Active Stock Investing and Your Retirement Plan – How do they fit together?
When planning for your sunset years, the premise is that you want to secure your financial future beyond your healthy, productive years. However, you need to have a retirement plan, to begin with.
Most retirees want to create a source of income and the stock market is an ideal investment ground where you can achieve that goal. Thus, it would be beneficial to engage in active stock investing to add to a retirement portfolio.
Of course, there are risks to this investment option that you have to consider. But if you can play your cards right, those perils can be minimized. The key to winning in the stock exchange is to always make well-informed investment decisions. Otherwise, the setbacks can lead to a financial dislocation in the future.
Retirement Age in Singapore
The minimum retirement age in the Lion City is 62 years old. Fortunately, Singaporean citizens and permanent residents are protected by law. No company or employer can fire out or pressure anyone to quit a job any time before that age. There is also the possibility of re-employment. You can still work up to age 67 if your health permits.
Nonetheless, those who plan ahead have greater chances of retiring early before the minimum age requirement. In the current times, the retirement age can be within the age range of 40 to 70 years old. But since there is an abundance of earning opportunities, the sooner you can chart your retirement goals the better.
Who doesn’t want to retire early and enjoy the good life? The millennials, in particular, are coming to their senses around. Retiring early is becoming a top-of-mind option.
Just thinking about the leisurely vacations you can have while still energetic is enough motivation to build wealth. One can quit the everyday humdrum if you can shape your retirement plan early.
Shape your retirement plan
The younger professionals are fortunate. They can seize the moment when they become financially independent. Time is on their hands and they can easily set a target age for retirement.
The next step is to forego useless spending and think about investing. Allocate a portion of income to save and build the investment fund. Once an adequate amount of investible capital is reached, begin your stock investing activity.
It’s not an exaggeration to advocate for saving heavily. You can begin drawing up a comprehensive retirement plan while you save. By learning the rudiments of stock investing, you can set your retirement plan in motion. You will become an astute investor and develop the trading skills as you go along.
Hence, the earlier you stay invested, the likelihood of earning more in the future is certain. Just imagine the compounding effect of the returns on your stock investments by the time you reach your retirement age target.
Investing for retirement and your risk appetite
Let us assume that you’re starting to invest at age 30 and 25 years is your time horizon to retire. But because you’re investing your hard-earned money, safety and risks are two major considerations. It is then extremely important to save up while gauging your personal risk appetite.
Amount of investment
In terms of required savings for retirement, you should at least have roughly S$17,000 annual savings to enjoy a decent retirement. With that much savings, it is suggested that S$5,000 annual stock investment is a good start.
As your savings grow and learning in the stock market deepens, you can decide to increase the amount of investment. But the recommendation of some financial planners is that if you’re 30 years old, stocks should comprise 70% of your investment portfolio.
The stock market may not be the avenue for you if you’re ultra-conservative and risk-averse. Others with zero-risk tolerance would rely on a fixed deposit account that will earn 2.0% per annum at best. But this type of investor will not realize the compounding effect and therefore minimal earnings.
Working Singaporeans and permanent residents can always depend on the Central Provident Fund (CPF). The best return of 4.0% p.a. is relatively better than the fixed deposits. This is also risk-free.
But for those who want higher returns, active stock investing can deliver and with a faster accumulation of principal and interest. Keep in mind that the higher returns mean higher risk too. The important thing is to choose your investment mix wisely.
Diversification can mitigate the risks. You can opt to purchase value stocks or invest in exchange-traded funds (ETFs). A dividend-paying stock or ETF is another alternative to add earnings.
On the average, your stock investing could earn 6.0% p.a. In case you want a higher yield, you can try growth investing once in a while. You can earn as much as 8.0% p.a. on growth stocks.
The downside to active stock investment
Providend’s portfolio manager Sean Cheng, points out that most professional fund managers who practice active stock investing underperform the market indices that they are trying to beat. For example, as of Dec 2017, over a 15-year period less than 8% of professional fund managers managed to outperform the S&P 500 Index, which tracks 500 of the largest companies in the United States.
“What this means is that if you had simply invested in a low-cost fund that seeks to mimic the S&P 500 Index, you would have enjoyed better returns than by investing with the large majority of professional active fund managers,” said Cheng, who adds that the amount of active stock investment in one’s retirement planning portfolio is “a matter of personal preference and a rational weighing of the opportunity costs involved”.
“But consider this: perhaps the greatest active stock investor of all time, Warren Buffett, has instructed that when he dies, his wife’s retirement portfolio is to have 10% invested into short term government bonds, and 90% into a low-cost passive stock fund. In other words, 0% of his wife’s retirement plan will be in active stock investments,” Cheng continues.
“So if you decide not to have any active stock investments in your retirement portfolio, you’ll be in good company.”
The sunset years may come faster than you think
Every individual has a specific retirement goal. But everyone’s retirement plan is anchored on a pre-determined time frame and financial objectives. The younger professionals with less financial responsibilities can start investing in the stock market to jumpstart their retirement plans. On the other hand, the older generation would go into stock trading for sustained income-generation.
Regardless of the group to which you belong, adding active stock investing to your retirement portfolio is a clever proposition. Your investment portfolio can generate the desired income if you stay invested in well-performing stocks.
The dream of many to retire early is not a remote possibility. However, it would be alarming if you don’t have a retirement plan. You don’t want to be financially wanting during your sunset years. Think comfortable retirement.