Many Singaporeans make these 3 retirement planning mistakes and it’s losing them money when they are old!

Did you know that nearly 8 out of 10 Singaporeans underestimate how much they would need to retire comfortably?

The OCBC Financial Wellness Index 2021 found that although Singaporeans were good at saving, they were not that savvy in growing their wealth.

And after almost a decade of helping Singaporeans with retirement planning, we have spotted some common blunders made by many in their preparation for retirement.

Even when they channel most of their hard-earn money into retirement savings and investments, some still said that their retirement fund is not enough.

How is this possible?

After thorough checking, we identified 3 major mistakes that are commonly overlooked by Singaporeans, which cause some of them to lose money during their retirement.

This can be a painful pill to swallow and a frustrating situation to be in. Can you imagine being short of funds when you’re ready to retire?

Your retirement may not be as comfortable as expected.

Or you might even have to continue working well into your old age.

We hope what we are going to share below here can help some of you avoid these expensive mistakes and potentially retire better.

At The Money Folks, we help our clients invest and build multiple income streams that potentially enable them to retire with more than $1 million. Reach out to us for a financial assessment call (by application approval only).

Disclaimer: This post represents our personal views and opinions and is neither associated with any organisation nor reflect the position of any organisation. This content is also only for informative purposes and should not be construed as financial advice. Past performance does not necessarily equate to future performance. Please seek advice from a Financial Adviser Representative before making any investment decisions.

Mistake #1: Overestimating your ability to work beyond retirement age

Remember how the saying goes, “Don’t make promises when you’re happy”?

It is the same as overestimating your ability to work in old age when you are young and healthy.

When we are young, our body is more resilient to stress and pressure. And on top of that, we are able to be productive for long hours.

However, can you still do so when you are 70?

Generally, when we are old, our body might not perform as well as we expect it to be.

It is also common for the elderly to develop health conditions or disabilities that may limit their capacity to work long hours. With such conditions, you might need to consider the potential costs that you may need:

• Medications
• Therapy and rehabilitation costs
• Home care services (if you prefer to be home)
• Transportations

Singaporeans receive support from the government regarding long-term care costs such as ElderShield or CareShield Life.

But have you ever wondered if the support is enough?

Just for illustration purposes, let’s pull out hypothetical numbers for clarity.

• You have $600,000 worth of nest egg.
• From 65 years old, let’s say your monthly expenses are $2,000 for 20 years.
• A study by Marsh & McLennan’s Asia Pacific Risk Center forecasted that by 2030, long-term term care costs for Singaporeans will be about $1,900/month.
• If you require long term care, let’s say you need about extra $900 monthly after support from CareShield Life.

As shown above, your retirement fund will potentially last you up until the age of 79 years old only. What happens if you live beyond that age?

How long do you intend to work beyond retirement age?

Even if you are working well into your 70s, do you have enough to cover these costs?

What you can do:

Instead of waiting until old age to figure out whether you are still able to work, it is important to strategise your investments so that you can afford to retire earlier if you need or want to.

This way, you can work not because you need to, but because you want to.

Your retirement strategy needs to include investments that can potentially meet your retirement expenses, including the unexpected ones like long term care costs (while being tailor-made to your risk appetite as well).

If you have $600,000 in your retirement nest egg and require long-term care, this is what your retirement fund may potentially look like if you receive 4% p.a. returns from your investments over 20 years.

For illustration purposes only. Refer to disclaimers at the end of this article.

It can potentially last you beyond 85 years old!

Investing towards your realistic financial goals can enable you to:

• Be financially prepared in case of sudden expenses (such as emergency medical expenses).
• Be financially sustainable during retirement even if you require long-term care.
• Grow your wealth even during retirement. You can potentially grow enough wealth to pass it down to your family.

If you need any help in growing your financial assets for retirement realistically, we are here for you.

Mistake #2: Not investing with a retirement strategy can end up with more losses than expected

Investing can be dangerous if you are doing it without a goal and strategy to achieve it.

This is because you could be investing too aggressively or too conservatively, or you might also be investing in assets that might be very volatile in the current economic climate.

This can cause significant losses for you.

And if you are currently losing money from more volatile assets, you need to consider your investment time horizon. For your investments to recoup their losses, you might need a substantial amount of time because it needs to gain much more.

Imagine if you had decided to do dollar-cost averaging (DCA) without a strategy into NASDAQ during a certain time period. For example, from 1999-2009:

Above is a hypothetical scenario. For illustration purposes only. No fee charges were considered in this calculation. Refer to disclaimers at the end of this article.

You would have generated a lower net return compared to having a diversified, recession-resilient portfolio during the 10-year period.

And since we can’t exactly predict when an asset would recover its losses, do you have the time capacity to wait it out?

On the other hand, if you are investing in assets that are not beating inflation with their returns, you run the risk of having your purchasing power eroded.

We understand that some of you might not be comfortable investing in higher-risk assets due to the fear of losing your hard-earned money.

However, we also need to acknowledge that inflation can cause you to lose money too by depleting your purchasing power over time.

And the reality is that inflation effects are definitely kicking in. According to Singstat, Singapore's headline inflation was at an all-time high at 5.6% as of May 2022.

