“The Timeline for Retirement Planning”, featured in StarBiz, The Star, on 27th July 2019.
The question, “when should one plan for their retirement?” always gets asked. It is one of the most important question that needs to be addressed, and taken seriously, because it has to do with one being in an uncomfortable situation where the possibility of constant income and cash flow is no longer a norm.
To be frank, there’s no hard and fast rules on this. I would urge my client to always begin with the end in mind. Once that context is set, we can safely move along its confines. Nevertheless, if you have no concept of the end – then let’s come at it from a view point of retirement planning from each stage of your life cycle.
Long-Term Accumulation Stage (starting age 20-30)
Intelligent investing is the key to build wealth. In other words, when saving / planning for retirement, you would want to put all your extra money into investments.
The long-term accumulation stage starts when you begin to invest for retirement purposes. It’s a commitment that will take you until you are 5 to 10 years from your intended retirement age. Because it is such a long process, it is important that you identify your risk tolerance, and choose the appropriate investment vehicles to match your risk profile. As you progress this stage, you would need to regularly keep an eye on your investment portfolio, and adjust it according to any changes in circumstances.
Ideally, the long-term accumulation period should start as early as possible because you have time on your side. Compared with someone who is about to cash out his EPF, you still have many active income earning years behind you, and with that, the opportunity to alter your saving habit should you incur losses in your investments. In fact, when you are young, you can afford to take greater investment risks. Take the opportunity to amass as much retirement assets when you can still afford to do it.
Care should be exercised when designing an investment portfolio at this stage. Just because you can afford more risk, doesn’t mean you should take your chances. A balance needs to be struck between meeting your risk tolerance and fulfilling your retirement fund objective.
If a risk- averse person were to implement an extremely conservative investment portfolio, chances are that he or she may not be able to meet his retirement objective. Why? Enter, inflation. