Short of winning the lottery or relying on hefty inheritance cheques, many of us are banking on the ‘work hard, save enough’ method to see us through our retirement. The problem is this doesn’t work. In short, while everyone else is playing chess, you’re playing checkers.
According to Seng Bingyang, wealth management director with Elpis Financial, winning the game of retirement is not about how much you’ve accumulated in savings. Rather, it’s about managing risks. He shares the hard truths about retirement and gives a few tips everyone can use.
Give us the hard truths about retirement.
Singaporeans are just not saving enough. Let’s do some basic maths. If you are 30 and going to be working for the next 30 years, then retiring for another 30 years, without factoring in inflation, you need to save 50 per cent of your income every month. Are you doing that?
Many of us are skilled at using the hours in our day to generate money. Some of us are also savvy at investing our money, using it to generate income. However, very few are properly trained in financial planning, which involves identifying the blind spots and risk factors in each stage of our lives, and then allocating resources to meet those needs and achieve those goals.
You’re scaring us. Is it too late to do anything about it? Where do we start?
To use a Chinese proverb, the best time to plant a tree was 20 years ago. The second best time is now. So it’s never too late. Whether you are in your 20s, 30s or 40s, everyone faces the same six risk factors and the game of retirement is all about managing these factors, which are:
- Longevity risk (living too long)
- Market risk (downturn in the market)
- Withdrawal risk (consuming too much of your savings each year)
- Sequence of returns risk (market movements when you withdraw money)
- Long-term care risk (needing costly long-term care due to disability)
- Regulatory and tax risks
Going into each specific risk would take far too long, so I’d like to talk about longevity risk. It’s the most important one since all the other risk factors also come into play when you live longer.
I find it ironic that everyone is exercising to live longer but not many are planning for the finances that they will need when they live longer. What’s the point of living a long and healthy life when you don’t have the money to support it?
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“Singaporeans are just not saving enough. Let’s do some basic maths. If you are 30 and going to be working for the next 30 years, then retiring for another 30 years, without factoring in inflation, you need to save 50 per cent of your income every month. Are you doing that?”
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How do we manage longevity risk and make sure that we have money for retirement?
The basic idea is to generate guaranteed lifetime income. There are a few instruments that help to achieve this, such as CPF Life, annuities and retirement plans issued by insurance companies. There isn’t a one-size-fits-all solution simply because all of us have different lifestyles, needs, wants, goals, etc. For example, many financial gurus recommend investing in property and living off the rental income in your retirement years. It’s definitely a great way to generate a lifetime income.
However, I personally find little joy in that. Sure, it might be sexy in our 20s and 30s but things will be different in our 70s and 80s, when time is even more valuable to us. We must run around and fix things that have broken down, find tenants, and all sorts of other issues that will invariably pop up.
One thing that I can recommend you without knowing your background and current status is to understand yourself better. Are you conservative or aggressive? Can you stomach the risks when you invest your money? Once you know yourself, then you can make financial decisions that will maximise your long-term happiness.
I’m going to sound like a broken record but I must stress again that accumulating wealth through savings, while a good habit, will not be enough for retirement. It’s more important to manage the risk factors and identifiy guaranteed lifetime income sources. You don’t have to do it yourself. You can talk to experts like me (laughs).
Seng Bingyang (CLU, ChFC) is a Wealth Management Director at Elpis Financial. Visit him at sengbingyang.com or email bingyang@elpis.com.sg.