Do You Have Enough Money to Stop Working?
14 December 2018
Various surveys done over the years seem to indicate that Singaporeans do not have enough money to stop working. This could be a result of poor financial planning and a lack of understanding of where and how to start. Even the children of baby boomers appear to be worried!
So, how can you know if you have enough money to stop working, no longer beholden to deadlines and the daily grind? This is a question that plagues many of us. While a proper answer will require a much longer article, or even a book, here is a quick list of pointers to start you off on tackling this seemingly elusive question.
1. The Value of Assets Will Fluctuate
When planning for retirement, one important truism is that any asset you own (stocks, bonds, property, art, wine, gold, etc) will see its value fluctuate over time. A common misconception is that hard assets like property always go up, but as we have written in our previous article, they are equally subject to market cycles as well. Even cash in the bank will see its value deteriorate as inflation eats up its purchasing power.
The good news is that even if we cannot control the prices of our assets in the future, we can control the following things:
- Diversification: “Don’t put all your eggs in one basket” is a common cliche but one that holds a lot of truth. For example, if you had all your money in property, hoping to earn a rental income when you retire, what would you do when the economy or property market sputters just as you stop working? You may be hard-pressed to find tenants at the rental rate you want, or find it difficult to liquidate your property. Similarly, if all your money was invested into stocks and a downturn similar to the Great Financial Crisis of 2008 occurred just as you retired, would you be able to sustain your lifestyle while waiting for the market to recover?
The antidote to this problem is to have different types of assets that, when put together, can lower your overall risk, since different types of assets usually perform differently at any given time.
- Discipline: Make a plan and hold yourself accountable for sticking to it, regardless of market movements and cycles. If you know you are prone to being emotional and less disciplined in such matters, get a trusted friend or adviser who can hold your hand through difficult market cycles and thus help you avoid making hasty changes to your portfolio based on current events.
2. Have a Clear Goal
To know whether you have enough money to stop working, you will obviously need to know how much money you need to accumulate in the first place. Start by figuring out what your monthly and yearly expenses are. Categorize your expenses into essential expenses (utilities, rent, taxes, groceries, transport, health insurance, etc.) and discretionary expenses (holidays, meals at Michelin-starred restaurants, entertainment, gifts, etc). Then multiply your expenses by the length of time you expect to spend in retirement, not forgetting to factor in inflation and a reasonable rate of return of your funds.
By doing this, you break up your retirement goal into 2 bite-size objectives to be tackled one at a time: funding your essential expenses and then funding your discretionary expenses. Once a year, do a review to track your progress towards meeting these goals. Don’t be discouraged if you seem to be back-tracking in some years, which can happen if your investments are hit by market downturns.
If all this seems daunting to you, look for a trusted fiduciary adviser to help you calculate how much you need to reach your goals and select appropriate diversified investments to get you there.
3. Plan for Future Unknowns
Just like we do not know how much our assets might fluctuate at any given time, there are also many unknowns that can affect our retirement plans – such as how our health will pan out and whether medical costs will eat into our retirement savings. Sometimes, all these uncertainties can be foreboding and discouraging in our planning. Even then, you will be infinitely better off having a plan than none at all!
Having a multi-layered plan is helpful to mitigate future unknowns. Essential expenses can be fulfilled by regular payouts from CPF Life, other guaranteed insurance annuity products, and so on. Unknown future healthcare costs can be covered by medical and hospitalisation insurance, where the cost of premiums represent a form of maximum expense to fund future unknown medical liabilities.
Discretionary lifestyle spending can be fulfilled by more volatile instruments, like a mix of equities, which provides inflation protection in the long run. Meanwhile, short-term large ticket purchases (if any) can be funded by fixed income investments. Having concrete goals makes it much easier to match them against the solutions available in the market. Other expenses, like money for helping out family members and charitable giving, can likewise be planned in advance.
You might also worry about what would happen if you outlive the retirement you planned for. This can also be mitigated in several ways. One way is to have a separate investment account designed to provide continued funding after your main plan has been exhausted. For example, if you had designed your retirement plan to cover your expenses until age 90, you can have a separate ‘longevity risk account’ that can provide additional funds if you live past that age.
At the end of the day, figuring out when you can afford to retire will need quite a bit of work and planning. But once you have done so, you’ll be rewarded with peace of mind over one of life’s more pressing questions!
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