The past few months I've been really occupied with helping clients plan their retirements. One interesting observation I encountered with younger clients/prospects is the belief that some retirement behaviors highlighted from personal experiences (I meet a lot of people with varying net-worths) won't apply to them.

In this article, I'm going to highlight my own observations from my interactions with the retired and provide some thinking points. As long as we aren't in our 60s when we read this, we still have some time to make plans and hopefully live out your dream retirement in a more hassle free manner.

1. Every comfortably retired person is not spending money from their capital

Retirement comes in 2 forms. You either save up a huge lump sum and drawdown from it or you put it into financial instruments and spend the income it generates.

One common worry that retirees encounter is the adjustment phase. That's the phase where the realisation that you no longer have an active income hits. Suddenly the amount of savings and assets you put aside during your working years becomes your resources to finance your lifestyle till you stop breathing. These resources would suddenly appear scarce and precious. Often, many financially prudent people will come to the conclusion that as long as they do not need to touch their scarce resources, they are safe!

Comfortably retired people use their resources to generate income

That's probably why all the comfortably retired people I know have an income stream that funds their expenses. The very frugal and less financially savvy ones would have amassed a significant lump sum that give them a decent pay out through fixed deposits. Eg: $1,500,000 @ 1% is $1,250 per month. Of course, they are panicking a little with the current interest rate environment... in their own words, "never expect interest rate to drop below 1%..."

The majority fall in between and have a good mix of invested assets like property, endowments, stocks, unit trusts as well as fluid assets like fixed deposits and cash.

Read also: How My Parent's Generation Saved For A Comfortable Retirement

2. Investment risk appetite reduce greatly and majority of funds are in wealth preservation tools

This point is interesting. I've been speaking with clients who are aggressively pro-investment and challenged the notion of whether would they be mentally prepared to stomach huge volatility during retirement. While most say yes, I remain doubtful. My more experienced colleagues who are more than 10 years in the industry casually remarked...

This is some data that I took from one of my own studies when I tested out the notion of investing about $20,000 +- into SPY ETF every 6 months starting from year 2000. The data above is the period from 2010 - 2020. This 10 years is somewhat like a golden era of investing because it was a very bullish period. However, COVID19 caused one of the fastest recessions too. Obviously, on hindsight we knew market rebounded above the March drop pretty quickly. However, few can stay calm during the 30% drop especially when it happened over 28 days. The question is, if this was your retirement money, would you have stayed indifferent when you saw close to $400K wiped from your retirement funds even if you are still in profit?

Most consumers wouldn't be thinking that there will be a V shape recovery. Rather they would be expecting a further drop to 50% given the severity of the pandemic at that point of time.

I guess how unemotional one will be depends on what percentage of your retirement funds lies in volatile assets and how significant does it contribute to your retirement expenses.

Most of the retirees I know only keep funds they can afford to lose in high risk assets. Most of their funds during retirement have been channeled to instruments that preserve their capital and offer income.

Some examples of these instruments I know include but not limited to:

• Buying tenanted properties without debt in children's name (as part their legacy planning)

• Annuities with premium financing (but have the full capital on hand to redeem loan)

• Dividend paying investment-linked policies which they do not intend to surrender but to leave as a legacy for their children (also part of legacy planning)

• Annuities

• Bonds

• Fixed Deposits

• Topping up CPF and spouse's CPF after retirement sum is fulfilled (hence fully withdrawable)

• Short duration endowments

It's pretty interesting how some of my wealthiest clients who built their wealth through high risk endeavours like business and equities told me they were done with risk during retirement. They were only keen to explore instruments that preserve capital and give them some money to spend during their living years. High return and uncertainty was no longer attractive.

Read Circuit Breaker Article: Self Employed, Coronavirus & Retirement

3. Search for yields become a form of active income

A common past time among the comfortably retired groups I'm exposed to enjoy sharing high yield deposit promotions with each other. For the extremely cash rich ones, it can be their weekly or monthly activity. One thing for sure, they will not leave their money idling in their bank accounts earning less than 1%.

This COVID19 pandemic poses an interesting scenario for this group. It's been ages since fixed deposit rates drop below 1%. Insurers are also rolling out lesser short duration endowments. Hence, it became an issue for the low risk consumer because they are sitting on cash with no place to put.

This might explain why property prices are not dropping despite the pandemic. Property is a potentially good store of value for large sums of money, obviously you still have to buy the right one.

Another relevant article: 5 Retirement Strategies Common In Singapore

4. Willingness to revisit longer duration financial instruments in view of longer life expectancy

The recent drop in interest rate and the acceptance of longer life expectancy has sparked a change in perspective for some clients. I've retiree clients who were only keen on short duration endowments or dividend income investments (some keep these portfolios simply to maintain their priority accounts in banks) because they must get 'interest' every year.

Recently, they became concerned with 2 issues.

1) They want to limit their exposure to investments but they have no place to store their funds given the low yield environment.

2) Most instruments linked to an insurer have a cut off entry age (mainly around 65-75) which means they would have limited low risk instruments to park their funds after that. Even banks who usually offer attractive structured deposits have remained quiet for the past year.

