investment Trusts or REITs, which are funds that develop or manage a basket of real estate. There are various types of REITs such as healthcare, residential, hotel, retail, mortgage, industrial and more; and the 34 Singapore-listed REITs offered an average total return of 12.9% in 2014(2).
Additionally, if you were thinking of an annuity that would provide a fixed monthly income for 30 years beginning in 35 years time, setting aside that $3,600 annually into a savings account with an interest of 4% (i.e. CPF-SA savings), will provide $1,000 of annuity income annually for 30 years.
There's no better time than now to start saving. To get yourself used to developing this habit, start with S$10 a day. It's not difficult especially if you have a steady job. You can further challenge yourself by finding ways to cut down on your expenses as well.
3 WAYS TO REDUCE YOUR EXPENSES
Go through your channel subscription; let go of some premium channels if you realise you don't watch them often.Is it worth signing up for an expensive plan to get the latest phone? Consider downgrading to lower plans if it is more cost-effective.Eating out can be costly; try cooking at home more often. This could even lead to a healthier lifestyle.
The future of your happiness lies in your hands. The most important thing you can do for yourself is to make the decision to take charge and start taking positive steps. No matter how small, a step in the right direction brings you closer to achieving your goals.
"The journey of a thousand miles begins with a single step."
The same study showed that Singaporeans' sentiments towards retirement are that it takes plenty of time, effort and money, yet only pays off far ahead in the future. Furthermore, many Singaporeans lack a proper financial plan.
So what should be your first step towards a comfortable retirement in the future? Just start saving! Even if you have to start small, with just S$10 a day, starting as soon as possible is key.
The Power Of Compounding
Albert Einstein once said that compounding is the eighth wonder of the world. The power behind compounding lies in the snowball effect – it makes your money grow over time.
It is also easy to start doing. Simply start by making regular deposits into a savings account. Imagine that you are a 25-year-old fresh graduate starting your corporate life. You make $3,000 (the average gross monthly salary in Singapore was $3,705 in 2013 ) a month and put aside S$10 a day. Within a month, you would have accumulated $300, and within a year, $3,600. You put that amount into a savings account, which earns you 1%, interest each year, and at the end of 35 years, you would have $151,477 in your account.
What if you invested that same amount in the stock market? The Nikko AM Singapore® Straits Times Index ETF has given returns of approximately 14% since 2009, up till the end of June 2015. Based on this, if you had invested $3,600 in the Singapore Stock Market through the STI-ETF annually for the next 25 years, that would potentially generate a total amount of $746,398 .
Another asset class to consider is real estate through investments in Real Estate Investment Trusts or REITs, which are funds that develop or manage a basket of real estate. There are various types of REITs such as healthcare, residential, hotel, retail, mortgage, industrial and more; and the 34 Singapore-listed REITs offered an average total return of 12.9% in 2014(2).
Additionally, if you were thinking of an annuity that would provide a fixed monthly income for 30 years beginning in 35 years time, setting aside that $3,600 annually into a savings account with an interest of 4% (i.e. CPF-SA savings), will provide $1,000 of annuity income annually for 30 years.
There's no better time than now to start saving. To get yourself used to developing this habit, start with S$10 a day. It's not difficult especially if you have a steady job. You can further challenge yourself by finding ways to cut down on your expenses as well.
3 WAYS TO REDUCE YOUR EXPENSES
Go through your channel subscription; let go of some premium channels if you realise you don't watch them often.Is it worth signing up for an expensive plan to get the latest phone? Consider downgrading to lower plans if it is more cost-effective.Eating out can be costly; try cooking at home more often. This could even lead to a healthier lifestyle.
The future of your happiness lies in your hands. The most important thing you can do for yourself is to make the decision to take charge and start taking positive steps. No matter how small, a step in the right direction brings you closer to achieving your goals.
"The journey of a thousand miles begins with a single step."
Wednesday, May 14, 2014
Planning for a sustainable retirement
The Business Times
Lorna Tan
14/5/2014
BUYING an annuity insurance policy is a daunting experience.
That was how I felt when I forked out $100,000 to insurance cooperative NTUC Income in 2011 in return for some peace of mind in my golden years.
It was unnerving not only because I coughed up a six-figure sum as a one-time single premium. It was daunting because, knowing that I'm here on earth on borrowed time, I felt as if I was audaciously negotiating with my maker for a longer life.
After all, it makes sense to buy an annuity only if I believe that I can live (God willing), and am committed to living, a long healthy life.
In 2011, I bought NTUC Income's Guaranteed Life Annuity policy, which is expected to pay a regular guaranteed income - $700 per month or $8,685 per year - from the time I turn 65 till I die.
So the longer I live, the more payouts I get to enjoy from the insurance policy.
But what happens if my "longevity" plan fails?
The policy comes with a death benefit that will be paid to my beneficiaries in one lump sum.
There are two scenarios. If death were to occur before I turn 65, the higher of the single premium or 97 per cent of the premium accumulated with interest and bonuses, is paid.
If death were to occur after the annuity payouts have started, the premium with interest and bonuses accumulated from the time I purchased the policy till my death, less the total annuity payments made, would be refunded.
The interest rate is guaranteed at 2.5 per cent per annum. And what if I change my mind and wish to surrender the policy? I could do so but it is not advisable as buying a life insurance policy, particularly an annuity, is a long-term commitment and an early termination involves high costs.
I would incur a loss if the surrender value is less than the premium paid. I can only "win" from buying the Guaranteed Life Annuity plan if I live a long life.
At least, until I live past 90, which is when I "break even". On a 2.5 per cent interest rate, it takes roughly 25 years for me to recoup, through the annuity payouts, my original $100,000 single premium, which would have compounded to $160,000 by the time I reach my drawdown age of 65.
Some of you may wonder why I bought an annuity.
After all, this would be on top of another annuity plan, the compulsory national annuity scheme called CPF LIFE (Lifelong Income For the Elderly), which Singaporeans or permanent residents born in 1958 or after would be placed on, when they reach 55. Under this scheme, members receive a monthly income for life, starting from their drawdown age.
If you are now a 50-year old male and have the CPF Minimum Sum of $148,000, your default CPF LIFE monthly payout from age 65 would be from $1,157 to $1,283. (The CPF Minimum Sum will be raised to $155,000 from July.)
Women are expected to live longer lives (87 for females, 83 for men) so the payouts based on the current Minimum Sum are lower, projected to be $1,053 to $1,172.
Well, the decision came about after I did an about-turn in my retirement planning.
Like many people in the past, I used to think that retirement planning is all about accumulating a certain magic number - depending on your desired lifestyle - before the drawdown phase kicks in. Not anymore.
As life expectancies increase, thanks to a host of reasons such as advanced medical science, one retirement risk we potentially face is the danger of outliving our nest egg.
It has been reported that for Singaporeans who are 65 today, about half of them are expected to live another 20 years (that is, 85 and beyond), while a third will live beyond 90. Therefore the difficulty of determining this magic retirement sum increases as well, rendering such an approach unsustainable. How much of this lump sum is enough? What if we get our sums wrong?
I used to think I would have achieved financial independence and could call it a day at work when I reach my retirement target of a million dollars.
I was wrong. Faced with a longer life expectancy, the rising cost of living, ongoing support for my ageing parents and an estimated overseas education bill of about $500,000 to be chalked up by my two kids in the coming years, I had to redo my sums.
To mitigate this risk, I've shifted my focus to ensuring lifelong cash flows or income sources - which we can call an income goal - that would fund my golden years, instead of just achieving a certain magic number.
Having an income (better still, if it is inflation-protected) throughout my golden years is now a measure of my success in retirement planning.
This income goal has a few important characteristics:
•The cash flows should be regular and sustainable.
•They should generate enough income for me to live on at all times, whether the economy is up or down.
A good way to get started is to work out the cash flows you need, followed by the crucial step of matching the investments that will generate income sources to fund the desired cash flows.
To make it easy to work out my cash flow needs, I pictured a money pyramid, much like a food pyramid, with the basic subsistence category of needs at the bottom.
Here, I would include essentials, such as food, housing, medical, insurance, utilities, and allowance to parents. It is prudent to project realistically how much you would need (say, $3,500) to sustain these retirement essentials. And I would want to ensure that the income flows required to fund these needs are safe, predictable and guaranteed.
Begin by listing the regular, sustainable and guaranteed recurring income flows (say, $1,500) that you already have and work out the cash flow gap ($2,000), before deciding how this gap could be closed.
This is where the two annuities I own would come in handy as they would potentially provide two streams of "guaranteed" income flows totalling about $1,700 per month.
Other financial instruments that would qualify are bank savings, monies and investments parked in my Supplementary Retirement Scheme account, dividend payments from real estate investment trusts (Reits), coupon payouts from bonds and preferred stocks, and rental income from investment properties.
The next layer in the money pyramid is the category of wants or non-essential items that I could do without if I couldn't afford them, such as cable TV, dining out, shopping, gifts, leisure activities and vacations. The income flows channelled to satisfy these wants would be generated by investments that offer growth and capital appreciation, and may be volatile. Examples are stocks, unit trusts, commodities and hedge funds.
In summary, they would be relatively less safe, less predictable and less guaranteed compared with the investments you match with the cash flows of your essential needs.
The rationale is that as I have taken care of my essentials, I can take more risk with the remainder of my retirement savings. Of course, this would also depend on your risk appetite and capacity. It is easy to fall into the mistake of matching the wrong investments with the different categories of cash flows. For instance, I wouldn't expect my investments in single stocks to fund my essential needs.
Here's why:
Taking a pointer from the financial meltdown in 2008 when stock prices headed south, many retirees who primarily invested in stocks found themselves caught in a situation where they either got out of the stock market with huge losses or gritted their teeth and tried to stay invested for better days.
When their stock investments were unable to immediately generate the cash flows they needed, they faced the dire choices of either going back to work and/or cutting down their expenses drastically.
In a best-case scenario, if I could successfully achieve my income goal, I could live off that income during my lifetime and bequeath my principal savings and assets to my beneficiaries.
Now, that would be planning my retirement sustainably.
The writer is the author of 'More Talk Money' and 'Talk Money', and former Sunday Times Invest editor. She is senior vice-president, corporate communications, at CapitaLand
Lorna Tan
14/5/2014
BUYING an annuity insurance policy is a daunting experience.
That was how I felt when I forked out $100,000 to insurance cooperative NTUC Income in 2011 in return for some peace of mind in my golden years.
It was unnerving not only because I coughed up a six-figure sum as a one-time single premium. It was daunting because, knowing that I'm here on earth on borrowed time, I felt as if I was audaciously negotiating with my maker for a longer life.
After all, it makes sense to buy an annuity only if I believe that I can live (God willing), and am committed to living, a long healthy life.
In 2011, I bought NTUC Income's Guaranteed Life Annuity policy, which is expected to pay a regular guaranteed income - $700 per month or $8,685 per year - from the time I turn 65 till I die.
So the longer I live, the more payouts I get to enjoy from the insurance policy.
But what happens if my "longevity" plan fails?
The policy comes with a death benefit that will be paid to my beneficiaries in one lump sum.
There are two scenarios. If death were to occur before I turn 65, the higher of the single premium or 97 per cent of the premium accumulated with interest and bonuses, is paid.
If death were to occur after the annuity payouts have started, the premium with interest and bonuses accumulated from the time I purchased the policy till my death, less the total annuity payments made, would be refunded.
