With COVID19, we have entered a new normal. The heightened alert situation has also afforded many people more time for reflection and thinking. We have to rush around less when we can't work in offices or dine out.
As I take in the new normal, I've also been afforded the time to reflect on my own life and do more financial planning for myself. I usually put my clients first and hence been very slow to put into action my own financial plans. This stay home period, I managed to get some done!
Which leads me to this question.
What's your biggest financial fear?
What steps have you put in place to mitigate them?
In this article, I share my views on my own fears and how I mitigate them.
What if I outlive my money?
Financial planning for me has always been motivated by the desire to sustain my quality of life. It can improve but it mustn't deteriorate beyond my minimum happiness level.
As I interact with more people, I'm beginning to realise that longer life expectancy is becoming an area of concern I can't neglect. I personally know a relative who is currently age 100 who is still fit and healthy.
If I only know 1 such person and haven't had more data, I'd say this is an anomaly. However, my friends in healthcare are confirming that there are more and more age 100 patients they are seeing and we haven't factored in those not seeking medical care.
What does this tell us?
Our quality of life is getting better. We are living longer and longer. I am not sure what contributes to our increased lifespan. Is it our clean sanitation or food we eat or lower stress levels... but if this keeps up, then living to 120 might become a new normal during my retirement.
1st Concern: Living longer means same working period to save for a longer retirement
I once did this slide as an infographic. If our life expectancy extends to 100 from 85, our money needs to last for an additional 15 years. Our money needs wouldn't increase in a linear manner because inflation impact is exponential.
2nd Concern: Longer life expectancy may not mean later retirement
Initially, I simply assume that since we are living longer, we can just extend our working years. However, it leads me to the second question. If we simply have more people on earth, are our jobs availability expanding or do we need the same amount of manpower?
If the older workers are going to be holding on to their jobs longer than expected, do the younger workers still have jobs to apply for?
Given that we are entering a new era of technology and gig economy, it is likely that the self employed market might become flooded. Above all, simple tasks are phasing out through technology and companies now only need to hire people to do the brainwork, less sweat work.
Financial implications
If I take my own needs as an example, living till 85 only requires me to set aside a fund of $2,232,824. If I invest my money, I only need to set aside a monthly investment amount of $3,000 per month at a modest 5% return from now till retirement to fulfill this goal.
On the flip side, I need $5,310,711 if I were to live till 100. Of course, there will be the debate about active and passive retirement as we age. However, I very much hope I'm fit and healthy if I live till so old and I wouldn't want to be confined to sleeping at home so naturally the lifestyle expenses is expected to be equal. In fact, my expenses might go up as I currently function without a helper.
This means I need to set aside about $5,500 every month for investments and this is money I can't use till I retire.
Unforeseen issues in the Gig Economy
Being your own boss can be lucrative. At the very least, your per hour can be much higher as you have free time when you don't work. However, the biggest issue with these is the lack of CPF.
A huge portion of the country still depends on CPF for forced savings. This is evident in our 90% home ownership data. Without CPF, will we still achieve 90% home ownership?
As much as people within the gig economy enjoy the autonomy and sufficient money to sustain themselves working, retirement might become a major issue if financial planning isn't done right. There's no safety net!
Retirement planning for longer life expectancy
Generally, Covid19 has also taught me that retirement can be really affordable if we stay confined to Singapore and cook at home or eat economical rice everyday. It just would bore the hell out of me if I did this for 40 years.
One general rule of thumb that is fairly safe to follow based on my interactions with happily retired retirees is to not touch your capital. As long as you are spending from some forms of additional income, your retirement is safe!
Build multiple income streams
Retirement planning is not rocket science. So if you have been reading this space, it'll sound like a broken record. The monies during retirement has to generate an income. Often to do so, you need to plan ahead because low risk instruments generally might run into a yield problem like how the folks who build their wealth saving in fixed deposit are discovering today. The common regret is not taking up annuities earlier (if they start when they are retired, there will be a number of years with no income before the payout starts). Lifetime income is so attractive now that there is few options to reinvest your money.
Of course, the alternatives would be income generating investments like bonds and equities. In Singapore, REITs is a hot favourite. Retirees though have shown a lower preference for fluctuating assets during retirement.
In my view, predictable income during old age is very much welcome. The more expenses could be replaced by extra income the better it is. At the minimum, it'll be good if the fixed expenses are replaced by predictable income.
Investing for Capital Gain
A common investing behaviour of retail investors today is still an emotional preference for income even during their working years. If you look at the figures I need for my retirement, investing for income requires a crazy amount of capital which most people starting out wouldn't have. At 4% dividend rate, you need $1,000,000 to generate $3,333 in monthly income. Not even enough to cover my retirement. To achieve such figures, you typically have to sink in huge amounts of capital and it may also mean an overly skewed percentage of a person's resources is stuck in income generating investments that can still fluctuate in value.
During the working years, especially when one has time on your side, it might be more prudent to invest for capital gain. If one is worried, dollar cost averaging generally can mitigate risk.
The issue with investing is the fear of loss of hard earned money. This is why there's a need for portfolio management to balance out the risk. A good mix of guaranteed returns with non guaranteed gains would help hedge again emotional behavior. You need a mechanism in place where if the market tanks suddenly, you can still remain zen.
Start early!
Even as a financial advisor, I view myself as a late starter. Part of the reason is because I only got proper financial knowledge training 2.5 years ago when I joined my current firm. Time is your biggest friend in my opinion. It makes it easier to accumulate wealth if you begin early with the right foundations.
Most people delay till they have no choice or start with a lukewarm effort. There's always excuses that something else is more important.
My take is, when resources are scarce, you need a good advisor to provide counsel. You cannot afford to be frivolous with your money because you need to maximize it. A quality retirement is definitely achievable when you plan right.
In summary
My biggest financial concern at the moment is the risk of running out of money to sustain my desired lifestyle if I live too long. To stretch my funds, I've committed pretty substantially to my financial planning needs the past 2 years. My own risk appetite is fairly aggressive hence I'm investing heavily for capital gains but I also take up instruments that provides income for my fixed expenses needs in the long run.
Hopefully this article gets you thinking about your own biggest financial fear. I just want to reassure you that most money issues can be resolved with good planning. The key is to start early.
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 retirement 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'.
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