In the past it's not much of an issue because people are expected to die by 85. However, increasingly they are witnessing more friends and relatives living beyond 85, some till 100 that they are becoming concern with how to preserve their money later on.

This is why they suddenly become willing to entertain delayed gratification again.

What can younger adults learn from these behaviors to plan ahead for retirement?

There are a few takeaways I drew from observing retirees.

1. Reinvestment risk is a major consideration during retirement planning

The recent pandemic has proven that anything that hardly or never happens can happen. Plenty of cash rich retirees who believe they need not draw onto their cash reserves and capitalize on fixed deposit rates need to dip into their capital the past year. Fixed deposit rates have fallen as low as 0.45% and $1,500,000 of 0.45% is basically $500++ monthly income. A significant 50% drop from their conservative estimates of 1%p.a.

On the flip side, people enjoying annuity pay-outs and dividend income are still enjoying a steady stream of income during this period. Given the yield trends we are seeing in Singapore, the search for risk free higher yields is likely to be harder 10 to 20 years later. Hence, we need to consider if it's a good idea to focus our efforts on shoring up capital till we are 65 before evaluating where to source for good income sources.

2. Build a safety net before investing aggressively

This is my first recession since I began working. As my invested funds are not sizeable enough to give me a heart attack during the March dip, I could function pretty rationally. Above all, I was still drawing an income and the dip wasn't significant enough that I couldn't earn the money back. It however got me questioning myself if I'd remain so steadfast in investing (despite knowing the principal of riding out the fluctuations) if my portfolio was above $1 million and I am nearing retirement.

In my opinion the only way to build guts is when the money invested has no significant impact to your day to day functioning. In most cases, your fixed expenses. If you needn't worry about subsistence issues your entire life without suddenly down-sizing your house or changing your diet to bread and water, you probably won't panic much during a recession.

3. Focus on building predictable long term income streams early

The reason why so many people are trapped in this hunt for yields circle now is because of the unwillingness to delay gratification. Take for instance, annuities pay you a lifetime income and keeps your capital in tack while paying you. Yet for the ones who are used to a fixed deposit or structured deposit which pays you a yearly payout, they cannot wrap the idea around having no income for the initial few years.

The truth is, retirement is for at least 20 years and you don't start planning for it at 65. If you live even longer, retirement can be for 40 years. For as long as your mindset remains as low risk, capital preserved with lesser interest, your options remains limited to these income generating instruments. For most of us working adults, we don't need the returns generated during our working years but it becomes important during retirement. Hence, it is okay to not earn a return for the initial few years for a bigger sustained payout when you need it.

Disclaimer: Bank future promotional FD rates unknown. The image above is just a simulation. I took the annuity figures off an actual endowment plan but wouldn't wish to disclose the plan as this isn't a plan recommendation. It's just to reflect the idea of why delayed gratification might make sense. The total payouts calculated from each category is accumulated year on year.

In the image above, we can see that despite a delay in payout from the annuity, the payout potentially can outperform fixed deposit rates within a 10 year window. Even if promotional rates stayed at 2% per year for 10 years assuming structured deposits, the annuity would still marginally outperform if all projections are met.

However, that's not the point. The point is the long term consistent predictable income that one could get during old age (when you need the pay out). If one took up an instrument with a lifetime pay out, this pay out could potentially pay you for 30 years or more. This means that in a potentially low interest rate (promotional rates are at 0.35% or 0.45%) environment like now, the guaranteed interest alone could match some short duration endowments and it's unlikely that insurers would have zero bonuses perpetually. When viewed in this comparison, then perhaps safe fluid assets like fixed deposits might no longer be as relevant as our parents' generation as we progress as a nation.

See also: Why I'm Sold On Lifetime Income Plans

Hopefully this article gave you some new perspectives to retirement planning. If one prepares well early, it's not that difficult to achieve a manageable retirement that is enjoyable.

After reading this article, you may have some questions or may want to get started on a retirement planning. You can reach me by dropping me a message.

Be sure to share the article if you feel this information is helpful. You will enable a lot more people to learn about financial planning.

About Janice

I specialize in portfolio optimization (ensuring you get maximum value for every dollar you put in) and retirement planning. Clients look for me primarily to outsource their retirement planning needs so that they can focus on other aspects of life that interests them. Many of whom are very good in earning their incomes in their respective professions and wish to ensure their monies continue to work harder while they focus on what they are good at. Refer to client testimonials here.

I've helped many clients who are referred to me reduce the costs they are paying for their insurance or help provide solutions when they deem they are stuck with huge commitments bought when they were younger but unsuitable for their present life stages. You can reach me at 94313076 or my social media accounts on Facebook and Instagram.

Disclaimer: The content created are based on my personal opinions and may not be representative to everyone or any organisation. If you have any doubts or queries pertaining to insurance or investment, please seek professional advice from a trusted adviser in an official setting. You may also reach out to me if you do not have a present adviser using the message box under 'Let's Talk'.