The interest rate is guaranteed at 2.5 per cent per annum. And what if I change my mind and wish to surrender the policy? I could do so but it is not advisable as buying a life insurance policy, particularly an annuity, is a long-term commitment and an early termination involves high costs.
I would incur a loss if the surrender value is less than the premium paid. I can only "win" from buying the Guaranteed Life Annuity plan if I live a long life.
At least, until I live past 90, which is when I "break even". On a 2.5 per cent interest rate, it takes roughly 25 years for me to recoup, through the annuity payouts, my original $100,000 single premium, which would have compounded to $160,000 by the time I reach my drawdown age of 65.
Some of you may wonder why I bought an annuity.
After all, this would be on top of another annuity plan, the compulsory national annuity scheme called CPF LIFE (Lifelong Income For the Elderly), which Singaporeans or permanent residents born in 1958 or after would be placed on, when they reach 55. Under this scheme, members receive a monthly income for life, starting from their drawdown age.
If you are now a 50-year old male and have the CPF Minimum Sum of $148,000, your default CPF LIFE monthly payout from age 65 would be from $1,157 to $1,283. (The CPF Minimum Sum will be raised to $155,000 from July.)
Women are expected to live longer lives (87 for females, 83 for men) so the payouts based on the current Minimum Sum are lower, projected to be $1,053 to $1,172.
Well, the decision came about after I did an about-turn in my retirement planning.
Like many people in the past, I used to think that retirement planning is all about accumulating a certain magic number - depending on your desired lifestyle - before the drawdown phase kicks in. Not anymore.
As life expectancies increase, thanks to a host of reasons such as advanced medical science, one retirement risk we potentially face is the danger of outliving our nest egg.
It has been reported that for Singaporeans who are 65 today, about half of them are expected to live another 20 years (that is, 85 and beyond), while a third will live beyond 90. Therefore the difficulty of determining this magic retirement sum increases as well, rendering such an approach unsustainable. How much of this lump sum is enough? What if we get our sums wrong?
I used to think I would have achieved financial independence and could call it a day at work when I reach my retirement target of a million dollars.
I was wrong. Faced with a longer life expectancy, the rising cost of living, ongoing support for my ageing parents and an estimated overseas education bill of about $500,000 to be chalked up by my two kids in the coming years, I had to redo my sums.
To mitigate this risk, I've shifted my focus to ensuring lifelong cash flows or income sources - which we can call an income goal - that would fund my golden years, instead of just achieving a certain magic number.
Having an income (better still, if it is inflation-protected) throughout my golden years is now a measure of my success in retirement planning.
This income goal has a few important characteristics:
•The cash flows should be regular and sustainable.
•They should generate enough income for me to live on at all times, whether the economy is up or down.
A good way to get started is to work out the cash flows you need, followed by the crucial step of matching the investments that will generate income sources to fund the desired cash flows.
To make it easy to work out my cash flow needs, I pictured a money pyramid, much like a food pyramid, with the basic subsistence category of needs at the bottom.
Here, I would include essentials, such as food, housing, medical, insurance, utilities, and allowance to parents. It is prudent to project realistically how much you would need (say, $3,500) to sustain these retirement essentials. And I would want to ensure that the income flows required to fund these needs are safe, predictable and guaranteed.
Begin by listing the regular, sustainable and guaranteed recurring income flows (say, $1,500) that you already have and work out the cash flow gap ($2,000), before deciding how this gap could be closed.
This is where the two annuities I own would come in handy as they would potentially provide two streams of "guaranteed" income flows totalling about $1,700 per month.
Other financial instruments that would qualify are bank savings, monies and investments parked in my Supplementary Retirement Scheme account, dividend payments from real estate investment trusts (Reits), coupon payouts from bonds and preferred stocks, and rental income from investment properties.
The next layer in the money pyramid is the category of wants or non-essential items that I could do without if I couldn't afford them, such as cable TV, dining out, shopping, gifts, leisure activities and vacations. The income flows channelled to satisfy these wants would be generated by investments that offer growth and capital appreciation, and may be volatile. Examples are stocks, unit trusts, commodities and hedge funds.
In summary, they would be relatively less safe, less predictable and less guaranteed compared with the investments you match with the cash flows of your essential needs.
The rationale is that as I have taken care of my essentials, I can take more risk with the remainder of my retirement savings. Of course, this would also depend on your risk appetite and capacity. It is easy to fall into the mistake of matching the wrong investments with the different categories of cash flows. For instance, I wouldn't expect my investments in single stocks to fund my essential needs.
Here's why:
Taking a pointer from the financial meltdown in 2008 when stock prices headed south, many retirees who primarily invested in stocks found themselves caught in a situation where they either got out of the stock market with huge losses or gritted their teeth and tried to stay invested for better days.
When their stock investments were unable to immediately generate the cash flows they needed, they faced the dire choices of either going back to work and/or cutting down their expenses drastically.
In a best-case scenario, if I could successfully achieve my income goal, I could live off that income during my lifetime and bequeath my principal savings and assets to my beneficiaries.
Now, that would be planning my retirement sustainably.
The writer is the author of 'More Talk Money' and 'Talk Money', and former Sunday Times Invest editor. She is senior vice-president, corporate communications, at CapitaLand
Sunday, March 30, 2014
Cost to retire in future: $1 MILLION
The Sunday Times
Jonathan Kwok
30/3/2014
One million dollars seems like a huge sum of money to any young adult.
It can probably buy you a small condominium. Or a few cars. I wouldn't even know what I would buy if I had $1 million.
It stretches my imagination to think about how long I will have to work to get to that magical seven-digit sum.
But for those of us starting our working life, we had better hope that we accumulate that amount in the next 30 to 40 years. Because we may all need around $1 million for our retirement.
That was the surprising conclusion last week when I used the retirement estimator on the Central Provident Fund (CPF) website.
My premises were simple. Assume a 25-year-old hoping to stop work at 62 and expecting to live to 83 - the life expectancy for Singapore men.
I assumed that the person would need $2,000 a month in "present dollars" - basically, that after retirement, he would consume the amount of goods and services that $2,000 can buy him today.
The CPF site assumed an inflation rate of 3 per cent and investment returns during retirement of 4 per cent.
And after the number-crunching, the figure of $1.14 million was generated.
"Owing to inflation, your desired monthly income of $2,000 (in today's dollars) would be the equivalent of $5,970 in 2051 when you retire," said the website to the hypothetical 25-year-old.
A smidgeon of good news was in the next paragraph.
"Similarly, the amount of $1.14 million at 62 is the equivalent of $381,000 in today's dollars," the site noted.
Ah, so the future $1 million is not really today's $1 million, if you get what I mean.
That gargantuan retirement sum exists in a future world where a bowl of prawn noodles will cost $10, and a small condo, not less than $3 million.
Fresh university grads had better be earning $10,000 a month by that time.
But still, it is a daunting figure to aim towards.
Who cares about "today's dollars" or "tomorrow's dollars"? The thing is, we better have seven digits in our bank accounts at 62.
If our investments or salaries cannot catch up with the assumed 3 per cent inflation rate, we will in fact be slipping further and further back.
I sure hope the McDonald's fast- food chain still hires older workers when I hit retirement age.
Far from our minds
It is safe to say retirement is one of the furthest things on our minds when we start out in the workforce - and understandably so.
There are a thousand financial commitments that suddenly creep up. The costs associated with getting a job include the daily commute and buying the right attire to look professional if that's your line of work.
There might be study loans to pay, and you may want to contribute financially to your family.
Unsurprisingly then, I was one of the youngest attendees when my company last year organised a talk on retirement planning.
The company had invited a speaker from the MoneySense- Singapore Polytechnic Institute For Financial Literacy.
As she asked for a show of hands, I found out that many of those in the auditorium had served the company loyally for 20, 30 or 40 years.
Those in the "less than 10 years" category, like me, were in the absolute minority.
"Who has time to think about retirement?" many people around my age may ask.
"It's so far away and right now I have so many immediate financial needs."
Unfortunately, such an attitude flies in the face of sound financial advice.
"Ideally, you'd start saving (for retirement) in your 20s, when you first leave school and begin earning pay cheques," said an article by CNN Money. "That's because the sooner you begin saving, the more time your money has to grow."
CNN isn't the first to extol the virtues of compounding and it won't be the last.
Basically, this refers to the ability for our money to snowball over time, as each year's investment returns get more returns in the next year and so on.
We will need all the help we can get from compounding, especially with inflation and longer lifespans.
The life expectancies of men are presumed to be 83 years while women can expect to live to 88, said the speaker at the company talk.
Such longevity should in theory be a blessing, but it can be a nightmare if we outlive our savings.
Many Singaporeans point to their CPF accounts, but really that should just be a part of our savings.
It may be a good idea to squirrel away a few hundred dollars each month just for retirement, leaving the money untouched come what may.
For the more enthusiastic ones, there is the Supplementary Retirement Scheme (SRS) to give tax incentives for retirement saving.
Not so simple
Of course, it is not so simple and there are multiple demands on our finances as we trudge through our 30s, 40s and 50s - making it harder and harder to save.
Planning our exact budgets for the decades to come can also be a headache.
You cannot just take the final retirement sum and divide it by the number of working years, to arrive at a figure of how much to save each year.
It isn't so simple, as our income and expenses will fluctuate throughout.
Alongside the simple retirement estimator that churned out the $1.14 million figure, CPF's website has a more detailed retirement calculator to help you plan your finances.
Using that more complicated calculator is tough, as you have to dig out all your financial details such as all your expenses, assets and liabilities.
Sometimes it turns into a fortune-telling exercise that would baffle the most experienced tarot card reader.
We are asked to impute our expected annual increment and bonuses, and the maximum salaries that we will hit in our lifetimes. I don't know how to pluck these numbers out of thin air.
With real-life personal finance so complicated, it makes the exercise very tedious and the results will have a margin of error.
I didn't complete filling in the calculator. So my retirement plan remains the same: Just save as much as possible and invest prudently.
Of course, critics will point out that this is as haphazard a "plan" as you can get. You can never know if you are saving too little until it is too late, and you find out you need to work beyond retirement.
For the love of a million dollars, I probably should use that complicated retirement calculator. And so should you.
jonkwok@sph.com.sg
--------------------------------------------------------------------------------
Background story
Start saving early
"Ideally, you'd start saving (for retirement) in your 20s, when you first leave school and begin earning pay cheques... That's because the sooner you begin saving, the more time your money has to grow."
Jonathan Kwok
30/3/2014
One million dollars seems like a huge sum of money to any young adult.
It can probably buy you a small condominium. Or a few cars. I wouldn't even know what I would buy if I had $1 million.
It stretches my imagination to think about how long I will have to work to get to that magical seven-digit sum.
But for those of us starting our working life, we had better hope that we accumulate that amount in the next 30 to 40 years. Because we may all need around $1 million for our retirement.
That was the surprising conclusion last week when I used the retirement estimator on the Central Provident Fund (CPF) website.
My premises were simple. Assume a 25-year-old hoping to stop work at 62 and expecting to live to 83 - the life expectancy for Singapore men.
I assumed that the person would need $2,000 a month in "present dollars" - basically, that after retirement, he would consume the amount of goods and services that $2,000 can buy him today.
The CPF site assumed an inflation rate of 3 per cent and investment returns during retirement of 4 per cent.
And after the number-crunching, the figure of $1.14 million was generated.
