Golden Rule for Retiring – Never Run Out of Money

The most nasty problem about retirement financial planning is not knowing how long you will live.   Therefore, it makes perfect sense to adopt this golden rule: “Never Run Out Of Money”.  That means you may want to take the most conservative approach in managing your nest egg.  But it is not that easy.  Putting all your savings in a bank’s fixed deposit sounds logical but at the current low interest rate, you may be making reals losses in your purchasing power if your returns cannot keep up with the pace of inflation.  The key here is to make sure that your portfolio has a good balance between safety and returns that can outpace inflation.  

  • Keep at least one year of expenses in cash or instruments that you can convert to cash quickly without incurring significant costs.  Liquidity is important when you are investing for your retirement because you should always plan for unforeseen circumstances.  If all your assets are tied up in non-liquid investments like owning a condo or invested in a business, trying to draw cash quickly may not be possible or even costly.  
  • Make sure you have a guaranteed regular source of income while you are living — simply because you do not want to outlive your savings.  CPF Life is a safe and effective way to ensure that you have at least a minimum stream of income as long as you live.  If you put in about $250K at age 55, you can get a monthly cash flow from CPF Life of about $2K every month and more if you defer withdrawal.  Consider this your safety net.
  • Beyond CPF LIfe, consider putting additional part of your portfolio to generate more income.  You can consider government-linked bonds like HDB or Temasek, but the interest rate is quite low at the moment but it is considered close to risk-free.  If you can take a little more risk, bonds issued by Singapore banks like OCBC, UOB or DBS are normally safe but pays better yield.  You may also take a little more risks and get a better return if you invest in high quality REITS like Mapletree or CapitaLand.
  • The last category is equity. Stocks have been historically proven to generate a better overall returns   However, stocks unlike bonds, can fluctuate significantly and you should be able to stomach these swings.  If you are the nervous type, this may not be for you.  In today’s global environment, the stock market can go up or down 10-20% in a given year.  Some retirees have panicked and sell when it is down.  Unfortunately, that also lock in their losses.  For your retirement portfolio, your equity portion should generally consists of blue chips or larger cap companies.  I would recommend that you have no more than 40-50% of your portfolio in equities.
  • You can also manage risk through diversification of your portfolio.  If you have a large enough portfolio, you can buy a variety of asset classes and stocks that will achieve that goal.  If you have a smaller portfolio, consider investing in ETFs or Mutual Funds that consist of a large number of stocks to spread the risk.  You should not have more than 5% of you portfolio in any one stock or more than 20% in any one sector.
  • Singapore currency is very strong because of the credibility of the Monetary Authority of Singapore (MAS) and the country’s strong reserve position.  Overall, Singapore currency itself is like a “mutual fund” of currencies.  However, based on the lessons from the Asian Financial Crisis and Sub-Prime Financial Crisis, we also learnt that overweighting the wrong country’s currency can really hurt your portfolio.  Be wary of aggressively investing in stocks and/or bonds in developing countries even if the returns are better because it is difficult to predict currency risks.  
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