4 Ways to Plan for a Financially Independent Retired Life
When you are in your 20s or in your 30s, it’s hard to start planning for retired life. At this age, you have dozens of other more important priorities. But paradoxically, it is easier to be financially secure in your retirement years if you begin saving at an early age.
How much money will you need every month when you are in your 70s or 80s? Will your investments provide you with an adequate return and allow you to lead the lifestyle that you are used to?
These questions are not easy to answer with any degree of accuracy. But that should not prevent you from planning for your post-working years right away.
Here are some time-tested steps that can help you in this endeavour.
1. Step up your savings rate
If there is one rule that you must follow, it is this. Make it a practice to put aside a certain percentage of your earnings every month – the higher the percentage, the better. Many individuals find it very difficult to do this on a consistent basis.
People who don’t save regularly or don’t save enough usually fall into two categories. The first justifies spending every last dollar that they earn by saying that even if they save, the amount that they can afford to set aside is insignificant.
The second category of individuals who are unable to maintain their savings plan falls into a different trap. They start off with the best of intentions and save a very high percentage of their monthly income. But soon they discover that this savings rate is unsustainable. They stop saving and even spend the amount that they have managed to accumulate.
What percentage of your earnings should you save? The answer to this question depends on your personal circumstances and there is no one-size-fits-all rate that you can use. However, you can safely assume that if you put aside less than 20% to 30% of your net monthly income, you will find it difficult to meet your savings goals.
2. Don’t make high-risk investments
If your retirement savings get a late start, you may be tempted to make up by trying to earn a higher rate of return on your investments. The stock market provides a convenient option to implement this strategy.
The last year has seen Singapore’s Straits Times Index (STI) gaining almost 18%. The seven months from January to July 2017 alone witnessed a rise of over 15%. It’s hard to beat these returns.
One year return on the STI (data on 25 July 2017)
While it is indisputable that the stock market has provided a spectacular rate of return in the last one year, it is useful to remember that you cannot expect this trend to continue for any length of time. In May 2013, the STI stood at 3400+. That’s about 100 points more than its current level. An investor who had entered the market a little over four years ago would still be waiting to recoup his principal investment.
Does this mean that your retirement savings should not include an exposure to shares? On the contrary, you must allocate a part of your portfolio to the stock market. It is one of the best ways to beat inflation and register long-term gains. Just remember that a large portion of your savings should go into fixed income securities.
The “100 minus your age rule” could be a useful principle to follow. According to this rule, a 65-year-old person’s portfolio should be split into fixed income securities and stocks in the ratio of 65:35. As the individual ages, this proportion would increase in favour of fixed income securities. A 75-year-old retiree’s portfolio would have only 25% in the share market.
3. Don’t put all your eggs in one basket
Many Singaporeans have a large part of their wealth in residential property. Those who purchased real estate about 10 years ago have seen their investment register tremendous gains. The private residential properties price index stood at 93.1 in 2006. By 2013, it had climbed to 153, a gain of 65%.
One way to unlock this value is to sell your property and shift into a smaller house post-retirement. You could invest the surplus funds and finance your retirement with the returns that you make. Although this could be a sound strategy, it could backfire if the real estate market slows down.
That is exactly what has happened over the last few years. In the quarter ending June 2017, Singapore’s home prices fell by 0.3%, the 15th straight quarterly loss. Investors and home owners waiting for the market to turn around to cash in on their gains have seen their plans delayed for almost four years.
What is the lesson in this? It is highly inadvisable to rely on a single form of investment to fund your retirement. Your retirement savings should be split between your CPF, stocks, fixed income securities, and real estate.
In fact, you should diversify your holdings even within the same asset class. For example, your investment in the stock market should be distributed between several companies. You could also spread your risks by investing in a unit trust instead of buying the shares of individual companies.
4. Create a plan
Many Singaporeans take the approach of saving what they can and hoping that the amount that they accumulate will be sufficient to meet their needs when they retire. However, it is advisable to work towards a specific savings goal.
How much money will you need to lead a comfortable retired life? This calculator could help you to make an estimate.
When drawing up your retirement savings plan you need to address several other points. When will your spouse retire? Will you continue to stay in the same house or will you move to smaller premises? Do you intend to take up part-time employment?
Answering these questions will help you to arrive at a specific investment goal. You can then plan your savings around achieving this goal.
Monitor your progress
Remember that the plan that you have made is not set in stone. As the years go by and your retirement approaches, circumstances may change. Your savings may get a boost from several unexpected bonuses. Your ability to save could see a sharp decline if you or your spouse needs to take a lower paying job.
It is useful to review the financial plan that you have established at least every year. This will give you the opportunity to take corrective action and help you to stay on track to achieve the goal that you have set for yourself.