"Owing to inflation, your desired monthly income of $2,000 (in today's dollars) would be the equivalent of $5,970 in 2051 when you retire," said the website to the hypothetical 25-year-old.
A smidgeon of good news was in the next paragraph.
"Similarly, the amount of $1.14 million at 62 is the equivalent of $381,000 in today's dollars," the site noted.
Ah, so the future $1 million is not really today's $1 million, if you get what I mean.
That gargantuan retirement sum exists in a future world where a bowl of prawn noodles will cost $10, and a small condo, not less than $3 million.
Fresh university grads had better be earning $10,000 a month by that time.
But still, it is a daunting figure to aim towards.
Who cares about "today's dollars" or "tomorrow's dollars"? The thing is, we better have seven digits in our bank accounts at 62.
If our investments or salaries cannot catch up with the assumed 3 per cent inflation rate, we will in fact be slipping further and further back.
I sure hope the McDonald's fast- food chain still hires older workers when I hit retirement age.
Far from our minds
It is safe to say retirement is one of the furthest things on our minds when we start out in the workforce - and understandably so.
There are a thousand financial commitments that suddenly creep up. The costs associated with getting a job include the daily commute and buying the right attire to look professional if that's your line of work.
There might be study loans to pay, and you may want to contribute financially to your family.
Unsurprisingly then, I was one of the youngest attendees when my company last year organised a talk on retirement planning.
The company had invited a speaker from the MoneySense- Singapore Polytechnic Institute For Financial Literacy.
As she asked for a show of hands, I found out that many of those in the auditorium had served the company loyally for 20, 30 or 40 years.
Those in the "less than 10 years" category, like me, were in the absolute minority.
"Who has time to think about retirement?" many people around my age may ask.
"It's so far away and right now I have so many immediate financial needs."
Unfortunately, such an attitude flies in the face of sound financial advice.
"Ideally, you'd start saving (for retirement) in your 20s, when you first leave school and begin earning pay cheques," said an article by CNN Money. "That's because the sooner you begin saving, the more time your money has to grow."
CNN isn't the first to extol the virtues of compounding and it won't be the last.
Basically, this refers to the ability for our money to snowball over time, as each year's investment returns get more returns in the next year and so on.
We will need all the help we can get from compounding, especially with inflation and longer lifespans.
The life expectancies of men are presumed to be 83 years while women can expect to live to 88, said the speaker at the company talk.
Such longevity should in theory be a blessing, but it can be a nightmare if we outlive our savings.
Many Singaporeans point to their CPF accounts, but really that should just be a part of our savings.
It may be a good idea to squirrel away a few hundred dollars each month just for retirement, leaving the money untouched come what may.
For the more enthusiastic ones, there is the Supplementary Retirement Scheme (SRS) to give tax incentives for retirement saving.
Not so simple
Of course, it is not so simple and there are multiple demands on our finances as we trudge through our 30s, 40s and 50s - making it harder and harder to save.
Planning our exact budgets for the decades to come can also be a headache.
You cannot just take the final retirement sum and divide it by the number of working years, to arrive at a figure of how much to save each year.
It isn't so simple, as our income and expenses will fluctuate throughout.
Alongside the simple retirement estimator that churned out the $1.14 million figure, CPF's website has a more detailed retirement calculator to help you plan your finances.
Using that more complicated calculator is tough, as you have to dig out all your financial details such as all your expenses, assets and liabilities.
Sometimes it turns into a fortune-telling exercise that would baffle the most experienced tarot card reader.
We are asked to impute our expected annual increment and bonuses, and the maximum salaries that we will hit in our lifetimes. I don't know how to pluck these numbers out of thin air.
With real-life personal finance so complicated, it makes the exercise very tedious and the results will have a margin of error.
I didn't complete filling in the calculator. So my retirement plan remains the same: Just save as much as possible and invest prudently.
Of course, critics will point out that this is as haphazard a "plan" as you can get. You can never know if you are saving too little until it is too late, and you find out you need to work beyond retirement.
For the love of a million dollars, I probably should use that complicated retirement calculator. And so should you.
jonkwok@sph.com.sg
--------------------------------------------------------------------------------
Background story
Start saving early
"Ideally, you'd start saving (for retirement) in your 20s, when you first leave school and begin earning pay cheques... That's because the sooner you begin saving, the more time your money has to grow."
Sunday, March 23, 2014
How to avoid retirement blues
The Sunday Times
Goh Eng Yeow
23/3/2014
Recently, I took a break from work to attend a two-day workshop designed to equip older working professionals with the know-how to cope financially.
One exercise generated some surprising responses from course participants.
We were asked to work out how a 55-year old breadwinner could continue to support a homemaker wife, a son doing national service and a bedridden mother being looked after by a maid, if he loses his $7,000-a-month job.
To a hard-headed financial writer like myself, the first thing the breadwinner should do is to check if the investment strategy he uses to deploy his $700,000 CPF savings and cash can generate sufficient passive income to carry on with the lifestyle his family is used to.
But other responses were sometimes bizarre, such as the suggestion to bump off the ailing mother in order to send the maid home.
Others were hilarious, like the advice from one person who said the son should live permanently in the army barracks so his room could be rented out for extra income.
But the consensus was that the breadwinner and his wife should both try to get part-time jobs, as their $700,000 nest egg would be insufficient to last them through their golden years even though it seemed like a large sum.
There would also have to be painful adjustments to be made, such as getting rid of the family car and the maid - in short, giving up the lifestyle to which they had become accustomed.
Since this exercise relates to a typical Singaporean family, it is a chilling reminder of the fate which may befall us if we fail to do proper financial planning while still gainfully employed.
It is also a problem which may become more prevalent, since Singaporeans aged between 45 and 64 make up about 29.5 per cent of the resident population.
A report released last year by the Institute of Policy Studies, based on interviews with 5,000 senior citizens in 2011, sheds some light on the financial issues faced after retirement.
It noted that one in five respondents had no savings by the end of each month. For those aged 75 and older, the figure rose to an even more worrying 40 per cent. Among the respondents looking for a job after retiring, more than half said they needed money for current expenses.
In the light of this, it should come as no surprise that a financial adviser is likely to serve up a blunt message: Save your way to retirement - and try not to spend more than you earn.
Still, I don't believe in trying to cut expenses to the bone and confining myself to a fixed budget every day just to reap some savings.
Such strictures make a person feel small and kill the spirit.
Our lives lie ahead for us to enjoy. It would be very miserable if we have to worry about how we spend our money all the time. That condemns us to a life of mediocrity and makes us unwilling to take any kind of risks.
Having said that, I have many friends who stopped working in their late 40s or early 50s and chose to live only on their savings and investments. They do not seem to be any worse off for it.
Indeed, they live rich and fulfilling lives. One of them volunteers twice a week at a hospice after giving up a career as a high-flying investment banker, while another is a former partner with a top accounting firm who spends her time teaching pre-school children for free.
How do they do it? One common trait is that they have tended to live below their means even while they were holding high-paying jobs which would have enabled them to live a much more lavish lifestyle if they chose to. They are more likely to be savers than spenders.
But that does not mean that they are miserly about how they spend their money. Rather, it is more a matter of making better use of the money they earn in order to enjoy the finer things in life, as they consider the value of each purchase before deciding to hand over their cash.
And since they have always lived modestly, they do not feel the need to make any big adjustments to their lifestyle after they stop working, like downsizing to a smaller house or switching from driving a flashy luxury car to using public transport. It's life as usual for them, job or no job.
Another trait is their high personal involvement in managing their own money. They gauge the risk of each investment carefully before they put in the money.
You are unlikely to find them getting panicked by a sudden rout in the stock market, or joining the queue to buy a condo in order not to miss the boat because real estate prices are going up.
Maybe some of my friends' excellent traits have rubbed off on me, based on the personality profile provided free for each participant in our course.
Mine described my personality type as having learnt how to master money and use some of it for enjoyment.
"This balanced way of operating gives them a real sense of security when it comes to financial matters," it said. The description is flattering. I hope it holds true.
engyeow@sph.com.sg
Goh Eng Yeow
23/3/2014
Recently, I took a break from work to attend a two-day workshop designed to equip older working professionals with the know-how to cope financially.
One exercise generated some surprising responses from course participants.
We were asked to work out how a 55-year old breadwinner could continue to support a homemaker wife, a son doing national service and a bedridden mother being looked after by a maid, if he loses his $7,000-a-month job.
To a hard-headed financial writer like myself, the first thing the breadwinner should do is to check if the investment strategy he uses to deploy his $700,000 CPF savings and cash can generate sufficient passive income to carry on with the lifestyle his family is used to.
But other responses were sometimes bizarre, such as the suggestion to bump off the ailing mother in order to send the maid home.
Others were hilarious, like the advice from one person who said the son should live permanently in the army barracks so his room could be rented out for extra income.
But the consensus was that the breadwinner and his wife should both try to get part-time jobs, as their $700,000 nest egg would be insufficient to last them through their golden years even though it seemed like a large sum.
There would also have to be painful adjustments to be made, such as getting rid of the family car and the maid - in short, giving up the lifestyle to which they had become accustomed.
Since this exercise relates to a typical Singaporean family, it is a chilling reminder of the fate which may befall us if we fail to do proper financial planning while still gainfully employed.
It is also a problem which may become more prevalent, since Singaporeans aged between 45 and 64 make up about 29.5 per cent of the resident population.
A report released last year by the Institute of Policy Studies, based on interviews with 5,000 senior citizens in 2011, sheds some light on the financial issues faced after retirement.
It noted that one in five respondents had no savings by the end of each month. For those aged 75 and older, the figure rose to an even more worrying 40 per cent. Among the respondents looking for a job after retiring, more than half said they needed money for current expenses.
In the light of this, it should come as no surprise that a financial adviser is likely to serve up a blunt message: Save your way to retirement - and try not to spend more than you earn.
Still, I don't believe in trying to cut expenses to the bone and confining myself to a fixed budget every day just to reap some savings.
Such strictures make a person feel small and kill the spirit.
Our lives lie ahead for us to enjoy. It would be very miserable if we have to worry about how we spend our money all the time. That condemns us to a life of mediocrity and makes us unwilling to take any kind of risks.
Having said that, I have many friends who stopped working in their late 40s or early 50s and chose to live only on their savings and investments. They do not seem to be any worse off for it.
Indeed, they live rich and fulfilling lives. One of them volunteers twice a week at a hospice after giving up a career as a high-flying investment banker, while another is a former partner with a top accounting firm who spends her time teaching pre-school children for free.
How do they do it? One common trait is that they have tended to live below their means even while they were holding high-paying jobs which would have enabled them to live a much more lavish lifestyle if they chose to. They are more likely to be savers than spenders.
But that does not mean that they are miserly about how they spend their money. Rather, it is more a matter of making better use of the money they earn in order to enjoy the finer things in life, as they consider the value of each purchase before deciding to hand over their cash.
And since they have always lived modestly, they do not feel the need to make any big adjustments to their lifestyle after they stop working, like downsizing to a smaller house or switching from driving a flashy luxury car to using public transport. It's life as usual for them, job or no job.
Another trait is their high personal involvement in managing their own money. They gauge the risk of each investment carefully before they put in the money.
You are unlikely to find them getting panicked by a sudden rout in the stock market, or joining the queue to buy a condo in order not to miss the boat because real estate prices are going up.
Maybe some of my friends' excellent traits have rubbed off on me, based on the personality profile provided free for each participant in our course.
