Invest too aggressively and you could end up losing all your hard earned savings. Invest too conservatively and your money dwindles in value because of inflation. Consider your risk profile and investment time horizon to retirement and achieve sufficient diversification.
The average cost of living rises by 3% per annum in Singapore. The average fixed deposit grows at less than 1%. So if you put your money only in fixed deposits, your money is effectively losing against inflation. For people who want zero risk and prefer to leave their money in the bank, they do not realise that by doing so, they are subjecting themselves to inflation rate risk.
To beat inflation, the only way is to save and invest. Whether you are a high risk taker, a balanced or a conservative investor, a suitable wealth accumulation strategy can be structured for you – one that has the right mix of savings and investments component.
Spending your nest egg requires planning. A smart drawdown plan takes into account a solid budget of expected expenses, the sources to withdraw income from and a cash cushion within the retirement savings to meet short term financial needs. This way, you do not overspend or underspend and avoid the situation of selling off investments prematurely.
Dividends and interest generate the income you need in retirement. However, do not be afraid to tap into capital gains and even dip into the principal, as and when necessary, to replenish your cash buffer over time. The important thing is to have a contingency plan in place for unexpected situations like, for example, a downturn in the markets.
Will you run out of money while you are still alive?
It may not be a bad idea to start with a smaller withdrawal rate per year and then if your investments perform well, you could increase the withdrawal amount down the road. Withdraw too much and it could deplete your savings way too quickly, leaving you with very little towards the later years of your retirement. Also, increasingly long life expectancies reduce the retirement savings you can spend each year as this money must last you longer.
Nobody can tell the future with full confidence. Many of the assumptions used to estimate safe withdrawal rates will likely be irrelevant or inapplicable during the 30+ years you live in retirement. You will never know when your time is up … your health and genetic makeup may lengthen or shorten that time-frame. Therefore, the lesson here is to plan your retirement savings to last in perpetuity.
Wealth accumulation and monetization are 2 distinct phases in retirement planning.
During the Wealth Accumulation phase (prior to retirement):
During the Monetization phase (during retirement):
Inflation makes goods and services more expensive and decreases the value of your money. Yet, most people underestimate the impact of inflation on their retirement plans. How much will S$10,000 in today’s value be worth at different inflation rates in 10 years time?
Singaporeans who are uncomfortable taking financial risks and who are happy parking money in bank deposits, playing ‘safe’, are facing a big risk – that of not protecting themselves against inflation. In the long run, savings will actually shrink and they could become poorer, not richer because of inflation.
What is your retirement nest egg (i.e. your golden number)?
Jane is age 35 and her target retirement age is 60. She expects to live till age 85. Her current monthly expense is $5,000. But this amount will drop to $3,500 in retirement as she would have paid off her mortgage and insurance plans.
It takes discipline and a sound retirement strategy to ensure that the impact of inflation is minimised.
Your lifestyle and needs will change with time. Hence, it is important to ensure that your retirement plan is up-to-date:
Many people make the mistake of not taking retirement planning seriously enough. They fail to start saving early, don’t save enough, or lack the financial literacy to make wise investment choices and manage risk. While more than 50% of Singaporeans believe they will not be able to live their desired retirement lifestyle, this need not happen to you!
Do not leave your retirement to chance. Talk to me today!