Retirement: how much is enough?

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#1
Business Times - 18 Jan 2012

Retirement: how much is enough?


Funding your retirement years comfortably is a trade-off between playing it safe, taking risks and spending prudently

By BEN FOK

AT A FAMILY function, my 60-year-old cousin Peter asked me for my views on retirement planning. He said that over the last 35 years he has worked hard, consistently saved and prudently invested his money. When he retires in two years' time, this should provide him with a nest egg of about $500,000. As I listened to him, it seemed that he had secured his financial future. But he kept asking: 'Is it really enough?'

At this age, many would expect to have a significant retirement nest egg. If they don't, they had better do something about it now.

In Singapore, our official statistics show that there are more than 300,000 individuals aged between 50 and 54 who are due to retire in 10 to 15 years' time. As a financial adviser, I often discuss this subject with my clients but often this issue is not treated as a top priority. Understandably, there are other priorities, such as children's education and mortgage repayments or other immediate needs, that take precedence over retirement planning.

Given the current economic volatility, the outlook for those planning their retirement is very cloudy. Over the last two years, we have seen the cost of living here increasing yearly, making retirement more expensive and resulting in many more Singaporeans having to put off retirement for a few more years. With higher longevity and people not saving enough, the working population of those aged 60 and over will inevitably continue to rise.

In Peter's case, he and his wife are healthy and they are likely to have a long life ahead of them. So it would be a mistake to concentrate solely on what's happening now or even on what might happen months from now. Rather, they should focus on coming up with a spending and preservation plan that can assure them of enough money to live comfortably for the next 25-30 years, if not longer.

Hence, funding your retirement years is a trade-off between playing it safe, taking risks and spending prudently.

With the nest egg that Peter has accumulated, he can create a cash flow, and that is the most important consideration during his retirement. At this point, he has to set a reasonable withdrawal rate that will give him the spending cash he needs but won't deplete his nest egg too soon. Peter asked: 'How much can I safely withdraw from my retirement fund every year?' It is obvious that a miscalculation could result in an involuntary return to the workforce or having insufficient funds for retirement.

To help Peter understand how much he can withdraw, I produced a table to show the number of years his money will last.

The table shows withdrawal rates ranging from 4 per cent to 13 per cent and annual growth rate of investment from 3 per cent to 12 per cent, which resembles a 100 per cent stocks to a 100 per cent bonds portfolio.

It also shows how many years a sum will last at various withdrawal rates and various rates of return. If the withdrawal rate and the rate of return are the same, the principal will not change. For example, when $100,000 earns 8 per cent per annum and 8 per cent is drawn, the principal stays the same. This is another strategy by which a retiree can create an income stream. So if Peter invests $500,000 in a diversified investment that can give him 5 per cent returns, he can make $25,000 per year of withdrawals without affecting his principal.

However, if $100,000 earns 4 per cent per annum ($4,000) and 8 per cent ($8,000) is withdrawn annually, the $8,000 annual income will continue for 17 years before the principal is gone.

It is important to understand that the rate of return and the withdrawal rate determine how many years the principal will last. There are no guarantees, of course, but generally the lower your withdrawal rate, the better the chances that your money will last throughout your retirement. But when the earnings are less than the amount that is taken out, you are dipping into your principal, so your money will not last for a long time.

If you start withdrawing a small amount from your portfolio, and adjust it for inflation, the chances are that your money will last longer whether you invest relatively conservatively or aggressively.

So to enjoy a decent retirement, you need to be responsible for your old age by starting to save adequately and invest prudently for your retirement as early as possible. I also believe that it is just as important that people take financial advice well in advance of their anticipated retirement. We have to carefully assess their investment portfolios, as this could make all the difference in the long run.

Singaporeans are intending to retire later, and those planning to stop working between the ages of 60 and 65 will double in the future. With increased longevity comes increased risk of potentially outliving one's retirement assets.

Another point to note is the unexpected 'life events' that may happen. No one can predict what lies ahead in their retirement journey. While we can determine when we want to retire and exercise to keep in good health, there are no certainties in life. Planning for one's retirement years must include taking into consideration life events that have the potential to disrupt your retirement years.

Hence, certain protection products - like medical, hospitalisation and long-term care insurance - are still needed during one's retirement to protect against the potentially devastating effects of unexpected life events like death and chronic illness. We need to have a financial strategy that is flexible enough to adapt to a person's changing needs and circumstances. Retirement can truly be great, but only if you carefully manage your money throughout your golden years.

Note: The strategy described in this article may not be suitable for all readers. If you are in doubt, consult a financial adviser.

The writer is chief executive officer of Grandtag Financial Consultancy (Singapore) Pte Ltd. He can be reached at ben.fok@grandtag.com

My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
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#2
If you need 5k per month (today's money) or 60k per year, and you expect to live 20 years after stopping work, you just need 20 x 60k = 1.2 million to retire *now* - if you can grow your money *at* the rate of inflation, post retirement.

If you have passive income (e.g. children), or your expenditure won't stay constant, or you only plan to retire in x years time.... use excel.

Theoretically you have good health, you expect to live longer and therefore need more money ( - you will also be dining / travelling more). But if you have poor health, you hand your money over to your doctor, so that he will dine / travel more, on your behalf, while you do your final countdown. I still prefer the first scenario for myself.


