This idea first came to me during the year my mom was retiring. She was telling me casually, "if I got a million dollars, I'll go to the bank every month and put $100K in fixed deposit each month so that I can get at least 1K income for 12 months risk free."
When I heard it, I thought it was an interesting idea if she had a million in free cash. What I took away from this random comment is that when a person stops working, incoming cash is king. Anybody who tells you they just gonna save up and draw from their savings to spend obviously have an overly simplistic idea of retirement. I can vouch for this because I have a retired mother with healthy savings, no liabilities, 2 kids working and contributing in allowance and she's actively looking to make her money work harder for her because she feels insecure otherwise.
So unless you have a million in free cash earning interest... it's delusion to believe you can comfortably retire simply with savings in the bank and no additional income.
By the way, you got to be retiring today because $1K/month is not going to give you much spending power if you retire 20 years later...
A relevant article: 5 Retirement Strategies Common in Singapore
What are Lifetime Income Solutions?
This leads me to my recent fascination in lifetime income solutions which generates a certain amount of lifetime cash-flow depending on the initial capital injection. The simple mechanics of such solutions usually starts with either a lump sum or yearly contributions (can be monthly, quarterly and semi-annual), payout can start either after the contributions end or after a waiting period and the payout is yearly for life. The principal will be guaranteed usually after the payout period ends or for some other solutions there's a breakeven so you essentially have liquid cash with lifetime payout once your commitment period stops.
For today, I'd like to touch on 3 functional benefits of this concept and why I so intrigued by it.
1. Everything is good about a fixed deposit, except it does not beat inflation
My mom's idea of diversifying her money in FDs that gives her yearly payout over 12 months basically hits the nail on the desire for income. This is especially the case for retirees. In fact, I'd say that people put money into a fixed deposit purely because they do not really wish to lock up big sums of money and get a yearly return that's fairly better than bank accounts.
When I was working in the banks, a product that was sold like hot cakes were structured deposits which essentially lock your money up for about 5 years and gives you fixed and variable interests. It caters to people who basically want a safe instrument without the hassle of 'taichi-ing' their money between banks whenever their fixed deposit matures because banks only give preferred fixed deposit rates for fresh funds.
The shortest lifetime income solutions I know have a breakeven after 5 years. Essentially if you take out the money after 5 years (obviously you have to get the right solution), you don't lose anything but if you keep the funds there, you get a lifetime payout. The payout which is made up of a guaranteed and non-guaranteed component currently beats fixed deposits and structured deposit returns. So I see it as a potentially suitable instrument for people with idle cash who wants a better return that can potentially beat inflation.
2. If you replace all your expenses, you are retired!
Essentially if you build streams of income that replaces your fixed expenses, you can retire if you want. In fact I once read this article that talks about replacing blocks of your essential expenses with every 10K you save through investments that generates an income. His idea comes with an element of risk because it's totally non-guaranteed. I like the lifetime income concept because it comes with an element of certainty and with that comes control.
Of course the trade off between risk and reward is always time. Having said that, I'm not oppose to the author's idea of using investment instruments to defray cost. This is purely a case of risk appetite and finding the suitable instrument to best fit the need. I'm simply advocating the idea that you use your idle money to generate an income that can offset essential expenses and the day you can offset all your necessary expenses, you have the freedom to choose whether you wish to continue working in the job you are currently in.
3. The rich get richer because they do not fund their luxury expenses with their active income
Wealthy people get their money to work harder for them and through that extra income, fund their luxury indulgences. This fact is probably undisputed. Wealthy people invests their money in real estate, stocks, even businesses which in turn earn them income outside of their main source of income. The 9 to 5 worker simply believes that this strategy is limited to the rich.
It's not true! Anybody with idle cash in the bank which most responsible individuals who care about emergencies, retirement, should have, would be able to do so. It's only a matter of degree how significantly can you achieve this. For instance, a person with free cash 1 million might invest in property while a person with free cash 20K might choose to put in Singapore Savings Bonds. The functional objective in both actions essentially is to earn more returns than a bank savings account right? That is the similarity.
Lifetime income solutions may cater to savers with sums of idle cash who probably are unwilling to splurge on luxuries which they might wish to experience but will feel heartache if they spend their active income on this. If you deplete your savings, you will need months to shore it up again! However, if this excess income is earned from the free cash which on a normal day sits in a bank account earning pathetic interest, the guilt might lessen, the justification might be easier on yourself. Am I advocating spending irresponsibly? No! I'm introducing a concept of leveraging on existing habits to get more out of it without sacrificing what you currently have.
To find out more about lifetime income solutions specifically which ones suit your exact needs, please speak to a trusted adviser. You can also drop me a message if you like.
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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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