AS MY financial knowledge and experience have grown over time, my beliefs on how to achieve sustainable financial wellness have also evolved.
I want to strike a balance between spending too much to the point that I outlive my nest egg, and under-spending at the risk of not enjoying my hard-earned savings fully.
To fund a comfortable retirement that can mitigate inflation, longevity and investing risks, building passive income flows is the way to go. In fact, the multiple income streams that I have built sit in these four pots:
- Decumulation: Drawing down till zero on assets such as CPF Life and insurance
- Preservation: Drawing down from returns/interest while keeping principal intact
- Growth: Long-term investments for potentially higher returns in future
- Legacy: Assets for distribution to loved ones when I am no longer around
Furthermore, retiring well requires more than just achieving financial numbers. As a disciplined saver, I am mindful that the shift from a savings mode to that of spending will be difficult. Boosting mental resilience through engaging in meaningful activities during retirement and staying physically healthy, are also important.
So, how do I create a robust retirement plan that ticks all the boxes? Here is a peek at eight guiding principles for my retirement.
1. Understand my retirement lifestyle
When I first started visualising my retirement, I was in my 30s. Being kiasu (Hokkien for fear of losing out) and not knowing what the future holds, I decided to quantify what it means to retire under these three lifestyles: basic, moderate and luxury.
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For each lifestyle, I worked out the needs and wants and quantified the expenses. I reviewed this regularly, stress tested it with inflation assumptions and made adjustments along the way.
2. Work out my “must-have income floor” (MIF)
This is the minimum monthly or annual income that I have determined as my MIF during retirement, and it should take inflation into account.
Since it is a “must-have” amount, it should ideally be funded via more stable and guaranteed income flows, regardless of the state of the economy and market performance.
I realised that the older I get, the more risk averse I become. Although I have the capacity and capability to take on more investment risk, the need to do so reduces over the years as more wealth is accumulated. This lower risk profile is reflected in a higher MIF, compared to that in my younger years. It will definitely cover all of my needs, and as I have become more conservative, this figure will cover some of my wants, too.
Do note that to achieve my desired higher MIF, I have to accumulate sufficient financial resources to invest in “safer” products. This is reflected in a higher concentration in fixed income products in my portfolio as I get older.
3. Build multiple income flows
Do not depend on a “magic retirement” lump sum to draw down from during retirement. To counter the risks most retirees face, it is more sustainable to build multiple income flows to fund our golden years.
For instance, income flows with a more guaranteed nature like CPF Life payouts can be used to fund our MIF, while the variable income flows from riskier products can fund the amount in excess of MIF, or our wants.
Reviewing our retirement plan regularly will help guide our allocation of savings into different investment products to achieve our objectives.
4. Build lifelong and long-term income streams
To fund my MIF in a sustainable manner, some of my multiple income flows will comprise lifelong cash flows, such as payouts from CPF Life and a private annuity plan.
Other income streams are for the long term. They include Supplementary Retirement Scheme withdrawals that last for up to 10 years, and payouts from retirement income insurance for a specified period of, say, 20 years. These will come in handy in the first phase of our retirement when we are still physically mobile and are likely to travel more, set up a business or pursue hobbies.
5. Build income streams that preserve principal
In addition, I invested in a few income instruments that offer decent returns/income to fund my retirement while keeping my principal intact.
They include the annual 4 per cent interest from my Central Provident Fund (CPF) Special Account (SA) savings (as I shielded my CPF SA just before I turned 55); coupons from the 50-year Green Singapore Government Securities and bond funds (like Singapore Savings Bonds, Astrea bonds and corporate bonds); dividends from real estate investment trusts and blue-chip stocks; payouts from income funds; and rental income.
6. Continue investing during retirement
A longer lifespan translates to more years in retirement. Imagine working for 35 to 40 years to fund potentially 40 years or more in retirement!
This is why we need to continue investing during retirement to grow our assets. You can do so via a portfolio – of stocks, index funds, exchange-traded funds and/or unit trusts – that offers variable but potentially higher returns for income growth by riding out market volatility over time.
7. Ensure healthcare and long-term care protection
One in two healthy Singaporeans aged 65 could become severely disabled in his or her lifetime. And about three in 10 will live a decade or more after becoming severely disabled.
As such, I have to ensure that I can continue to afford the premiums of my private hospitalisation Integrated Shield Plan and CareShield Life plan during my lifetime.
8. Build a sound estate plan
The investments that help to preserve my principal amounts will offer flexibility and a buffer in the face of potential curveballs, such as a medical crisis, black swan events and a persistently high inflationary environment in retirement.
These investments as well as assets that are unused in my lifetime, will form part of my estate when I am no longer around. To have an efficient distribution to intended beneficiaries, I have set up an estate plan through common tools such as a will and CPF nomination.
I have also drawn up my Lasting Power of Attorney, which can be activated should I become mentally incapacitated.
In summary
There is not a single solution that will suit everyone, because what gives me peace of mind will be different for another individual.
If you are constrained by limited savings, you should maximise government schemes like the CPF and leverage the magic of compounding to grow your nest egg. At the same time, ensure that you make the right big decisions, like not overpaying for your home.
For those who have surplus cash after setting aside an emergency fund and adequate protection, do invest wisely and build multiple income flows as retirement draws near.
Retiring comfortably is within our reach. But we have to take the first step. It starts with us taking the responsibility and making retirement planning a key priority.
The choice is yours.
The writer is head of financial planning literacy, DBS Bank.
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