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#3
If i need 60k per year. i will need $x and dump all into shares of a few good companies giving inflation proof dividend of 7.5%. Not difficult to get such shares during a recession. $x = 60k/0.075 = $800,000. After i die, if i have children, this 800,000 amount will be pass on to them or if not donated to charity.
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#4
You are right, you will need "inflation proof" dividend (dividend growing at the rate of inflation), of course the children will find the $800k having less purchasing power than before (unless the stocks can be sold at good capital gain, enough to beat inflation).

By the way, our problems are:
A.) the seed capital of $800k (sell house? downgrade? take equity loan?) +
B.) the crisis kind of opportunity to get yield as high as 7.5%.
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#5
Inflation proof dividend companies: SMRT, Semcorp, ComfortDelgro, Singtel and many more.
A)The seed capital will have to come from savings. Once 800k is reached, wait for max 10 years for a recession to happen then strike.
B) 1998 asia financial crisis, 2003 SARs, 2008 Global recession. I expect latest by 2018 there will be another one. But the common investor's problem is, are they willing to wait for as long as 10 years? Warren Buffet employ this method and he only dump most of his money in during recessions. The last recession i dump all investible cash into shares all yielding consistent dividend as high as 7.5-10.5% dividend. And i did it slowly buying down in a pyramid manner all the way STI 2.7k to 1.7k. The highest STI that time was 3.8k? and lowest STI went was 1.5k but i have used up all my money that time. No one can time when the deepest recession will happen. But i do use dividend as one of a guide to time my purchase.

If u purchase SingTel say 2.50 (price during last recession?). I dont expect SingTel price to remain at 2.50 20 years later. Its NAV will increase and hence its share price. Even 20 years another recession happen to strike, i doubt it will go back to 2.50.

All will fail if a war breaks out here or a disease killing lots of pp. Money will become worthless here during war time anyway as i dont expect Spore to win any war.
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#6
"Secrets of dividend investors : the DIY approach to finding the best dvidend stocks / Mark Lin."

The book I reserved just arrived at my library. In one or two week's time, I will be able to share what else to watch out for, in div paying stocks.

Happy lunar new year to bibi & all!
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#7
Looking forward to it. Happy Lunar new year to you and all too.
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#8
Secrets of dividend investors
==================

Two key factors: dividend safety + capital preservation

Dividend safety

1. Credit analysis

1a. Will you lend $ to the company if you are the bank? (willingness & ability [cash flow, what if scenarios] to pay, collateral)

1b. Credit ratios

1bi. Leverage ratios:
-- debt to asset
-- debt to equity

1bii. Liquidity ratios:
-- current assets to current liabilities ("current ratio")
-- cash & equivalents + marketable securities + a/c receivables) to current liabilities ("quick ratio")

1biii. Coverage ratios:
-- "earnings before interest & tax" to interest expense ("EBIT interest coverage")
-- "earnings before interest, tax, depreciation & amortization" to interest expense ("EBITDA interest coverage")

2. Dividend sustainability

2a. Comfortable dividend payout ratio

2b. Dividend payment track record

2c. Earnings risk

3. Dividend yield

3a. Yield > 10 year government bond yield

3b. Payback period acceptable (5% yield => payback period = 20 years)

4. Valuation

"Perpetuity dividend discount" model
P = D / (k - g)

P = reference price (possible entry point for long term conservative dividend investors)

D = average annual dividend

k = cost of equity = risk free rate + beta x equity risk premium

e.g. k = 3% (10 yr govt bond) + 1 (market) x 6% = 9%

g = perpetual growth rate in dividend

e.g. g = long term GDP growth rate of a developed economy = 3%

So, P = D / ( 9% - 3%) = D / 6% i.e. buy if dividend yield is above 6%.

Capital preservation

5. low financial risk (less debt, longer debt maturity, higher proportion of fixed rate debt)

6. low business risk (products/services non-discretionary, lower proportion of fixed costs, less working capital/capital expenditure for sales growth)

7. high returns on investment (ROE, ROA)

8. good growth prospects (take market share from competitors, go into new markets/products/customer segments, M&A - risky)

9. ANAV approach (adjusted net asset value -> adjust down trade receivables, inventories, investment properties & listed investments, intangible assets / goodwill, adjust up liabilities)

10. 2RV approach (V: value according to 4 above, must be high, R: risk must be low, R: return must be reasonable)
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#9
how much for retirement?

actually a lot of things we don't really need other than a roof over your head, shirt on your back, food .. each meal how many dishes everyday can eat? Eat too much will get sian or get sick - gout, diabeties, high blood.

You see some of the poor malay families, 7 mouths to feed but household income 800 a month or less maybe with government subsidy all in under $1.3k also can get by, you see some of the aged already retired but no savings also can get by.

I think a 2 room unit with 300k will be enough, 500k will be more than enough but must have hospitalization insurance.


All this news about living longer is just the government bull trying to brainwash people so that they can make the case to justify holding back cpf longer by increasing the ceiling higher and higher.
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#10
(20-02-2012, 09:07 AM)sgd Wrote: how much for retirement?

actually a lot of things we don't really need other than a roof over your head, shirt on your back, food .. each meal how many dishes everyday can eat? Eat too much will get sian or get sick - gout, diabeties, high blood.

You see some of the poor malay families, 7 mouths to feed but household income 800 a month or less maybe with government subsidy all in under $1.3k also can get by, you see some of the aged already retired but no savings also can get by.

I think a 2 room unit with 300k will be enough, 500k will be more than enough but must have hospitalization insurance.

Better to have upgraded 3 room or 4 room flat. When I am old, I will rent out my HDB 2 bedrooms... It's a better option than taking the government retirement village... You get a chance of a new HDB, and constant retirement income...
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