You must have heard this phrase eat an elephant one bite at a time. This is also the mindset many of us adopt when doing financial planning - especially retirement planning. After all, financial planning is a long term process and we can add on to our portfolios during financial reviews right? So it's alright to start small, bite size.
What if bite size retirement planning can't give you the retirement lifestyle you want?
This doesn't mean that doing bite size retirement planning is not useful. I'm just saying, it might not help us to maintain the quality of life we are currently enjoying when we retire. Take weight loss for instance, taking a 30min walk every morning is definitely healthier than not going for a walk. But is it effective in helping a person lose weight if they maintain a high calorie intake while their metabolic rate is slowing down with age?
Not necessarily right?
In this article, I touch on these consequences bite size retirement planning brings:
Getting a false sense of security that you are on track to maintaining your lifestyle during retirement.
Paying for psychological comfort with lost time
How fear increases with age
Getting a false sense of security that you are on track to maintaining your lifestyle during retirement
Setting aside a bite size amount from our salaries towards our retirement and gradually contributing more to the pot is a common approach in Singapore. If we spend our entire work life religiously contributing to our retirement, we should be able to retire without downgrading our lifestyles eventually right?
This is the first trap of bite size retirement planning. If we spend our entire life trying to be responsible to ourselves, isn't it a waste if it doesn't give us the outcome we hope for?
The only benefit of a bite size approach is the psychological comfort that we are doing something towards our retirement. The rational basis is often weak.
Firstly, bite size often refers to us allocating a minimal amount of our disposable surplus to our retirement efforts. So a person with $50,000 disposable yearly surplus opting to contribute $6,000 yearly to retirement planning and keeping $44,000 in the bank is one such example.
We all know that bank deposit interest rates (with the exception of these 2 years) have been exceptionally low. Even at the current deposit rates, inflation rates are scarily higher. This means that holding a majority cash position would expose the bulk of your money to inflation risk while a small portion of your funds grows at a rate that hopefully beats inflation.
Even as one income grows, as long as the retirement planning contributions remain proportional to the sizeable surplus, the retirement strategy remains bite size and minimally effective.
Ask yourself this question, why are you doing retirement planning if at all? You are probably aware of the rising cost of living and the potential possibility that our reduced purchasing power might downgrade our lifestyles.
Would having a small percentage of our surplus in instruments that beat inflation while the bulk of our funds take a definite loss to inflation serve our purpose? Does this approach help us to maintain our quality of life during retirement or help us to merely downgrade less?
We should also consider the possibility we can't retire if our strategy is too bite size...
The last thing we want after 40 years of regular meetings with our banker, financial advisor or blocking out time to DIY, we realise our gap at retirement is far larger than we expect.
Paying for psychological comfort with lost time
Having more cash on hand gives us temporary psychological safety. Excessive cash on hand subtly jeopardizes our retirement dreams without improving our present quality of life.
Take a look at this simple illustration of the amount of savings we need in order to retire a millionaire. This graphic shows us the amount of money we need to set aside each month depending on whether we hoard our money in a bank savings account or an instrument with a 3% or 5% to achieve $1million by 65.
There are a few considerations from this graphic. Firstly, the money we set aside cannot be spent. Otherwise, the money won't be there at 65. Imagine a fresh grad earning a wage of $3,500 gross income before CPF. Setting aside $1,852 per month would leave he/she with limited funds for bills and a decent social life.
On the other hand, if one chooses to utilize financial instruments with a potential higher return, they need to commit less to achieve the same goal. This gesture actually frees up their cash flow for short term needs without compromising on long term goals.
The longer one takes to realise this concept, the more money one needs to set aside in higher return instruments as one ages.
I would like to point out from my experience as a FA, most Singaporeans need more than $1million dollars for retirement.
This is also why we should start our effort for retirement planning at a higher threshold early. Imagine investing $1000/month for retirement planning in our 20s, stacking another $1000 - $2000/month in our 30s to 40s as our incomes increase is a lot easier.
Comparatively, imagine starting our journey at $300/month and periodically investing more $300 - $500/month. There will be a huge shortfall in our retirement needs by our 40s and the demands for our new monthly contribution might balloon to $3000 - $4000. The huge jump in commitment would make it psychologically excessive and more often than not, dissuade us from even trying.
Many people end up with a 'hope for the best' mentality.
Our fear increases with age
We dare to take more risk in our 20s than our 50s. This applies to our career decisions and our willingness to try investments.
When we are older we command higher salaries and hopefully have more savings. At the same time, we also worry about retrenchment risk and health risk. As we age, we also want more guarantees compared to our willingness to take on more uncertainty when we are younger.
Safer instruments also means a lower return and higher investment commitments to get a similar net dollar amount.
The willingness to part with more disposable income if we have not done it before becomes scary in our 40s and 50s. What if I cannot continue this commitment if I lose my job? I can't quit my job even though it is stressful and I might end up using my health to exchange for money!
Yet, if our investment strategy was bite size when we were younger, we will eventually realise our retirement shortfall becomes a big hole. It's mathematics. If your lifestyle cost $4,000 now, you will need at least $8,000, 20 years later.
The purpose of this article is not to tell you to go big or go home.
Rather, it is to create awareness about the dangers of bite size retirement planning as a strategy. It is okay to take baby steps to get started.
It's just not okay if you take baby steps all the way.
Unless, your expenses are super low, your income is super high and you can hoard your cash to retirement.
Even so, why would you want to subject your cash to a definite loss to inflation?
After reading this article, you may have some questions or may want to find out more about retirement planning through a conversation with me. 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 retirement planning.
About Janice
I specialize in wealth management 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 achieve tangible financial goals without compromising on their aspirations and many clients reach out to me in order to achieve their ideal retirement goals. 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'.
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