Mine described my personality type as having learnt how to master money and use some of it for enjoyment.
"This balanced way of operating gives them a real sense of security when it comes to financial matters," it said. The description is flattering. I hope it holds true.
engyeow@sph.com.sg
Friday, March 14, 2014
5 Essential Habits of Early Retirees
Thursday, 13 March 2014
By David Ning
The idea of retiring early can seem so far-fetched you've never considered trying to get there. Still, this select group of people is worth emulating in many ways, even if kicking back early isn't on your radar. Here are a few traits of early retirees you should consider adopting:
They save a lot. There are an exceptionally lucky few who inherit their wealth, but the vast majority of early retirees spend years saving to increase their stash, plugging away towards their goal until they've saved enough to buy their freedom. While you may not care to retire before everybody else, having a big cushion can give you the necessary ammo to take significant risks that can pay off big time. Perhaps it's a new job opportunity with a better career path that requires a short-term pay cut, or taking time off to obtain additional certifications to significantly lift your salary trajectory for the rest of your life. Whatever it is you want to do, having the comfort of not running out of money as soon as the paycheck stops offers choices.
They understand their spending habits. Talk to enough people who are financially independent and you'll realize they have a pretty firm grasp of how much they spend. After all, how could anyone who's not a billionaire know they can afford their lifestyle indefinitely unless they know how much they are spending? Yet, how many people know where their money is going? The good news is that once you start tracking your expenses, you are likely to find many areas to cut spending without affecting your quality of life.
They have an investment plan. No one is going to live off their savings for 40 to 50 years with all their money hidden under a mattress because inflation is relentlessly chipping away at their wealth. While not every early retiree is an expert in finance, they've all had to come up with a way to finance their lifestyle using their portfolio as the primary source of funds and deal with market volatility along the way. By learning about investing, you'll be able to increase your wealth much faster than if you just stick everything in a savings account thinking that's the safest place to put your money.
They pursue happiness instead of more income. It's obvious that quitting the rat race early is leaving salary on the table, but that's fine with those who retire early because they value freedom much more than a higher account balance. Unfortunately, many people in our consumer society do just the opposite, slaving away for long hours while sacrificing their health, family ties and happiness. The new smartphones sure are nice, but are they more important than all the other things you could be doing with your time?
They are optimistic. With the heavy reliance on investment returns to sustain a long retirement, you have to put quite a bit of faith in the stock market to leave your job. Early retirees are willing to make the leap, while pessimists who fear running out of money might work longer in order to save more and shorten the period of retirement they need to finance. But the power of optimism goes way beyond expecting lucrative investment returns. A positive attitude will help motivate you, which can lead to better opportunities, more promotions and ultimately a better retirement.
Link
http://createwealth8888.blogspot.sg/2014/03/5-essential-habits-of-early-retirees.html?m=1
By David Ning
The idea of retiring early can seem so far-fetched you've never considered trying to get there. Still, this select group of people is worth emulating in many ways, even if kicking back early isn't on your radar. Here are a few traits of early retirees you should consider adopting:
They save a lot. There are an exceptionally lucky few who inherit their wealth, but the vast majority of early retirees spend years saving to increase their stash, plugging away towards their goal until they've saved enough to buy their freedom. While you may not care to retire before everybody else, having a big cushion can give you the necessary ammo to take significant risks that can pay off big time. Perhaps it's a new job opportunity with a better career path that requires a short-term pay cut, or taking time off to obtain additional certifications to significantly lift your salary trajectory for the rest of your life. Whatever it is you want to do, having the comfort of not running out of money as soon as the paycheck stops offers choices.
They understand their spending habits. Talk to enough people who are financially independent and you'll realize they have a pretty firm grasp of how much they spend. After all, how could anyone who's not a billionaire know they can afford their lifestyle indefinitely unless they know how much they are spending? Yet, how many people know where their money is going? The good news is that once you start tracking your expenses, you are likely to find many areas to cut spending without affecting your quality of life.
They have an investment plan. No one is going to live off their savings for 40 to 50 years with all their money hidden under a mattress because inflation is relentlessly chipping away at their wealth. While not every early retiree is an expert in finance, they've all had to come up with a way to finance their lifestyle using their portfolio as the primary source of funds and deal with market volatility along the way. By learning about investing, you'll be able to increase your wealth much faster than if you just stick everything in a savings account thinking that's the safest place to put your money.
They pursue happiness instead of more income. It's obvious that quitting the rat race early is leaving salary on the table, but that's fine with those who retire early because they value freedom much more than a higher account balance. Unfortunately, many people in our consumer society do just the opposite, slaving away for long hours while sacrificing their health, family ties and happiness. The new smartphones sure are nice, but are they more important than all the other things you could be doing with your time?
They are optimistic. With the heavy reliance on investment returns to sustain a long retirement, you have to put quite a bit of faith in the stock market to leave your job. Early retirees are willing to make the leap, while pessimists who fear running out of money might work longer in order to save more and shorten the period of retirement they need to finance. But the power of optimism goes way beyond expecting lucrative investment returns. A positive attitude will help motivate you, which can lead to better opportunities, more promotions and ultimately a better retirement.
Link
http://createwealth8888.blogspot.sg/2014/03/5-essential-habits-of-early-retirees.html?m=1
Tuesday, July 30, 2013
The importance of equities for retirement
The Business Times
30/7/2013
LAST week, the Singapore Exchange (SGX) and consultancy Oliver Wyman released a paper on retirement savings. It suggested scrapping the $40,000 requirement to invest Central Provident Fund (CPF) Special Account so that Singaporeans can start early, have a chance of accumulating high returns and ride out market volatility.
The paper said that the average Singaporean reaches the current $40,000 threshold too late, at age 40, to start allocating money to higher-risk equities through the CPF. Also, just 12 per cent of the CPF was put in equities, compared to 49 per cent in Malaysia's pension scheme equivalent, 68 per cent in the US and 69 per cent in Australia.
Stock markets have a propensity to reward people who can stomach its wild gyrations. But the rewards can be decent. The US S&P 500 index has returned an average of around 8 per cent a year over the last 60 years. Singapore's Straits Times Index has returned 9.3 per cent a year in the last 10 years, though this was distorted by a low point in 2003 and a 20 per cent surge last year. Still, these 10-year returns are noticeably better than fixed deposits (1.3 per cent), inflation (2.7 per cent), Singapore government bonds (2.6 per cent) and even property (6.3 per cent).
Stocks, particularly solid, income-generating businesses, should be promoted as a viable investment choice. To promote retail participation, a lot more investor education is needed. This can be on basics such as the benefits of diversification and the concept of investing over a time period to cut costs. However, SGX's suggestion to do away with the CPF Special Account limit is not necessary.
The current floor rate of 4 per cent a year for the Special and Retirement Accounts is a decent, risk-free return. The study itself said that the CPF will provide 68 per cent of a Singaporean's working income in retirement. This is within the World Bank's recommended range of 53 per cent and 78 per cent.There is no need to fix something that isn't broken.
What is also interesting is SGX's conclusion that the expense fees for many investment products are too high and people are paying more for middlemen expenses than actual investment management. This is true for structured products, many investment funds and investment-linked insurance policies. Singaporeans need to be warned against investing in products they do not understand, promoting minimal returns at low risk levels but high fees. Online brokerages offer a low-cost alternative that many are not aware of.
Many Singaporeans tend to view stocks as a form of gambling. Others are scarred by their memories of the global financial crisis. Yet those who shied away from the market missed out on a strong rally over the past four years, and many dividend payments in between. Ultimately, investors lose money because they trade too much and too hastily. If they invest for the long-term and start early, their eventual portfolio can help bolster their CPF retirement savings.
30/7/2013
LAST week, the Singapore Exchange (SGX) and consultancy Oliver Wyman released a paper on retirement savings. It suggested scrapping the $40,000 requirement to invest Central Provident Fund (CPF) Special Account so that Singaporeans can start early, have a chance of accumulating high returns and ride out market volatility.
The paper said that the average Singaporean reaches the current $40,000 threshold too late, at age 40, to start allocating money to higher-risk equities through the CPF. Also, just 12 per cent of the CPF was put in equities, compared to 49 per cent in Malaysia's pension scheme equivalent, 68 per cent in the US and 69 per cent in Australia.
Stock markets have a propensity to reward people who can stomach its wild gyrations. But the rewards can be decent. The US S&P 500 index has returned an average of around 8 per cent a year over the last 60 years. Singapore's Straits Times Index has returned 9.3 per cent a year in the last 10 years, though this was distorted by a low point in 2003 and a 20 per cent surge last year. Still, these 10-year returns are noticeably better than fixed deposits (1.3 per cent), inflation (2.7 per cent), Singapore government bonds (2.6 per cent) and even property (6.3 per cent).
Stocks, particularly solid, income-generating businesses, should be promoted as a viable investment choice. To promote retail participation, a lot more investor education is needed. This can be on basics such as the benefits of diversification and the concept of investing over a time period to cut costs. However, SGX's suggestion to do away with the CPF Special Account limit is not necessary.
The current floor rate of 4 per cent a year for the Special and Retirement Accounts is a decent, risk-free return. The study itself said that the CPF will provide 68 per cent of a Singaporean's working income in retirement. This is within the World Bank's recommended range of 53 per cent and 78 per cent.There is no need to fix something that isn't broken.
What is also interesting is SGX's conclusion that the expense fees for many investment products are too high and people are paying more for middlemen expenses than actual investment management. This is true for structured products, many investment funds and investment-linked insurance policies. Singaporeans need to be warned against investing in products they do not understand, promoting minimal returns at low risk levels but high fees. Online brokerages offer a low-cost alternative that many are not aware of.
Many Singaporeans tend to view stocks as a form of gambling. Others are scarred by their memories of the global financial crisis. Yet those who shied away from the market missed out on a strong rally over the past four years, and many dividend payments in between. Ultimately, investors lose money because they trade too much and too hastily. If they invest for the long-term and start early, their eventual portfolio can help bolster their CPF retirement savings.
Tuesday, April 23, 2013
Retirement: What's missing from your plan
Magdalen Ng
Tuesday, Apr 23, 2013
The Straits Times
Some folks who contemplate retirement make the mistake of thinking it's all about the money and nothing else.
Sure, financial planning for your golden years is vital. You want to continue living in much the same style to which you've become accustomed.
But there are other important issues that should not be overlooked.
For instance, it is crucial to write a will, and also to nominate who should receive your Central Provident Fund (CPF) savings when you die.
Both these steps prevent unnecessary hassle for others when the time comes.
It is also important to think about giving someone a lasting power of attorney in the event that you lose your mental capacity.
Also, even though you would have stopped working, your insurance policy needs to continue and becomes even more important with the loss of income.
Lastly, retirees tend to find themselves with a lot of time on their hands and uncertain about what to do with it. Or the lack of routine in their lives may leave them at a loss.
Many organisations, such as the Council for Third Age (C3A), run events and activities for seniors. C3A promotes active living, with a focus on life-long learning and promoting senior employability.
Here are some of the big issues that those facing retirement should address:
1. Insurance
Ms Joanne Yeo, head of product and funds development at AIA Singapore, says that it is never too late to start protecting yourself. "We recommend making this a priority, especially if you do not have any insurance," she says.
This ensures if you fall ill or anything unforeseen happens, your family will be financially prepared.
Mr Gerard Ee, chairman of C3A, says Medisave and MediShield are national health-care saving schemes designed to help Singaporeans with the burden of hospitalisation expenses and selected outpatient treatment.
