There's really only two ways to save for retirement. You either set aside a lump sum to drawdown from till you are no longer around or you create a stream of passive income which can replace your expenses while you are alive. In this article, I'd like to talk about the pros and cons of both strategies and set you thinking what is your ideal method to save for your retirement.
Save up a lump sum so that you can spend it all when you stop working
This strategy is not uncommon. There are more people hoarding cash in bank savings accounts than people putting the majority of their cash in financial instruments to grow. Agree? This tells us that many people believe that by diligently setting aside their active income, they can hoard enough money to finance their lifestyle when they stop working. I would also like to put capital gain investment returns as part of lump sum savings. This can come in the form of stock and derivatives investing, property sale, endowment plans that pays a maturity benefit at a fixed age.
Pros
You will probably feel a sense of security if you have a big sum of money on hand when you stop working and no longer have income.
You have full control and flexibility of your funds to spend or invest as you wish given that you have set aside a lump sum to drawdown from.
Capital gains are not taxable in Singapore so you get to keep the bulk of your gains.
Cons
Having full control of your funds also means you might accidentally overspend during your retirement given that you suddenly have 7 days free to do whatever you want instead of working 5 days and resting 2 days.
You might under-estimate the effects of inflation and under-plan your lump sum to last you for a life-time. When we have active income now, we might not realise the effects of the increasing cost of living as much as when we have no income.
You might outlive your lump sum.
Creating a stream of income to pay for your expenses
The fundamental basis why income is attractive is because it proxies your salary. You get paid on a periodic basis and it's predictable. Some income streams like CPF Life is designed to give a lifetime payout.
Pros
You cannot overspend your total savings because it pays you either monthly or yearly. While you might overspend your one month worth of income, you will still have income to spend the next month.
Creating a stream of income for yourself would also mean that you have lump sum lying around in financial instruments creating cashflow for you. It also means your lump sum is still available in some cases to fund emergencies.
Some income payouts can be escalating in nature thus factoring in the increased cost of living
Your money can still continue to work for you given that you will not be spending all your savings in the first year of retirement.
Cons
It rations your cash flow based on the structure you set up prior to your retirement age. In a way it limits your flexibility.
Certain forms of income streams are taxable. Eg: rental income
You might outlive your income streams
Some income streams such as dividends in stocks, unit trust, REITs and rental income from property are non-guaranteed. It might leave you with reduced income and your capital is also subject to market conditions. This might leave you with lesser projected income than you expect making you downgrade your lifestyle.
Personally, I'll prefer a hybrid of both with a stronger inclination towards retiring by having my passive income paying for my expenses. I know for a fact that drawing down on a lump sum will breed insecurity as you see the total savings dropping month on month. Having said that, I like having a lump sum on hand to pay for emergencies while having an income stream to pay for the predictable expenses.
How would you plan for your retirement? Have you thought about it before?
If you would like to get started on retirement planning, please speak to a trusted adviser. You can also drop me a message if you do not know of a trusted adviser you can speak to.
Be sure to share the article if you feel this information is helpful. You will enable a lot more people to learn about growing their wealth.
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'.
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