10 January 2013

How to manage your money when you are in retirement life

I have some clients who are in their retirement age. They tend to be more conservative partly due to their income stream is now reduced to near to zero as most of their cash flow are coming from monthly pay slip. It brings a question of how to manage your money when you are in retirement age.

In most of the wealth management courses, it teach us to set aside (100-your age%) in equities. The higher age you are, the lower percentage of equities should be allocated in your portfolio. Most of the retired people are more willing to park their excess cash in Fixed Deposits, Fixed Income Instruments or money market fund to enjoy stable monthly income. In Singapore, you can even sell and less back your real estate from Singapore government. It can allow you to have a stable monthly income even if you are in your retirement.

Basically we also have a theory of having at least 70% of your monthly income prior to your retirement, to support your life style. For example, a man with age 65 years old could have 4,000 dollar in his income. So he would need at least 2,800 dollar per month to support his daily expenses, not to talk about the other expenses such as medical expenses and traveling expenses. If this is the case, you can easily use a financial calculator to get a figure to sustain your lifestyle. In this case, a man would need at least 1,680,000 dollar based on assumption of 2% annual return with infinite investment horizon. If you need to add in the inflation factor, then you could need to add in another 3% (so in total 5% discount rate) and therefore you need at least 168 times of your monthly income before retirement or around 14 years income savings for your retirement.

Can we use 30-40 years to accumulate savings of 14 years income? I believe some are able to achieve it only if they have their own sound investment and saving strategy to meet this requirement. You will need to have a proper asset allocation in your portfolio to achieve this. In long run, Fixed Income can best on par or slightly better than inflation rate, while Equities can beat inflation rate with careful strategy. Let's say if you are now in early 20s, you should fully utilize your advantage of having more "Time" to invest in Equities or leveraging products such as mortgage loan + Real Estate or Margin Loan + Equities after a lot of thorough homework. Be prudence to your hard earned money, especially you are approaching retirement age.

I always believe in hard work. There is no free lunch in this world. You have to do your own homework even others give you so called tips to make the money. The more experience you are, the better result you could get. In Long Run.


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