He adds: "Seniors who would like additional and better coverage for better financial security should speak to financial consultants to understand their options, and get a family member's opinion when making an investment in insurance products."
Ms Cindy Huang, master financial consultant and wealth manager at Prudential Singapore, says that depending on each individual's needs, buying short-term term insurance may be more suitable than a long-term plan.
For those who already have insurance plans, it is also important to regularly review their insurance portfolio to ensure they are still relevant to their needs.
However, as you get older, the likelihood of poor health increases, which means premiums for protection plans are typically higher for those buying them at an older age.
And as an older person, you may also already have pre-existing health conditions. Depending on the type of coverage, insurers may either increase the premiums in exchange for full coverage or they may choose to exclude coverage on certain conditions.
An Aviva spokesman says: "Having some coverage is better than none at all. If you are reconsidering insurance because you feel the premiums quoted are too high, we urge you to consider how you might pay $5,000, $10,000 or even $50,000 in medical bills - and this can happen any time and recur at unpredictable frequencies.
"Ultimately, the cost of insurance premiums is far more manageable and predictable than unexpected expenses you would face in the event of hospitalisation, major illnesses or disability."
For those who are concerned about minor pre-existing conditions, Aviva Singapore offers moratorium underwriting, which means that no health declaration is required and certain pre-existing conditions will be covered after an absence of symptoms, treatments or medication for five years.
While certain conditions apply and not every pre-existing condition is eligible, this can still be beneficial for those with less serious pre-existing conditions trying to obtain full coverage.
2. Making a will
A will is a legal document where personal wishes are set out.
Prudential's Ms Huang says that writing a will is important as part of holistic planning.
She adds: "This ensures that your property and other personal possessions will be passed on to your loved ones in a manner of your wish or choice. It also provides one with peace of mind and reduces any undue worry, stress or arguments among the people you may have left behind."
There is a common myth that only a lawyer can help you write a will. Actually, anyone can do it and register it with the Insolvency and Public Trustee's Office.
The will should spell out the names of the people you entrust with the responsibility of taking charge of your assets and the proper distribution to the beneficiaries.
Those who do not have a will run the risk of their savings or estate not going to the people they would have wanted them to go to.
3. CPF nomination
However, monies in the CPF cannot be included in a will. To direct your CPF savings to the beneficiary of your choice, you will have to make a nomination.
If you do not do so, your money will be distributed to your family according to intestacy laws.
For example, if you leave a spouse and three children, half of your savings will go to your spouse, and the other half will be split equally among your children.
For singles who have not made any nomination, the money will be shared equally between their surviving parents.
Your CPF monies will go to the Government in the absence of a spouse, children, siblings, grandparents, an uncle or an aunt.
However, if you make a nomination, you can choose to leave everything to your spouse, or to your children, and even include your parents.
For Muslims, however, with no nomination made, CPF funds will be distributed differently, in accordance with the Inheritance Certificate, which can be obtained from the Syariah Court.
If Muslim CPF members make a nomination, the nominees are fully entitled to the savings bequeathed to them.
4 Lasting power of attorney
Unlike a will, which comes into effect only after you die, a lasting power of attorney (LPA) allows you to appoint a proxy decision-maker to act on your behalf if you lose mental capacity.
The LPA will be revoked upon death and the will, if made, will come into effect.
LPAs can be made to appoint proxy decision-makers for personal welfare matters, which include where you should live and day-to-day care decisions.
You can also appoint a decision-maker for property and affairs matters, which relate to decisions about property and insurance.
According to the Office of the Public Guardian, there are 3,200 applications to register LPAs as at January this year.
It costs $50 for Singaporeans and permanent residents to register a standard LPA. The standard LPA gives broad powers to your proxy decision-maker or donee. This form can be self-completed.
To register an LPA that allows you to specify restrictions and instructions on the powers of your appointed decision-maker will cost $200. You will also require the services of a lawyer to help you indicate your requirements.
C3A's Mr Ee says: "One can lose one's mental capacity at any time and at any age. The risk increases as one grows older. The LPA allows one to protect one's interests by indicating his personal, considered choice of a proxy decision-maker - someone he trusts to be reliable, competent and capable to act and make decisions on his behalf should he lose the mental capacity.
"The LPA can only be executed when one still has mental capacity to act. By planning ahead, it alleviates the stress and difficulties faced by their loved ones."
Similarly, Mr Richard Magnus, chairman of the Public Guardian Board, notes that Singaporeans have responded positively to the LPA as a planning instrument.
He says: "We also acknowledge that making an LPA is a personal choice, involving careful considerations in appointing someone they trust to decide and act on their behalf if they should lose their mental capacity."
songyuan@sph.com.sg
Link:
http://business.asiaone.com/news/retirement-whats-missing-your-plan
Tuesday, Apr 23, 2013
The Straits Times
Some folks who contemplate retirement make the mistake of thinking it's all about the money and nothing else.
Sure, financial planning for your golden years is vital. You want to continue living in much the same style to which you've become accustomed.
But there are other important issues that should not be overlooked.
For instance, it is crucial to write a will, and also to nominate who should receive your Central Provident Fund (CPF) savings when you die.
Both these steps prevent unnecessary hassle for others when the time comes.
It is also important to think about giving someone a lasting power of attorney in the event that you lose your mental capacity.
Also, even though you would have stopped working, your insurance policy needs to continue and becomes even more important with the loss of income.
Lastly, retirees tend to find themselves with a lot of time on their hands and uncertain about what to do with it. Or the lack of routine in their lives may leave them at a loss.
Many organisations, such as the Council for Third Age (C3A), run events and activities for seniors. C3A promotes active living, with a focus on life-long learning and promoting senior employability.
Here are some of the big issues that those facing retirement should address:
1. Insurance
Ms Joanne Yeo, head of product and funds development at AIA Singapore, says that it is never too late to start protecting yourself. "We recommend making this a priority, especially if you do not have any insurance," she says.
This ensures if you fall ill or anything unforeseen happens, your family will be financially prepared.
Mr Gerard Ee, chairman of C3A, says Medisave and MediShield are national health-care saving schemes designed to help Singaporeans with the burden of hospitalisation expenses and selected outpatient treatment.
He adds: "Seniors who would like additional and better coverage for better financial security should speak to financial consultants to understand their options, and get a family member's opinion when making an investment in insurance products."
Ms Cindy Huang, master financial consultant and wealth manager at Prudential Singapore, says that depending on each individual's needs, buying short-term term insurance may be more suitable than a long-term plan.
For those who already have insurance plans, it is also important to regularly review their insurance portfolio to ensure they are still relevant to their needs.
However, as you get older, the likelihood of poor health increases, which means premiums for protection plans are typically higher for those buying them at an older age.
And as an older person, you may also already have pre-existing health conditions. Depending on the type of coverage, insurers may either increase the premiums in exchange for full coverage or they may choose to exclude coverage on certain conditions.
An Aviva spokesman says: "Having some coverage is better than none at all. If you are reconsidering insurance because you feel the premiums quoted are too high, we urge you to consider how you might pay $5,000, $10,000 or even $50,000 in medical bills - and this can happen any time and recur at unpredictable frequencies.
"Ultimately, the cost of insurance premiums is far more manageable and predictable than unexpected expenses you would face in the event of hospitalisation, major illnesses or disability."
For those who are concerned about minor pre-existing conditions, Aviva Singapore offers moratorium underwriting, which means that no health declaration is required and certain pre-existing conditions will be covered after an absence of symptoms, treatments or medication for five years.
While certain conditions apply and not every pre-existing condition is eligible, this can still be beneficial for those with less serious pre-existing conditions trying to obtain full coverage.
2. Making a will
A will is a legal document where personal wishes are set out.
Prudential's Ms Huang says that writing a will is important as part of holistic planning.
She adds: "This ensures that your property and other personal possessions will be passed on to your loved ones in a manner of your wish or choice. It also provides one with peace of mind and reduces any undue worry, stress or arguments among the people you may have left behind."
There is a common myth that only a lawyer can help you write a will. Actually, anyone can do it and register it with the Insolvency and Public Trustee's Office.
The will should spell out the names of the people you entrust with the responsibility of taking charge of your assets and the proper distribution to the beneficiaries.
Those who do not have a will run the risk of their savings or estate not going to the people they would have wanted them to go to.
3. CPF nomination
However, monies in the CPF cannot be included in a will. To direct your CPF savings to the beneficiary of your choice, you will have to make a nomination.
If you do not do so, your money will be distributed to your family according to intestacy laws.
For example, if you leave a spouse and three children, half of your savings will go to your spouse, and the other half will be split equally among your children.
For singles who have not made any nomination, the money will be shared equally between their surviving parents.
Your CPF monies will go to the Government in the absence of a spouse, children, siblings, grandparents, an uncle or an aunt.
However, if you make a nomination, you can choose to leave everything to your spouse, or to your children, and even include your parents.
For Muslims, however, with no nomination made, CPF funds will be distributed differently, in accordance with the Inheritance Certificate, which can be obtained from the Syariah Court.
If Muslim CPF members make a nomination, the nominees are fully entitled to the savings bequeathed to them.
4 Lasting power of attorney
Unlike a will, which comes into effect only after you die, a lasting power of attorney (LPA) allows you to appoint a proxy decision-maker to act on your behalf if you lose mental capacity.
The LPA will be revoked upon death and the will, if made, will come into effect.
LPAs can be made to appoint proxy decision-makers for personal welfare matters, which include where you should live and day-to-day care decisions.
You can also appoint a decision-maker for property and affairs matters, which relate to decisions about property and insurance.
According to the Office of the Public Guardian, there are 3,200 applications to register LPAs as at January this year.
It costs $50 for Singaporeans and permanent residents to register a standard LPA. The standard LPA gives broad powers to your proxy decision-maker or donee. This form can be self-completed.
To register an LPA that allows you to specify restrictions and instructions on the powers of your appointed decision-maker will cost $200. You will also require the services of a lawyer to help you indicate your requirements.
C3A's Mr Ee says: "One can lose one's mental capacity at any time and at any age. The risk increases as one grows older. The LPA allows one to protect one's interests by indicating his personal, considered choice of a proxy decision-maker - someone he trusts to be reliable, competent and capable to act and make decisions on his behalf should he lose the mental capacity.
"The LPA can only be executed when one still has mental capacity to act. By planning ahead, it alleviates the stress and difficulties faced by their loved ones."
Similarly, Mr Richard Magnus, chairman of the Public Guardian Board, notes that Singaporeans have responded positively to the LPA as a planning instrument.
He says: "We also acknowledge that making an LPA is a personal choice, involving careful considerations in appointing someone they trust to decide and act on their behalf if they should lose their mental capacity."
songyuan@sph.com.sg
Link:
http://business.asiaone.com/news/retirement-whats-missing-your-plan
Wednesday, January 18, 2012
Retirement: how much is enough?
Published January 18, 2012
MONEY MATTERS
Funding your retirement years comfortably is a trade-off between playing it safe, taking risks and spending prudently
By BEN FOK
AT A FAMILY function, my 60-year-old cousin Peter asked me for my views on retirement planning. He said that over the last 35 years he has worked hard, consistently saved and prudently invested his money. When he retires in two years' time, this should provide him with a nest egg of about $500,000. As I listened to him, it seemed that he had secured his financial future. But he kept asking: 'Is it really enough?'
