Planning for a Sustainable Retirement (Part 1)

Lorna Tan (ex Sunday Times Invest editor and now Senior VP, Corporate Communications at CapitaLand) wrote an interesting piece explaining why she has bought annuities for her retirement in Business Times (12th May 2014). Her website is at www.lornatan.com

In the past, she used to think that retirement planning was all about accomulating a certain magic number - depending on your desired lifestyle - before the drawdown phase kicks in. But she has changed her mind.

What is your magic number?

She observes, quite accurately, that one retirement risk we all face is the danger of outliving the nest egg. Life expectancy seem so the growing longer. Would the lump sum savings be sufficient? What if we got our sums wrong?

Shift from Lump Sum to Cash Flows
Lorna has now shifted her focus from achieving a desired lump sum, to ensuring lifelong cash-flows or income sources. So, the focus has changed from building up a stock (i.e. a lump sum to fund retirement) to building a flow (i.e. income payouts from investment vehicles). The characteristics that she is looking for are

1) the cash flows should be regular and sustainable;

2) the cash flows should generate enough income for her to live on at all times, regardless of the state of the economy (e.g. recession)

How to do this?

Consider your retirement needs as a pyramid. Determine your NEEDS versus your WANTS. By needs, it would include basic essentials like food, utilities and the like. Wants would be everything else other than needs.

Example of needs and wants, Business Times 12 May 2014

Doing this has a key advantage of being able to match your retirement funds against your needs and your wants in a more targetted fashion. For your needs, you ought to have risk-free savings/annuities/CPF Life and the like. Even if the economic situation turns bad, you would still have enough income to meet your needs. This should give you some comfort.

Lorna shared a good point about not putting all your eggs in a single basket. During the 2008 financial meltdown, when stock prices pummelled, many retirees who primarily invested in stocks were caught in a situation where they either got out of the stock market with huge losses or tried to stay invested for better dates.

 When the stocks were unable to generate the cash-flow they needed, they either had to go back to work and/or cut down their expenses drastically. I think this is something we all want to avoid when planning for retirement.

Move on to Part 2: