5 Don’ts to Retirement Planning

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1. Delay retirement preparations, or save too little

Have you see the above table before? That’s a table people use to prioritise their to-do-list for their day. However, we all also have a to-do-list in Life. And Retirement planning is one of the items. Many a times, it gets binned in the Delay it or Drop it zone.

Many of us think there’s still a long way to go. We have more urgent matters at hand, like the family, mortgage or vacation to Europe.

The reality is, if you haven’t started saving towards retirement, an illustration by NerdWallet, an American personal finance company, shows the amount you have to save a month towards a 6%p.a. investment instrument, at various starting ages to arrive at $1Million by the age of 67.

(Source: NerdWallet)

Laying it out clearly here, these are the amounts you need to save for every $1Mil you need in your Retirement NestEgg:

20: $319 per month

25: $440 per month

30: $613 per month

35: $864 per month

40: $1,240 per month

45: $1,831 per month

50: $2,831 per month

We see that starting at 35 requires only $864/mth, and delaying savings by 10 years means we need to save $1832/mth. That’s more than double.

How about if we could turn back time till when we are 20? Only $319. That’s why it’s important to get our children on board as early as possible.

2. Be too conservative in your investments

The younger we are, the more opportunistic we can afford to be our investments. I have experienced some of my millennial clients saving towards retirement who err on the side of extreme caution often quoting how their parents lost money investing in the stock market.

On the other hand, I have some middle-aged parents planning for their children’s retirement requesting fixed-deposit like instruments for a 30 year timeframe.

For most given periods of time, there should be some exposure of our portfolio to the stock market. Even a Conservative portfolio is made up of 20% of Stocks; A retiree at 55 has a good 30 years ahead of him till life expectancy of 85, where his money needs to be growing ahead of inflation effectively.

Below shows the MSCI World Index (1969-2020)

(Source: Wikipedia)

When we invest in the stock markets, we must know that we are investing in real businesses. The stock market, despite major economic events WILL continue to rise over time because of demands on the companies spurred on by Population Growth and Rising Standard of Living. And as long as there is a growing demand for goods and services, these businesses as a whole will continue to grow in their earnings.

3. Rely only on your savings in CPF funds

“I am saving a part of my income for retirement in CPF, I do not need to put in more for Retirement.”

The very same people who say this also comment that the monthly payouts from CPF is not enough for their lifestyle, or they want to be able to retire earlier than the payout age of 65, or are the ones who are depleting their CPF savings on their mortgages.

I am a strong advocate of CPF LIFE being the foundation of one’s Retirement, but I am sure you would not call it a house if you have only the foundation in place.

4. Mixing up Retirement Savings with one’s General Savings

Most people mix their retirement savings with General savings for their family, vacation or upgrading of their house. Maintaining dedicated accounts for different types of savings makes it less likely that you will spend everything before retirement.

When I save towards my own retirement, I organise a core portfolio which I do not interfere with and just automate savings monthly into the account. It is like a piggy bank that I only want to break open at my desired retirement age, and not to be used in any other circumstances. I know that my future self will thank me for this.

5.  Assuming that you will be able to Work till Retirement.

We all believe and plan to work as long as we want to. However, life could throw a curveball when least expected which may cause us to have down-time for a season or forever. Even if we were healthy, it could be someone in our family we have to sacrifice our career to look after as well. Even worse if we had to deplete our savings for retirement to cope with the life-crisis.

In these scenarios, it might be impossible to save towards our original Retirement Plan. That is why income protection in the form of insurance for us and our families is important.

A good rule of thumb for Critical Illness protection is 2-3 years of Annual Income + 100K for alternative treatment.

A good rule for Disability is monthly expenses multiplied by life expectancy.

And always make sure that we and our families are protected with comprehensive medical coverage.

I hope these 5 Dont’s have been helpful for you. Do you have any other tips to share with my readers? – Leave a comment below.

Disclaimer: The views expressed here are solely those of the author in his private capacity and not necessarily to the author’s employer, organization, committee or other group or individual.

 

 

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About Me

Hi, my name is
Joshua Hoong
I’m a Chartered Financial Consultant (ChFC) at ACTS Advisory Group, IPP Financial Advisers specialising in comprehensive Retirement Planning, as well as a Million Dollar Round Table (MDRT) member.

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