For illustration purposes only. Refer to disclaimers at the end of the article.

Therefore, you might be on the losing end by not gaining enough returns due to overly conservative investment methods and strategies.

Are you investing in assets that can potentially beat inflation?

And how can you know if you are investing optimally, neither too aggressive nor too conservatively?

What you can do:

In retirement planning, there are two important phases which are the wealth accumulation and monetization phases.

In this section, I will elaborate more on the accumulation phase. More on the monetization (decumulate) phase later.

The wealth accumulation phase is done prior to retirement. It is a very crucial part to build your retirement fund.

• During this period of time, you are actively earning an income and you have the potential to earn so in many more years to come.
• With such a time horizon, your investment focus would likely be on long-term capital growth. Receiving steady income streams from your investments will not be so much of a priority as you are getting a regular salary.
• And because you have time on your side, you would likely be able to tolerate more risk and ride out the market volatility in the long run.

Have you started accumulating your wealth for retirement?

We understand that in this current economic climate, the stock market is not looking optimistic.

However, if you are investing in a diversified basket of assets for the long term with the right strategy, you will be able to grow your wealth so that you can potentially have enough for retirement.

This is through having a good understanding of your investments, such as how different asset classes respond to certain market conditions and how each industry performs in different economic sectors.

Additionally, you may need to also know which countries may present you with opportunities and protect you from geographical risks.

The right mix of asset allocation in your investment portfolio is key to achieving the balance of risk and return that you aim for. Asset allocation is done by apportioning your portfolio to different asset classes according to your goals, risk appetite and time horizon.

Over time, it is important to ensure that your asset allocation is rebalanced to your intended compositions and relevant industry exposures.

So regardless of whether you have an aggressive or conservative risk appetite, you can structure an investment strategy tailored for you, that matches your investment profile and goals.

This is what a seasoned financial advisor representative is able to do for you as well, so you can potentially retire with a peace of mind.

Mistake #3: Using the wrong retirement withdrawal strategy can leave you with no more money if you live longer

Singaporeans are living longer.

The graph below shows an increasing trend in life expectancy amongst Singaporeans compared to a decade ago.

Source: Singstat

With the possibility that you might live longer than expected, how can you ensure that your retirement fund lasts you for as long as you live?

Many of you might already know this – managing your expenditure is important.

You would not want to overspend and potentially have little left if you live longer. On the other hand, being too restrictive in your expenditure might not be a comfortable way to spend your golden years.

Another factor that plays a crucial role in ensuring you have enough is your retirement withdrawal strategy.

How much should you withdraw from your nest egg so you can retire comfortably yet still have enough even if you live longer than expected?

What you can do:

Now, let's discuss the monetization phase which is during your retirement. This is when you utilise your retirement nest egg.

To manage your finances so they can potentially last you for the rest of your life without having to limit your spending habits, you need to first understand your needs and financial capacity:

• During this period, you might still be working to stay active. However, your salary should not be your main source of income, as you might not be able to work like you used to anymore.
• Your retirement income can potentially be from annuities, dividend income from stocks or REITs, and even from your capital gained from investments in unit trusts and Exchange Traded Funds (ETFs).
• Your main concern would be more on wealth preservation (instead of capital growth).
• Due to time constraints, your risk tolerance would likely be lower. You might not be able to ride out market volatility in the short term, especially if you are withdrawing regularly from your retirement capital.

It is best to map out your expenses and what kind of sources of income can potentially meet them. This includes short-term and long-term financial needs.

Therefore, in this phase of retirement planning, it is important to match your potential income to your expenses. Don’t forget to factor in inflation as well.

For example, with all of that considered, a strategy that we have adopted for one of our clients is to establish a range of percentages he can withdraw according to his investment performance and also prevailing market conditions.

For example, when his portfolio reaps more than 6% p.a. returns, he withdraws only up to 4% a month. While if his portfolio reaps 4% and below, he would only withdraw no more than 1.5%.

This way, he would not be withdrawing too much capital if his portfolio is not performing well. He is also staying invested so he can potentially preserve his wealth longer.

Don’t waste your money by filling up a leaking retirement bucket

The above are common major mistakes made by pre-retirees and retirees, which often leads to them not having enough for retirement.

That’s why it is important to have a solid investment framework for your retirement planning, so you can plan and strategise your retirement with a clear goal:

• Build multiple income streams so you potentially don’t have to work beyond retirement.
• Grow your wealth so you can potentially achieve your financial goals realistically without taking on more risks than you can handle.
• You can also have a personalised withdrawal strategy so that your wealth can potentially last you for the rest of your life.

Retirement planning requires careful strategy and taking into consideration the factors (and more) mentioned in this article.

It requires running through various scenarios to identify the best possible way to ensure that your retirement objectives can be potentially met with minimal risks.

This is where a skilled financial advisor representative can value-add to your retirement planning.

We have designed the above multi-income-stream framework for our clients, so that they are on track to potentially retire earlier than planned. We also recommend to them the best withdrawal strategy that fits their lifestyle and goals.

Most of our team members are also recognised as the top 5% of financial adviser representatives worldwide, so you can be assured that with our guidance, you can potentially get your retirement planning on track.