Wednesday, January 22, 2014

Do You Know How Much You Need To Retire?

According to BlackRock's latest 'Investor Pulse' survey that was conducted with over 17,000 investors across 12 different countries, there are increasing concerns from many respondents that they do not have enough to retire comfortably. In fact, the survey revealed a significant mismatch* between the amount of retirement funds survey respondents targeted to achieve and their retirement income needs, which suggests that not many investors have actually given a serious thought as to how much they need for retirement, much less how they can go about achieving these goals. In this week's "Idea of the Week" segment, we provide several suggestions to ensure that you have enough when planning for your retirement.
*As an example, Hong Kong-based respondents in the survey thought a HKD3.7 million “retirement pot” would be sufficient to provide for their golden years, although they also suggested that an annual retirement household income of HKD747,000 would be required – their retirement fund would last just under 5 years!

Determine the Amount You Need

According to a 2013 report from HSBC, over half of the Singaporean respondents felt that their financial preparations for a comfortable retirement were inadequate: 44% felt their preparations were not enough, whilst 12% were not preparing at all. And yet, most Singaporeans understand the importance of planning and preparing for their retirement early on in life.
Estimating the amount that you need for your retirement is thus a crucial step in determining and controlling your financial future. To do this, first take a look at your current monthly expenses. Some bills will no longer be in effect upon retirement (monthly mortgage payments, selected insurance premiums etc.) while others will still be in force (utilities, phone bills, groceries etc.). To these ongoing costs, add a reasonable amount for retirement hobbies (travel plans perhaps?). This simple exercise would provide you with a reasonable estimate of expenses in your golden years. Assuming that you will require annual spending of $50,000 in your retirement years, this translates to a $1 million retirement fund target, assuming a full drawdown over 20 years.

Don't Forget to Consider Inflation!

Our example of a $1 million retirement fund is missing one critical point - this estimate has not yet considered the effects of inflation, which can be fairly substantial over the long term (see Idea Of The Week: Defend Your Savings From An "Invisible" Enemy [26 April 2013]). To add on to our example, assume that you have 30 years more to retirement and that inflation averages 2.5% over the next 30 years. In this case you should actually be targeting a retirement fund size of $2.1 million**, rather than $1 million! While this appears like a daunting task, investing your savings wisely by having a long-term saving and investment plan can certainly help.
**Calculation as follows: $1 million * (1 + 2.5%)^(30) = $2.1 million

Have A Disciplined Saving and Investing Plan

A proper balance needs to be established between spending on short-term needs and saving for longer-term goals such as retirement. Most Singaporeans and indeed, most people around the world understand the need to save a portion of their incomes and set aside monies for their retirement. However, what many fail to realise is that saving regularly only is only half the step required! The other important action to undertake is to deploy some of those savings and to grow them over a long term horizon – this means you need to have a disciplined saving and investing plan.
The BlackRock survey revealed that many Americans are still allocating their savings to cash, with many unsure and fearful to invest in other asset classes. Like in the US, deposit rates are next to nothing in Singapore, and while many of us think of savings as keeping money in the bank, we should ideally invest these monies to generate better returns to compound and grow our savings. Having a regular savings plan (RSP) for example, helps to automate this process, as well as to foster a disciplined and regular investing habit. At Fundsupermart, investors can opt for a Regular Savings Plans (RSP) that is available for many funds that are available on the platform. There are even some funds that you can start an RSP with for as low as $100 per month! (see RSP Special List). Our RSP calculatortells you how much you will need to invest per month in order to meet your financial goals.

Start Investing Today!

The HSBC report revealed that people who have a proper financial plan (which includes a disciplined saving and investing plan) on average have more money stashed away for retirement than those who don't have a plan. While this appears to be an obvious conclusion by virtue that those who have a financial plan probably started saving up for retirement earlier, it also masks the extra compounding effect that you can benefit from by starting early. After all, as what famous investor Warren Buffett said: "Someone is sitting in the shade today because someone planted a tree a long time ago." If you desire to have enough to sufficiently retire or much less to retire comfortably, you have to start planting your trees today!

Investing is Important Even When Retirement Comes

When that eventual day of retirement finally comes, you want to ensure that the retirement monies and capital that you have and will be living on will not just be able to survive the drawdown of your various expenses, but also to carry on with the good fight against inflation. Converting all your retirement monies into cash may thus not be the wisest thing to do, especially when people are living longer which heightens the risk of outliving your retirement savings. By keeping a reasonable portion of your retirement fund in lower risk funds like short duration bond funds (like the Nikko AM Shenton ShortTerm Bond(S$)), your monies will have a chance to generate sufficient returns to at least keep pace with inflation and preserve the real value of your hard-earned and accumulated wealth.
It is not surprising that famous investors like John Templeton and Jim Rogers still actively manage and invest their capital and monies even when they are retired – for they understand this situation very well!

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