Planning for the Golden Years

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In the present financial crisis, we are talking about liquidity, mortgage issues, bad debts etc. Let's talk about a huge problem not discussed much.

Retirement funds, Government pension funds.

World over, pension funds, managed by govt., and fund houses, are having serious problems. Some funds are also closed as the fund size it has shrunk that it is not worth to have a fund manager to manage it.

Normally, during recession, the people to be hit hard are the people planning to retire or those who thought they could retire but the money in the funds or stocks have plummeted so low that they can't think of retiring.

What is the Meaning of Retirement?

The Meaning of Retirement as per the Oxford Dictionary is "Stop working, Give up your regular work because of age.

These days, word retirement has become a luxury to most people. There are a few reasons but the most important reason is NO FINANCIAL PLANNING DONE FOR RETIREMENT WHEN YOUNG.

In Asia typically, children, family come before planning for retirement. At least some parents have the privilege of children who are supporting them in retirement. We can't take that for granted when we retire.

WE NEED TO PLAN TO BE FINANCIALLY INDEPENDENT WHEN WE ARE OLD.

When I talk to a 40 year old about retirement, most of the time the only answer I get is, that's not a priority now. I need to provide for my family, plan for my child's education, buy a home, car etc.

When I talk to a 50 year old, then they saw, RETIRE? I think I can't afford it. I need to work.

When one is 60 years old, it's too late to talk about planning to save for retirement. You only have to learn how to live with what you have. Because, at that age, I guess staying employed or getting a job is not going to be easy. There could also be health issues.

And the life span has increase over the years and its no surprise if one lives up to 90 year now.

When we talk about retirement planning there are 3 factors. TIME, AMOUNT NEEDED & and METHOD.

• TIME: The best time to start planning is when you are in your 40s. Earlier the better. So that the amount you set aside is small but will grow over a period of time.
• AMOUNT: How much do I need to retire?

As a thumb rule, typically, you need to plan for at least 60% of your current expenses. So arrive at the amount you need for your basic needs, find the future value as what you get for $1 now, may cost you $1.5 in 10 years time and finally, the number of years you need the money. Each of us has different needs. So the final number varies.

• METHOD:

TOP up your CPF: You can top your CPF to get tax benefit and also set aside extra money for retirement. However, remember to put the money in the Special account so that you don't use it up for house, education etc.

SRS: Supplementary Retirement Scheme is a good way to set aside money and get tax exemptions too. The amount that you can set aside depends on your Annual income.

Regular savings. You can set aside a regular amount as savings.

Rental Income: You could invest in rental generating properties which generate income for you on a monthly basis.

The challenge is how to grow the money to match the amount you want at retirement. This depends on the Risk appetite.

OPTION 1: Investment Linked Investment plans

Typically, these plans are taken when one is young and the units are accumulated and when the person is reaching retirement the plan can either be terminated or partially cashed out

Pro	Con
The insurance costs are less when young and hence there are more units purchased. Dollar cost averaging also helps the accumulation of units.	The mortality cost increase with age and also the policy charges can be expensive as the age increase. If the market is low during redemption, then retirement plan has to be deferred till the market picks up. NON GUARENTEED RETURNS

OPTION 2: Regular Savings Plan

Typically, these plans work on dollar average concept so that you accumulate more units when the price of the unit is low and eventually you can redeem it when the person is reaching retirement age. It can be either be terminated or partially cashed out

Pro	Con
Long term dollar cost averaging can give good returns on investment.	If the market is low during redemption, then retirement plan has to be deferred till the market picks up. NON GAURENTEED RETURNS

OPTION 3: Annuities

Typically, these plans can be started at age 40 by either investing lump sum or by regular investment. This money is let to grow with the company and at a pre-determined age say 55 or 60 yrs old, the company will give out monthly payout of the money accumulated.

Pro	Con
GUARANTEED PAYOUTS.	As the risk in such products is low, the returns of such products are low.

So which option is better?

Let's look at why the pension funds have failed. Almost all Pension funds are exposed to Equities. So they are cyclical. Some years they are up and some years they are down. Also, the returns are not guaranteed. So if you are lucky to retire when there is a bull run, then you get good returns on your pension fund. But if you are not, then you have to wait for the markets to recover. Can you predict how the market is going to be when you retire?

This is my view. Any suggestions or comments.....