Karen Tang, CFP®: Certified Financial Planner in Singapore
Secure A Comfortable Retirement by Avoiding These 12 Mistakes - Part 3
Retirement Planning Mistake #9: Investing Too Aggressively – Or Not Aggressively Enough
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.
- Savings
This is the foundation to building your wealth. It provides certainty and security. - Investments
This will help your money grow at a faster rate and it does involve some risk taking. In investments, asset allocation is key. Asset allocation aims to balance risk and reward by apportioning a portfolio’s assets to the different asset classes, keeping in mind an individual’s goals, risk tolerance and investment time horizon. That is why rebalancing is important to ensure that the overall asset allocation is maintained. Asset classes include:- Cash
- Fixed income
- Equities
- Others (for example – property, alternative investments
Retirement Planning Mistake #10: No Drawdown Strategy for Your Retirement Savings
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):
- You are actively earning an income and have many more economically productive years to go.
- Your priority is long-term capital growth.
- You have a greater appetite for risk. When the markets are down, you are ready to take advantage of the lower prices.
- You do not require investment income at this point in time because you are paid a salary.
During the Monetization phase (during retirement):
- You may still be working to stay active physically and mentally. Your passive (retirement) income could come from sources like annuities, rental income and investments like unit trusts and stocks that pay dividends.
- Your priority is capital preservation.
- You have a lower appetite for risk. Market volatility is not your friend as it could depreciate your investments portfolio significantly, especially so if you are making regular withdrawals from your investments.
- Investment income is extremely important to you, especially if you are depending on it entirely for your expenses during retirement.
Retirement Planning Mistake #11: Underestimate the Effects of Inflation
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?
- At 2% inflation, it will be S$8,171.
- At 3%, it will be S$7,374.
- At 4%, it will be S$5,987.
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.
- Assuming inflation at 3% p.a.
- $3,500 in today’s dollars will become $7,328 by the time Jane reaches age 60 in 25 years’ time.
- With 25 years in retirement, and assuming net inflated adjusted return is 0%, Jane needs to have in place a retirement fund of $2,198,400!
It takes discipline and a sound retirement strategy to ensure that the impact of inflation is minimised.
Retirement Planning Mistake #12: Not regularly reviewing your retirement plan
Your lifestyle and needs will change with time. Hence, it is important to ensure that your retirement plan is up-to-date:
- The asset allocation of your investment portfolio needs to be rebalanced if it has shifted from your original asset allocation (which takes into account your investment objective and risk appetite)
- Your insurance coverage ought to reflect any changes in income or life events like marriage, the arrival of a newborn and supporting elderly parents. I can’t emphasize enough that life insurance covering death is critical when you have dependents.You can be retirement-ready or even retire early!
A Final Word
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!