At this age, many would expect to have a significant retirement nest egg. If they don't, they had better do something about it now.
In Singapore, our official statistics show that there are more than 300,000 individuals aged between 50 and 54 who are due to retire in 10 to 15 years' time. As a financial adviser, I often discuss this subject with my clients but often this issue is not treated as a top priority. Understandably, there are other priorities, such as children's education and mortgage repayments or other immediate needs, that take precedence over retirement planning.
Given the current economic volatility, the outlook for those planning their retirement is very cloudy. Over the last two years, we have seen the cost of living here increasing yearly, making retirement more expensive and resulting in many more Singaporeans having to put off retirement for a few more years. With higher longevity and people not saving enough, the working population of those aged 60 and over will inevitably continue to rise.
In Peter's case, he and his wife are healthy and they are likely to have a long life ahead of them. So it would be a mistake to concentrate solely on what's happening now or even on what might happen months from now. Rather, they should focus on coming up with a spending and preservation plan that can assure them of enough money to live comfortably for the next 25-30 years, if not longer.
Hence, funding your retirement years is a trade-off between playing it safe, taking risks and spending prudently.
With the nest egg that Peter has accumulated, he can create a cash flow, and that is the most important consideration during his retirement. At this point, he has to set a reasonable withdrawal rate that will give him the spending cash he needs but won't deplete his nest egg too soon. Peter asked: 'How much can I safely withdraw from my retirement fund every year?' It is obvious that a miscalculation could result in an involuntary return to the workforce or having insufficient funds for retirement.
To help Peter understand how much he can withdraw, I produced a table to show the number of years his money will last.
The table shows withdrawal rates ranging from 4 per cent to 13 per cent and annual growth rate of investment from 3 per cent to 12 per cent, which resembles a 100 per cent stocks to a 100 per cent bonds portfolio.
It also shows how many years a sum will last at various withdrawal rates and various rates of return. If the withdrawal rate and the rate of return are the same, the principal will not change. For example, when $100,000 earns 8 per cent per annum and 8 per cent is drawn, the principal stays the same. This is another strategy by which a retiree can create an income stream. So if Peter invests $500,000 in a diversified investment that can give him 5 per cent returns, he can make $25,000 per year of withdrawals without affecting his principal.
However, if $100,000 earns 4 per cent per annum ($4,000) and 8 per cent ($8,000) is withdrawn annually, the $8,000 annual income will continue for 17 years before the principal is gone.
It is important to understand that the rate of return and the withdrawal rate determine how many years the principal will last. There are no guarantees, of course, but generally the lower your withdrawal rate, the better the chances that your money will last throughout your retirement. But when the earnings are less than the amount that is taken out, you are dipping into your principal, so your money will not last for a long time.
If you start withdrawing a small amount from your portfolio, and adjust it for inflation, the chances are that your money will last longer whether you invest relatively conservatively or aggressively.
So to enjoy a decent retirement, you need to be responsible for your old age by starting to save adequately and invest prudently for your retirement as early as possible. I also believe that it is just as important that people take financial advice well in advance of their anticipated retirement. We have to carefully assess their investment portfolios, as this could make all the difference in the long run.
Singaporeans are intending to retire later, and those planning to stop working between the ages of 60 and 65 will double in the future. With increased longevity comes increased risk of potentially outliving one's retirement assets.
Another point to note is the unexpected 'life events' that may happen. No one can predict what lies ahead in their retirement journey. While we can determine when we want to retire and exercise to keep in good health, there are no certainties in life. Planning for one's retirement years must include taking into consideration life events that have the potential to disrupt your retirement years.
Hence, certain protection products - like medical, hospitalisation and long-term care insurance - are still needed during one's retirement to protect against the potentially devastating effects of unexpected life events like death and chronic illness. We need to have a financial strategy that is flexible enough to adapt to a person's changing needs and circumstances. Retirement can truly be great, but only if you carefully manage your money throughout your golden years.
Note: The strategy described in this article may not be suitable for all readers. If you are in doubt, consult a financial adviser.
The writer is chief executive officer of Grandtag Financial Consultancy (Singapore) Pte Ltd. He can be reached at ben.fok@grandtag.com
MONEY MATTERS
Funding your retirement years comfortably is a trade-off between playing it safe, taking risks and spending prudently
By BEN FOK
AT A FAMILY function, my 60-year-old cousin Peter asked me for my views on retirement planning. He said that over the last 35 years he has worked hard, consistently saved and prudently invested his money. When he retires in two years' time, this should provide him with a nest egg of about $500,000. As I listened to him, it seemed that he had secured his financial future. But he kept asking: 'Is it really enough?'
At this age, many would expect to have a significant retirement nest egg. If they don't, they had better do something about it now.
In Singapore, our official statistics show that there are more than 300,000 individuals aged between 50 and 54 who are due to retire in 10 to 15 years' time. As a financial adviser, I often discuss this subject with my clients but often this issue is not treated as a top priority. Understandably, there are other priorities, such as children's education and mortgage repayments or other immediate needs, that take precedence over retirement planning.
Given the current economic volatility, the outlook for those planning their retirement is very cloudy. Over the last two years, we have seen the cost of living here increasing yearly, making retirement more expensive and resulting in many more Singaporeans having to put off retirement for a few more years. With higher longevity and people not saving enough, the working population of those aged 60 and over will inevitably continue to rise.
In Peter's case, he and his wife are healthy and they are likely to have a long life ahead of them. So it would be a mistake to concentrate solely on what's happening now or even on what might happen months from now. Rather, they should focus on coming up with a spending and preservation plan that can assure them of enough money to live comfortably for the next 25-30 years, if not longer.
Hence, funding your retirement years is a trade-off between playing it safe, taking risks and spending prudently.
With the nest egg that Peter has accumulated, he can create a cash flow, and that is the most important consideration during his retirement. At this point, he has to set a reasonable withdrawal rate that will give him the spending cash he needs but won't deplete his nest egg too soon. Peter asked: 'How much can I safely withdraw from my retirement fund every year?' It is obvious that a miscalculation could result in an involuntary return to the workforce or having insufficient funds for retirement.
To help Peter understand how much he can withdraw, I produced a table to show the number of years his money will last.
The table shows withdrawal rates ranging from 4 per cent to 13 per cent and annual growth rate of investment from 3 per cent to 12 per cent, which resembles a 100 per cent stocks to a 100 per cent bonds portfolio.
It also shows how many years a sum will last at various withdrawal rates and various rates of return. If the withdrawal rate and the rate of return are the same, the principal will not change. For example, when $100,000 earns 8 per cent per annum and 8 per cent is drawn, the principal stays the same. This is another strategy by which a retiree can create an income stream. So if Peter invests $500,000 in a diversified investment that can give him 5 per cent returns, he can make $25,000 per year of withdrawals without affecting his principal.
However, if $100,000 earns 4 per cent per annum ($4,000) and 8 per cent ($8,000) is withdrawn annually, the $8,000 annual income will continue for 17 years before the principal is gone.
It is important to understand that the rate of return and the withdrawal rate determine how many years the principal will last. There are no guarantees, of course, but generally the lower your withdrawal rate, the better the chances that your money will last throughout your retirement. But when the earnings are less than the amount that is taken out, you are dipping into your principal, so your money will not last for a long time.
If you start withdrawing a small amount from your portfolio, and adjust it for inflation, the chances are that your money will last longer whether you invest relatively conservatively or aggressively.
So to enjoy a decent retirement, you need to be responsible for your old age by starting to save adequately and invest prudently for your retirement as early as possible. I also believe that it is just as important that people take financial advice well in advance of their anticipated retirement. We have to carefully assess their investment portfolios, as this could make all the difference in the long run.
Singaporeans are intending to retire later, and those planning to stop working between the ages of 60 and 65 will double in the future. With increased longevity comes increased risk of potentially outliving one's retirement assets.
Another point to note is the unexpected 'life events' that may happen. No one can predict what lies ahead in their retirement journey. While we can determine when we want to retire and exercise to keep in good health, there are no certainties in life. Planning for one's retirement years must include taking into consideration life events that have the potential to disrupt your retirement years.
Hence, certain protection products - like medical, hospitalisation and long-term care insurance - are still needed during one's retirement to protect against the potentially devastating effects of unexpected life events like death and chronic illness. We need to have a financial strategy that is flexible enough to adapt to a person's changing needs and circumstances. Retirement can truly be great, but only if you carefully manage your money throughout your golden years.
Note: The strategy described in this article may not be suitable for all readers. If you are in doubt, consult a financial adviser.
The writer is chief executive officer of Grandtag Financial Consultancy (Singapore) Pte Ltd. He can be reached at ben.fok@grandtag.com
Friday, May 13, 2011
4 retirement tips for twentysomethings
By Yesha Shah
In today's dismal job market, it's no wonder college grads are focused on finding a job instead of socking away money for the future.
Unfortunately, young people aren't the only ones befuddled by their post-career plan.
But saving early is the key to building up a nest egg.
A panel of experts brought together by Merrill Lynch Wealth Management last month offers twentysomethings this advice for getting started on reaching their retirement goals.
Get out of debt
It's common for students to graduate with thousands of dollars in student loan debt, and thousands more in high-interest credit card bills.
"Don't forget that paying down debt is … the financial equivalent of saving. So if you have some debt, be focused on paying that down," says Andrew Sieg, head of retirement services at Bank of American Merrill Lynch.
Be flexible
Don't count on working at the same place for your entire life.
Traditional jobs - where you work one place for your entire career - are gone; pensions, gone, says ABC host and panel moderator Charles Gibson.
And flexibility will pay off in the event of an unexpected job loss or changes in income, says Anya Kamenetz, author of Generation Debt and staff writer at Fast Company.
"Real financial freedom and security doesn't come from having a certain number in the bank… It comes from knowing that I have the ability to live within my means," she says. "If I have a fluctuating income, I can live at the low end of that, and that's what really makes me feel comfortable."
Take advantage of workplace savings program
Get educated and learn about your benefits, says John Pelletier, director of the newly created Center for Financial Literacy at Champlain College.
Build up your skill set
Investing in yourself will pay off, says Kamenetz.
Young people "understand the importance of investing in education and having skills that translate from decade to decade, career to career," she says.
Developing transferable skills and acquiring various experiences are key to diversifying your life portfolio and will better prepare you for peaks and valleys in the workforce.
In today's dismal job market, it's no wonder college grads are focused on finding a job instead of socking away money for the future.
Unfortunately, young people aren't the only ones befuddled by their post-career plan.
But saving early is the key to building up a nest egg.
A panel of experts brought together by Merrill Lynch Wealth Management last month offers twentysomethings this advice for getting started on reaching their retirement goals.
Get out of debt
It's common for students to graduate with thousands of dollars in student loan debt, and thousands more in high-interest credit card bills.
"Don't forget that paying down debt is … the financial equivalent of saving. So if you have some debt, be focused on paying that down," says Andrew Sieg, head of retirement services at Bank of American Merrill Lynch.
Be flexible
Don't count on working at the same place for your entire life.
Traditional jobs - where you work one place for your entire career - are gone; pensions, gone, says ABC host and panel moderator Charles Gibson.
And flexibility will pay off in the event of an unexpected job loss or changes in income, says Anya Kamenetz, author of Generation Debt and staff writer at Fast Company.
"Real financial freedom and security doesn't come from having a certain number in the bank… It comes from knowing that I have the ability to live within my means," she says. "If I have a fluctuating income, I can live at the low end of that, and that's what really makes me feel comfortable."
