Planning for Sustainable Retirement (Part 3)

Continued from Part 2

You may think of retirement as a stage of life where we are happy and carefree. But in reality, one should at least think of the retirement years in three phases.

1. Go-Go Years
This is when you just retired - full of energy and life. Now is your time to enjoy your place in the sun. No more worries about making ends meet. Just relax, chill, pursue your passions. After all, you are still healthy and hearty. You may even decide to climb a Mountain as last hurrah! Go for it!

Let it go!

Slow-Go Years
This will be after the Go-Go years, where you have had all the fun you wanted to have (or could afford to have). Now, age is catching on. It is less convenient to travel. You prefer to chug along, take a leisurely pace, with the occasional exciting trip or challenge.

relax.

No-Go Years
This would be twilight years, where they say - the heart is willing but the flesh is weak. You want to keep your mind occupied and you contemplate life and all that you have done.

Go-Go, Slow-Go, No-Go Helps To Match Incomes/Assets to Expenditures
This helps us  think more clearly what the expected expenditures are like during these 3 phases of retirement. Your expenditure will differ according to your desires.

Chances of spending a lot more during the Go-Go years is to be expected, especially if you like travelling, exploring the world and doing things that you had never done in your life. On the other end of the spectrum, expeditures during No-Go years would likely to be on medical care and perhaps even nursing homes or old-age homes.

By splitting the retirement years into 'Go-Go', 'Slow-Go' and "No-Go", you would better be able to match your expected retirement assets/savings/income stream to fund your desired lifestyle.

Income Stream To Meet Basic Needs
Coming back to Lorna's advice on having an income stream to meet basic needs, I think that advice is sound. You would need this basic needs retirement income stream through all your retirement years.

You should have a plan on how to fund the Go-Go years and Slow-Go years. For example, if you have certain assets, you could decide to liquidate them during a certain time and spend that money during those years. This would also help you keep track of your income and expenditure.

My Retirement
I hope to have fabulous Go-Go years and enjoy all that life has to offer with my dear wife. Let's say I retire at 60. I reckon 60 to 70 would be my Go-Go years. There are so many places I want to visit, so many things I want to do in this 10 years. This also means that I need to prepare the funds for it. So it would be prudent to have a good estimate of how much funds are required, and then allocate the savings and assets to those years.

Cruising - fun!

Liquidating the UK Properties
Where our UK properties are concerned, due to the hefty inheritance tax structure, it does not make any sense for us to leave them for our children. Therefore, the plan is to liquidate them all. By when? That is the key question. I think by the time I reach Slow-Go years, it should all be liquidated. Furthermore, we can't predict with absolute certainty, when we will depart from this Earth.  Also I have to bear in mind the hefty inheritance tax regime in the UK.

Illustration
By way of illustration, let's say I have 3 London properties, each worth 500,000 pounds. A sensible method would be to liquidate 2 of the 3 properties to fund my Go-Go years and then the remaining property to fund the Slow-Go and No-Go.

Spreading the Eggs
All that said, we should also spread our eggs and not put them all in one basket. So, I am not advocating that you put all your retirement funds into one instrument, be that property or annuities or stocks etc.

It would be prudent first to pay attention to Lorna's advice, of looking at income streams to cover your most basic of needs. Then, also consider the 3 phases of retirement that I have suggested and plan & structure your assets and retirement funds to meet your desired lifestyle during those years.

Happy Investing!

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Planning for a Sustainable Retirement (Part 2)

Continued from Part 1

My Retirement Views
Lorna's article and advice resonated with me because I have been thinking about retirement for many years, even though I still have a good 20 or more years in the work-force (going by how the retirement age seems to keep increasing!)

Think About Retirement Early
Start thinking about retirement early. Thinking of the huge sums needed to have a comfortable retirement has the positive effect of making me a lot more prudent in my spending. Everytime I see my paycheck, I will be thinking, $XX must be shifted to retirement funds. If you have too much money lying around, especially as incomes grow, the tendency is to spend more and reward yourself 'because you have arrived'.

I have arrived.

I think such behaviour is not be wise. Do not assume that the grass will always be green and the sun will always shine.  I find it useful to re-define what it means 'to have arrived'. This is important, because money is a means to an end, and not an end in itself.

To have arrived, to me, means to achieve financial independence, i.e. I can stop work and pursue my hobbies and passions, without the need to worry for income, because my finances are already well-taken care of.

Take More Risks When Younger
It is with retirement planning and funding for our kids' education in mind that we started investing in London some 5 years ago. I had previously blogged about this here, see this post.

Originally, we thought that we would just purchase 1 London property to fund our kids' education. Doing our sums, we realised that after we come up with the 30% downpayment, the property would be able to fend for itself. When our kids were ready to go to University, we could liquidate the property, and release approximately 300,000 GBP - this sum would be sufficient to fund most, if not all, the expenses for our kids' overseas education.

Invest Some More
Because the first investment worked out so well, and we could see the rental yields back then (2009/10/11) were so strong relative to capital costs (easily achieve net 5%, if not more), we pushed ourselves harder and plonked down more downpayments for further properties.

When I say pushed ourselves, we really did. Our incomes were growing and the temptation was to spend more. Instead, we spent the same (if not less) and channelled every spare dollar we had into these investments. By God's grace and providence, we are 'sitting pretty' today, because the UK London property market has shot up so much in the past 12 months.

Fast Forward To Retirement
Now that we have more properties on hand, it is useful to think about the plan for them. But before we dive into the details, I would like to build on Lorna's good advice by introducing another concept which I had read before, i.e to spilt the retirement years into 3 phases - Go-Go, Slow-Go and No-Go.

Please read on in Part 3.

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: