Do you often feel that financial articles and all financial advisors take pleasure in scaring us with regards to retirement? I recently even told one client, you need 7 million during your retirement years based on your current lifestyle. 7 MILLION?!
It's this balance of need and want that gives me this constant struggle. I mean, there are people who aren't earning much in Singapore and they somehow managed to make it. This makes me question, are we too pessimistic about retirement? On the flip side, I've clients who are resigned to working for as long as they can. "I don't believe majority of people can afford to retire in Singapore", one of them told me. So then are we too optimistic about retirement?
Let's take a look at the 4 common optimistic assumptions when retirement is discussed.
1. Cost of living will not inflate till it doubles every 20-30 years
I was studying the cost of my own necessities in the past and present. I drink coffee everyday and it used to cost 50-60 cents in the 1990s. Now the cheapest coffee in CBD costs $1.20 till even $1.80 (if you drink at toast box). Then there's chicken rice which costs $1.50-$2.00 in the 1990s and now most cost $3 - $4.50. What this appears to tell me is that cost of living seems to double every 20 years, at least that's what happened in the past.
Apart from relying on past data, I'd like to introduce the concept of the Law of 72. According to the law, 72/% = number of years to double your money.
This also tells us that if we peg inflation rate to about 2-3%, then it'll take between 24-36 years for cost of living to double.
Can inflation change? Of course, it can go higher or lower. However, do we really wish to be planning our futures with such optimism that only our ideal world exists and what happens if we are wrong?
2. I will downgrade my lifestyle during retirement
Is this really likely? Some people believe they can stay at home everyday and stare at each other for perhaps 20 years of their retirement. When we peg our present expenses to our current lifestyle which is 5 days of work and 2 days of rest, imagine what will it cost us if we suddenly have 7 days of rest.
To be fair, perhaps some people can really stay at home for 7 days and do this for years. However, I'm highly doubtful this applies to the greater majority of Singaporeans. My mom, a fairly thrifty lady, who is happily retired, is constantly asking me if she should apply for this or that part-time work because she's too bored. Largely because of the age and education level, as kids we tend to discourage her to take up those part-time jobs because it's physically tiring and given that working is merely to pass time, we rather she do something else. So now she gets involved in taking classes, volunteering and travelling. All of which is an upgrade of her lifestyle if we compare her working life. In fact, she's becoming a savvier woman now compared to her pre-retirement days.
Why am I sharing this? Whenever I hear people claim they will downgrade their lifestyle and live simply, it makes me wonder how realistic this outlook is. Will people really be happy when they are forced to downgrade their lifestyle after a good 20-40 years living a certain way?
Sometimes we think we can do certain things because we wish to delude ourselves into not worrying about the future, but when the time comes and we live those conditions out, will we really be happy?
3. We do not account for illness or death of our spouse
Another aspect of retirement planning always carry this blind spots which people overlook. Let's touch on the illness aspect first. For a start, your hospitalisation plans cost will be much higher. Secondly, if one is sick and potentially without critical illness coverage, a chunk of your savings might be wiped out. Thirdly, you might need to account for hiring of caregivers. A lot of these factors are merely part and parcel of old age, but when people talk about their retirement needs in their prime years, they don't factor these in.
One reason why people may even consider downgrading their lifestyle during old age is partially due to the belief that they won't be bored because they can live simply for years with their spouse. It's the companionship that matters. But, what happens if either party leaves the other first? Your children would have their own lives then, are you sure you won't be bored?
What will you do if you are bored? You will hang out with friends, you might travel or join community social activities, so what will happen? You will spend!
4. As long as we did something for our retirement planning, we did our part
So the entire premise of this article and the optimistic outlooks that I'm exposed to are usually from people with stretched resources. Perhaps because there's limited resources to work with, people tend to be ambivalent about retirement planning. To many people and perhaps why roadshows still works today, as long as they have bought a financial product for their purpose, they are done.
However, wouldn't it make sense that because we have limited resources we need to be careful about how we spend our resources? I mean, if you are wealthy and you wish to grow your wealth, as long as your instrument gives you a return you are happy with, it's fine because you are wealthy and any additional gain is extra. However, if we got limited resources to work with, then every additional percentage gain would mean how much closer we get to ensure that we can maintain our lifestyle during retirement. In that case, it's not a matter of whether we did something for our retirement (because it's a given we should) but whether we made an effort to explore our options before we make a financial commitment.
Most people opt for convenience and that's really the problem. Your opportunity cost is the 20-30 years committed to a solution or lost of time where the funds can be put to better use.
Summary
In short, my objective for this article is to create thinking points for people to properly consider retirement planning. Ultimately, the one reaping the rewards of proper planning is ourselves.
Just remember the considerations:
Will you have enough based on future cost of living if inflation remains at 2-3% at 65-85?
Will you really be happy if you downgrade your lifestyle after 20-40 years of living as you currently do?
Are you prepared for the requirements of old age particularly if you are alone?
Is your current financial plans robust to meet your goals in the future?
If you would like to double confirm that your financial plans are adequate for your future goals, please sit down with a trusted advisor. Alternatively you can drop me a message and I can help you with it.
Be sure to share the article if you feel this information is helpful. Like my page if you would like to read more of such articles.
Articles which might also interest you:
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'.
コメント