Take advantage of workplace savings program
Get educated and learn about your benefits, says John Pelletier, director of the newly created Center for Financial Literacy at Champlain College.
Build up your skill set
Investing in yourself will pay off, says Kamenetz.
Young people "understand the importance of investing in education and having skills that translate from decade to decade, career to career," she says.
Developing transferable skills and acquiring various experiences are key to diversifying your life portfolio and will better prepare you for peaks and valleys in the workforce.
Friday, August 6, 2010
Retirement math: How much you really need
Are people actually running out of cash when they retire?
Fri, Aug 06, 2010
Reuters
Those scary studies keep on coming: The latest one from the Employee Benefit Research Institute drives home the same message as many others: Americans won't have enough money for retirement.
The EBRI study said that nearly half of older baby boomers approaching retirement risk running out of money in their golden years.
But is that really true?
Are people actually running out of cash when they retire?
Are those findings a cause for panic, or can small adjustments around the edges fix the problem?
Like most other retirement studies of the frightening genre, the EBRI report did make a few calculating short cuts that might have made the situation look worse than it is.
For example, EBRI weighed only retirement accounts and home equity, ignoring any other savings that families might have accumulated.
It also assumed that all workers would retire at 65.
I am not picking on EBRI. In general, its methodologies are sound, and more measured than the typical "OMG, it's a retirement disaster!" studies put out by some insurance and investment companies.
But, in general, it isn't the methodology of these studies that is troubling, but the ideas behind them.
They assume, for example, that people will blithely spend their nest eggs at a fixed rate until the day they wake up at 87 or 92 with no money left. And they suggest that retirement is an all-or-nothing proposition: You either can afford to bring your lifestyle into retirement, or you can't.
They don't focus -- or often, even acknowledge -- that retirement is a series of budgetary trade-offs, just like the first 2/3 or 3/4 of life.
So sure, stash away as much as you can -- the more cash you can spend in the last third of life, the better. But instead of panicking and worrying about retirement, take a more logical approach.
The basic math of official retirement planning goes like this: Take your current monthly spending, subtract your expected Social Security payment, and the remainder is what you need to pull out of your retirement fund every month in your first year of retirement.
Multiply that figure by 12, to get the amount you'd need to withdraw in a year.
Multiply that by 25, and that's the size of the nest egg you need to leave work with, to insure that your money never runs out.
Yikes! No wonder everyone's scared.
Here are some mitigating points.
You'll spend more than you think for a while, but not forever.
Retirement planners make much of the first few years of retirement, when you spend on everything from leisure clothes to long-deferred cruises to all those household projects you didn't have time to do when you were working.
But by mid-retirement, many of those expenses disappear.
By the time a person passes 75 years of age, his spending is almost half of what it was for the years between 55 and 64, according to figures from the Bureau of Labor Statistics.
Older retirees spend about 76 percent of what people between 65 and 74 spend. So you can aim to take more out in earlier years and take less out in later years.
You won't want to stay in your house forever.
You may, but not many people do. So at some point in mid or late retirement, you can sell your home, downsize, and add your accumulated equity to the pot of money you have to spend (lowering your expenses along the way.)
Even if you do want to stay in your home forever, new and improved reverse mortgage products will allow you to tap that equity at some point along the road.
You can make little adjustments that will stretch your money further.
You can increase your annual retirement income by about 7 percent for every year that you defer retiring, says research from T. Rowe Price.
Just working a small part-time job and delaying the start of your Social Security benefits for one year will raise the size of your benefit check by about 8 percent for life.
If you keep a little bit more of your portfolio in the stock market over long periods of time (even after you retire), that will help it to last longer.
You can protect yourself against actually running out of money with a few well-chosen products.
A small, low-fee, immediate annuity bought with part of your savings once you are retired will insure that some money comes in every month.
A solid long-term care policy will insure that if you do need extensive care in your later years, you won't have to demolish your family nest egg to get it. It will be protected for your spouse or your kids.
You can live a good retirement life on a budget.
You can do everything from downsize to one car to cut back on restaurant meals.
You can grocery shop with coupons, wait for sales to buy clothes and housewares, and do your own mending, lawn mowing (at least in early retirement) and more -- you know, the kinds of things you already do.
You can take in a roommate, move in with the same kid who moved in with you after college, eat more popcorn and less meat.
You can camp and fish on vacation or couch surf at the homes of all of your old friends, instead of flying to Europe or cruising the Caribbean.
None of those alternatives will ruin your life, or even diminish your fun.
Remember that you have reasonable options that will help your money last far longer than the spreadsheets say it will.
Fri, Aug 06, 2010
Reuters
Those scary studies keep on coming: The latest one from the Employee Benefit Research Institute drives home the same message as many others: Americans won't have enough money for retirement.
The EBRI study said that nearly half of older baby boomers approaching retirement risk running out of money in their golden years.
But is that really true?
Are people actually running out of cash when they retire?
Are those findings a cause for panic, or can small adjustments around the edges fix the problem?
Like most other retirement studies of the frightening genre, the EBRI report did make a few calculating short cuts that might have made the situation look worse than it is.
For example, EBRI weighed only retirement accounts and home equity, ignoring any other savings that families might have accumulated.
It also assumed that all workers would retire at 65.
I am not picking on EBRI. In general, its methodologies are sound, and more measured than the typical "OMG, it's a retirement disaster!" studies put out by some insurance and investment companies.
But, in general, it isn't the methodology of these studies that is troubling, but the ideas behind them.
They assume, for example, that people will blithely spend their nest eggs at a fixed rate until the day they wake up at 87 or 92 with no money left. And they suggest that retirement is an all-or-nothing proposition: You either can afford to bring your lifestyle into retirement, or you can't.
They don't focus -- or often, even acknowledge -- that retirement is a series of budgetary trade-offs, just like the first 2/3 or 3/4 of life.
So sure, stash away as much as you can -- the more cash you can spend in the last third of life, the better. But instead of panicking and worrying about retirement, take a more logical approach.
The basic math of official retirement planning goes like this: Take your current monthly spending, subtract your expected Social Security payment, and the remainder is what you need to pull out of your retirement fund every month in your first year of retirement.
Multiply that figure by 12, to get the amount you'd need to withdraw in a year.
Multiply that by 25, and that's the size of the nest egg you need to leave work with, to insure that your money never runs out.
Yikes! No wonder everyone's scared.
Here are some mitigating points.
You'll spend more than you think for a while, but not forever.
Retirement planners make much of the first few years of retirement, when you spend on everything from leisure clothes to long-deferred cruises to all those household projects you didn't have time to do when you were working.
But by mid-retirement, many of those expenses disappear.
By the time a person passes 75 years of age, his spending is almost half of what it was for the years between 55 and 64, according to figures from the Bureau of Labor Statistics.
Older retirees spend about 76 percent of what people between 65 and 74 spend. So you can aim to take more out in earlier years and take less out in later years.
You won't want to stay in your house forever.
You may, but not many people do. So at some point in mid or late retirement, you can sell your home, downsize, and add your accumulated equity to the pot of money you have to spend (lowering your expenses along the way.)
Even if you do want to stay in your home forever, new and improved reverse mortgage products will allow you to tap that equity at some point along the road.
You can make little adjustments that will stretch your money further.
You can increase your annual retirement income by about 7 percent for every year that you defer retiring, says research from T. Rowe Price.
Just working a small part-time job and delaying the start of your Social Security benefits for one year will raise the size of your benefit check by about 8 percent for life.
If you keep a little bit more of your portfolio in the stock market over long periods of time (even after you retire), that will help it to last longer.
You can protect yourself against actually running out of money with a few well-chosen products.
A small, low-fee, immediate annuity bought with part of your savings once you are retired will insure that some money comes in every month.
A solid long-term care policy will insure that if you do need extensive care in your later years, you won't have to demolish your family nest egg to get it. It will be protected for your spouse or your kids.
You can live a good retirement life on a budget.
You can do everything from downsize to one car to cut back on restaurant meals.
You can grocery shop with coupons, wait for sales to buy clothes and housewares, and do your own mending, lawn mowing (at least in early retirement) and more -- you know, the kinds of things you already do.
You can take in a roommate, move in with the same kid who moved in with you after college, eat more popcorn and less meat.
You can camp and fish on vacation or couch surf at the homes of all of your old friends, instead of flying to Europe or cruising the Caribbean.
None of those alternatives will ruin your life, or even diminish your fun.
Remember that you have reasonable options that will help your money last far longer than the spreadsheets say it will.
Friday, April 30, 2010
What if you can't afford to retire?
Options for low-income elderly folk.
Fri, Apr 30, 2010
The Business Times
By Lorna Tan
The reality of just how much it costs to retire is sinking in for many people.
As a result, more expect not to be able to retire completely - they will need to turn to part-time jobs in their golden years.
Related stories:
» Minimise risks of retirement
» Tinkering with the CPF rate
This was a key finding in a recent survey by Russell Investments and The Nielsen Company on how Singaporeans are planning for their retirement.
The findings indicated that about 70 per cent of the more than 500 respondents believe they will need some part-time work to supplement their retirement income.
Singapore's rapidly ageing population is a cause for concern, with the number of people aged 65 and older expected to treble to 900,000 in 20 years, from about 300,000.
Adding to the bleak picture: The survey indicated that only half of Singaporeans who have not reached retirement age have made financial plans for their nest eggs.
It is no wonder that experts constantly emphasise that when you fail to plan, you plan to fail. But for those who do not have time on their side and have yet to start mapping out their plans, not all hope is lost.
The Sunday Times looks at the income options available to low-income elderly people, particularly those with no financial plans. Some of these options look at the flat as an asset, as well as a source of rental and retirement income.
Lease Buyback Scheme (LBS)
Launched on March 1 last year, the scheme allows low-income elderly Singaporeans living in three-room and smaller flats to monetise their flats to supplement their retirement needs.
It is believed that these households need more financial help, as they are unlikely to be able to take advantage of other options such as downsizing to a small flat or subletting a room.
Under the scheme, the HDB will buy back the tail end of a flat's 100-year lease at market valuation, leaving a 30-year lease for the owner. For example, if a flat has 70 years left, the HDB buys 40 years of the lease from the owner. It pays the market rate for the 40-year lease and this money goes to the CPF Life national annuity scheme in the flat owner's name. He will then receive a monthly income stream for life.
According to a study last year on unlocking housing equity for retirement by Dr Ngee-Choon Chia and Dr Albert Tsui, a three-room flat which is now worth $236,000 has an estimated housing value, unlocked from a 40-year lease, of about $109,000 at present.
The monthly annuity payouts from CPF Life through the buyback of the three-room flat is $694 to $724 for a man and $620 to $650 for a woman. Monthly payouts for women are lower than for men because of the longer life expectancy of women, on average.
Both the study's authors are from the economics department at the National University of Singapore (NUS).
To be eligible for LBS, the homeowner must be aged at least 62, have enjoyed only one housing subsidy and must have occupied the flat for at least five years, among other conditions. If the owner dies before his lease runs out, his family gets the refund of the balance.
At the start of this month, the scheme was broadened to include those who previously owned four-room or bigger flats.
It also includes those with outstanding housing loans exceeding $5,000, but who are able to buy an annuity under CPF Life for at least $60,000 with the HDB payout. Previously, the household had to have less than $5,000 outstanding on a home loan.
