Retirement Planning: Chickens, Eggs, And Investing For Retirement In Singapore

385 0

Clients often tell us that they want to jumpstart their retirement planning and that they have a target amount in mind. That is only half the battle, or don't let say beauty, of being invested.

How we invest from retirement to death is critically important to sustaining our lifestyles, beating inflation, and improving our ability to live better.

In Life, You've Two “Chickens”

One is the “Work Chicken” – this is you – your projects, creativity and labour are translated into the money you make from your efforts. We call this “human capital”. The number of eggs the work chicken produces typically grows using your working life (as your salary increases), but will slow down as you reach retirement.

Then you have your “Wealth Chicken” – the money you accumulate, save, inherit (if any), and invest. We can call this financial capital. The amount of eggs it produces is in accordance with the size of the chicken (amount of capital accumulated) and the excellence of the food you feed it (the way you invest it).

Both of these chickens produce eggs (money) at varying speeds throughout life and really should cross paths at some point. For the over-simplified example provided below of the extremely diligent investor, passive wealth income is expected to overtake work income in the age of 52.

Have an evidence-based retirement plan: investing only until retirement may be the equivalent of killing your chickens and just being left with eggs

Life expectancy is 85 years in Singapore and trending upwards each year. This is great news. But what this also means is that our money must keep going longer.

Decumulation, the drawing down of financial capital, is really a phase of life we quite often associate with retirement planning. This drawdown will probably happen at an increasing rate, keeping pace with inflation and unfortunately more healthcare costs, to be able to maintain a standard of living.

For example, if you are 65 and spending $60,000 per year ($5,000 a month), when you are 85, assuming an average of 2% inflation, you will need $89,156 per year to maintain the same quality of life.

This makes the management of your “Wealth Chicken” extremely important through decumulation.

You Possess a Couple Of Options For Your “Wealth Chicken”

1) Kill the chicken, and store the eggs: No investment and put the money under your mattress, or perhaps in the bank, earning next to no interest.

2) Feed the chicken a bit but with almost no risk: Leave your money in your CPF Ordinary Account, earning an interest of 2.5%, or in the CPF Special Account or Retirement Account, earning an interest of 4%, assuming the interest rates do not change.

3) Feed the chicken more but take on more risk: Invest your hard earned money in a moderate portfolio of globally diversified stocks and SGD-hedged bonds (we use 60% stocks and 40% bonds let's imagine)

4) Let the chicken run free-range with the hope of many golden eggs while taking on a greater level of risk: Invest your hard earned money in a globally diversified portfolio of 100% stocks

Before we obtain into some statistics, make a strategically crucial decision in trying to maximise your probability of success of not not having enough money while not pinching your pennies beyond reason and still being able to live.

1. Select a reasonable rate of decumulation (or eating your eggs), taking inflation into consideration (your cash flow),

2. Decide on just how much volatility you can tolerate (based on your own personality and behaviour), and

3. Understand the risk of running out of money.

Now, let's imagine you have $1 million at retirement and want it to last 3 decades. We tested three different withdrawal rates – 5% ($50,000 per year), 4% ($40,000 per year), and 3% ($30,000 per year) – and adjusted these withdrawal amounts for inflation with time.

A withdrawal rate of 5% is aggressive, with the probability of a 100% stocks or balanced 60% stocks and 40% bonds investment portfolio lasting 3 decades to be 65% to 70%. That being said, you are better off investing (and more aggressively) these days if you want any chance of success in sustaining this withdrawal rate for 3 decades. There is no chance of success if left earning an assured interest rate of 4%, or 2.5%. A portfolio of 100% stocks includes a dramatically higher media median ending value in excess of $1.1 million.

By reducing withdrawals to 4%, it is clear that investing does bear some risk, but with a very high rate of success of lasting 30 years, along with a much more significant median ending value to pass through on to your loved ones (over $2.2 million). Leaving money earning 2.5% p.a. or less will run out of money in under 30 years.

By reducing withdrawals to 3%, the chances of running out of money by investing are very low. The ending value to pass through on to your loved ones is significant, at many times your initial capital.

Represented differently, see below a graphical depiction of the disbursement of projected outcomes for that 4% withdrawal rate, followed by the straightforward median outcome of the five options presented for your Wealth Chicken.

Not investing, in the case of any withdrawal rate, isn't the best option. Don't kill your Wealth Chicken. Place it to work.

Note: Results for 100% stocks portfolio, and 60% stocks and 40% bonds portfolios are based running 5,000 Monte Carlo Simulations made of underlying correlated Gaussian distributions of SGD monthly returns from the MSCI ACWI NR and BBgBarc Global Aggregate TR SGD-Hedged from 1990 to April 2021, assuming monthly withdrawal increasing yearly in the rate of inflation 2%. This analysis is prepared by Endowus and is for informational purposes only. Endowus will not make any claim to its accuracy. Purchasing securities involves risk of loss. Past performance is no guarantee of future returns.

There is a misconception that by being “safer” the risk of running out of money is lower. This is not true.

Investing better is crucially important to living better. This means staying broadly globally diversified, at the right risk tolerance based on your goals and behaviour, and at a low cost. Keep your “Wealth Chicken” healthy and producing those eggs!

What is your “Wealth Chicken” doing?

Invest Better With Endowus

If you’re interested to begin investing with Endowus, you’ll be happy to know that DollarsAndSense readers can have their first $10,000 managed free of charge for 6 months, which translates to savings of $20 in fees. Sign-up using this link to claim this special offer. Terms & Conditions apply.

Endowus is really a MAS-licensed financial advisor that leverages technology to make investing accessible to all. Should you enjoyed reading this article from Endowus Insights, you can subscribe to their weekly memo. Follow Endowus on LinkedIn or connect on Facebook as they bring you financial insights.

Related Post

Leave a comment