With the revision in rules, the number of elderly households that stand to benefit from LBS has risen to 34,800 or 82 per cent of elderly households in three-room and smaller flats.
One key advantage of the LBS is that you get to live in your home and at the same time receive a lifelong income.
Mr Ben Fok, chief executive of Grandtag Financial Consultancy, says: 'This option is viable for owners who are comfortable to stay where they are and do not wish to move or downgrade to a smaller flat. They prefer not to sublet their flat as privacy may be important to them.'
The downside is that upon the death of the retiree, he may not leave behind anything for his loved ones. In Asian culture, this may not be well accepted, says Mr Christopher Tan, chief executive of wealth management company Providend.
And retirees may also not like the idea that the house they are living in no longer belongs to them.
Mr Leong Sze Hian, president of the Society of Financial Service Professionals, however, believes that the owner will be worse off under this option.
He believes that HDB flats will be worth more 30 years down the road. After all, they have always increased in value historically, as old flats may be selected for en bloc redevelopment. Under this programme, the residents of affected blocks will be offered replacement flats. In fact, he notes that older flats have generally appreciated more, as they are in mature estates with more amenities.
Based on an annual price appreciation of 5 per cent for an HDB flat, Mr Leong works out that a flat valued at $200,000 now will be worth $864,388 in 30 years.
Subletting
Another viable option is for elderly people to sublet their rooms. Mr Leong says this option is suitable for the retiree who wants to grow old in his own flat and still have some rental income.
According to the NUS study, about seven in 10, or 74 per cent, of the elderly prefer to 'age-in-place'.
The retiree can also opt to sublet his entire flat by moving in with his children. One key advantage of this is that the appreciating equity of the flat is retained by the flat owner, adds Mr Leong.
Mortgage consultancy Housing LoanSG.com founder Dennis Ng prefers this option to LBS, as he believes it is possible to rent out a room for $400 to $500 a month while the elderly person still retains ownership of the home.
Mr Fok cautions, however, that the owner may have to pay income tax for rent collected.
Of course, the inconvenience of having strangers in the house cannot be avoided. The owner will have to contend with losing some degree of privacy as well as putting up with strangers who may have different lifestyle habits.
Says Mr Tan: 'Not only is your privacy being intruded upon, but your whole life may be disrupted too. You share his friends if he brings them back, and you have to share the kitchen, the bathroom, the TV set and more. I am not sure whether a retiree is willing to sacrifice so much during his golden years.'
Downsizing
Another option is for elderly people to sell their flats and downgrade to smaller flats or to HDB studio apartments.
According to the NUS study, significant sums will be cashed out if elderly people downgrade to smaller units. On average, $79,000 or $132,000 can be cashed out by downgrading from four-room to three-room or two-room flats, respectively. The sums could be even higher now, given the current trend of appreciating HDB prices.
If, say, $79,000 is placed in an annuity, a man can get a monthly payout of $502 to $526, and a woman can get $450 to $472 a month, for life.
If the elderly person opts to downgrade to an HDB studio apartment, which costs less than $100,000 currently, the cash proceeds would be even higher, says Mr Ng.
Most financial experts agree that downsizing seems to be the best financial option. After all, most retirees will conclude that they do not need to live in a big flat upon retiring.
The advantages are clear, says Mr Tan.
'You may get some cash for selling your bigger house and buying a smaller one, and at retirement, you do not have to spend so much energy cleaning the bigger premises. At the same time, expenses such as utility costs are lower with a smaller apartment.'
Mr Fok likes this option because it can help to reduce one's debt if there is an outstanding mortgage.
'You clear your debt and use the proceeds to buy a smaller home and be debt-free,' he adds.
Working longer
Mr Tan believes that the real option is really retiring later and working longer. But in order to do that, he proposes the following:
Accept that you have to work through your golden years. This is really a mindset shift, and you must make this shift at least five years before your planned retirement age or before you leave your current place of work.
To suddenly realise that you have to work longer without mentally preparing for it may be very tough to accept for a retiree.
Keep yourself healthy. Many may want to work but find that they no longer have the health to keep working.
Keep yourself relevant to the corporate world. Decide what is needed in the job market now; find something you would like to do and go for training. After all, you are bound to want to do something that you like, so it is best to start preparing yourself early.
If you want to go into business, prepare a business plan and do a cost-benefit analysis. Ask yourself if you can afford to lose your money.
This article was first published in The Straits Times.
Fri, Apr 30, 2010
The Business Times
By Lorna Tan
The reality of just how much it costs to retire is sinking in for many people.
As a result, more expect not to be able to retire completely - they will need to turn to part-time jobs in their golden years.
Related stories:
» Minimise risks of retirement
» Tinkering with the CPF rate
This was a key finding in a recent survey by Russell Investments and The Nielsen Company on how Singaporeans are planning for their retirement.
The findings indicated that about 70 per cent of the more than 500 respondents believe they will need some part-time work to supplement their retirement income.
Singapore's rapidly ageing population is a cause for concern, with the number of people aged 65 and older expected to treble to 900,000 in 20 years, from about 300,000.
Adding to the bleak picture: The survey indicated that only half of Singaporeans who have not reached retirement age have made financial plans for their nest eggs.
It is no wonder that experts constantly emphasise that when you fail to plan, you plan to fail. But for those who do not have time on their side and have yet to start mapping out their plans, not all hope is lost.
The Sunday Times looks at the income options available to low-income elderly people, particularly those with no financial plans. Some of these options look at the flat as an asset, as well as a source of rental and retirement income.
Lease Buyback Scheme (LBS)
Launched on March 1 last year, the scheme allows low-income elderly Singaporeans living in three-room and smaller flats to monetise their flats to supplement their retirement needs.
It is believed that these households need more financial help, as they are unlikely to be able to take advantage of other options such as downsizing to a small flat or subletting a room.
Under the scheme, the HDB will buy back the tail end of a flat's 100-year lease at market valuation, leaving a 30-year lease for the owner. For example, if a flat has 70 years left, the HDB buys 40 years of the lease from the owner. It pays the market rate for the 40-year lease and this money goes to the CPF Life national annuity scheme in the flat owner's name. He will then receive a monthly income stream for life.
According to a study last year on unlocking housing equity for retirement by Dr Ngee-Choon Chia and Dr Albert Tsui, a three-room flat which is now worth $236,000 has an estimated housing value, unlocked from a 40-year lease, of about $109,000 at present.
The monthly annuity payouts from CPF Life through the buyback of the three-room flat is $694 to $724 for a man and $620 to $650 for a woman. Monthly payouts for women are lower than for men because of the longer life expectancy of women, on average.
Both the study's authors are from the economics department at the National University of Singapore (NUS).
To be eligible for LBS, the homeowner must be aged at least 62, have enjoyed only one housing subsidy and must have occupied the flat for at least five years, among other conditions. If the owner dies before his lease runs out, his family gets the refund of the balance.
At the start of this month, the scheme was broadened to include those who previously owned four-room or bigger flats.
It also includes those with outstanding housing loans exceeding $5,000, but who are able to buy an annuity under CPF Life for at least $60,000 with the HDB payout. Previously, the household had to have less than $5,000 outstanding on a home loan.
With the revision in rules, the number of elderly households that stand to benefit from LBS has risen to 34,800 or 82 per cent of elderly households in three-room and smaller flats.
One key advantage of the LBS is that you get to live in your home and at the same time receive a lifelong income.
Mr Ben Fok, chief executive of Grandtag Financial Consultancy, says: 'This option is viable for owners who are comfortable to stay where they are and do not wish to move or downgrade to a smaller flat. They prefer not to sublet their flat as privacy may be important to them.'
The downside is that upon the death of the retiree, he may not leave behind anything for his loved ones. In Asian culture, this may not be well accepted, says Mr Christopher Tan, chief executive of wealth management company Providend.
And retirees may also not like the idea that the house they are living in no longer belongs to them.
Mr Leong Sze Hian, president of the Society of Financial Service Professionals, however, believes that the owner will be worse off under this option.
He believes that HDB flats will be worth more 30 years down the road. After all, they have always increased in value historically, as old flats may be selected for en bloc redevelopment. Under this programme, the residents of affected blocks will be offered replacement flats. In fact, he notes that older flats have generally appreciated more, as they are in mature estates with more amenities.
Based on an annual price appreciation of 5 per cent for an HDB flat, Mr Leong works out that a flat valued at $200,000 now will be worth $864,388 in 30 years.
Subletting
Another viable option is for elderly people to sublet their rooms. Mr Leong says this option is suitable for the retiree who wants to grow old in his own flat and still have some rental income.
According to the NUS study, about seven in 10, or 74 per cent, of the elderly prefer to 'age-in-place'.
The retiree can also opt to sublet his entire flat by moving in with his children. One key advantage of this is that the appreciating equity of the flat is retained by the flat owner, adds Mr Leong.
Mortgage consultancy Housing LoanSG.com founder Dennis Ng prefers this option to LBS, as he believes it is possible to rent out a room for $400 to $500 a month while the elderly person still retains ownership of the home.
Mr Fok cautions, however, that the owner may have to pay income tax for rent collected.
Of course, the inconvenience of having strangers in the house cannot be avoided. The owner will have to contend with losing some degree of privacy as well as putting up with strangers who may have different lifestyle habits.
Says Mr Tan: 'Not only is your privacy being intruded upon, but your whole life may be disrupted too. You share his friends if he brings them back, and you have to share the kitchen, the bathroom, the TV set and more. I am not sure whether a retiree is willing to sacrifice so much during his golden years.'
Downsizing
Another option is for elderly people to sell their flats and downgrade to smaller flats or to HDB studio apartments.
According to the NUS study, significant sums will be cashed out if elderly people downgrade to smaller units. On average, $79,000 or $132,000 can be cashed out by downgrading from four-room to three-room or two-room flats, respectively. The sums could be even higher now, given the current trend of appreciating HDB prices.
If, say, $79,000 is placed in an annuity, a man can get a monthly payout of $502 to $526, and a woman can get $450 to $472 a month, for life.
If the elderly person opts to downgrade to an HDB studio apartment, which costs less than $100,000 currently, the cash proceeds would be even higher, says Mr Ng.
Most financial experts agree that downsizing seems to be the best financial option. After all, most retirees will conclude that they do not need to live in a big flat upon retiring.
The advantages are clear, says Mr Tan.
'You may get some cash for selling your bigger house and buying a smaller one, and at retirement, you do not have to spend so much energy cleaning the bigger premises. At the same time, expenses such as utility costs are lower with a smaller apartment.'
Mr Fok likes this option because it can help to reduce one's debt if there is an outstanding mortgage.
'You clear your debt and use the proceeds to buy a smaller home and be debt-free,' he adds.
Working longer
Mr Tan believes that the real option is really retiring later and working longer. But in order to do that, he proposes the following:
Accept that you have to work through your golden years. This is really a mindset shift, and you must make this shift at least five years before your planned retirement age or before you leave your current place of work.
To suddenly realise that you have to work longer without mentally preparing for it may be very tough to accept for a retiree.
Keep yourself healthy. Many may want to work but find that they no longer have the health to keep working.
Keep yourself relevant to the corporate world. Decide what is needed in the job market now; find something you would like to do and go for training. After all, you are bound to want to do something that you like, so it is best to start preparing yourself early.
If you want to go into business, prepare a business plan and do a cost-benefit analysis. Ask yourself if you can afford to lose your money.
This article was first published in The Straits Times.
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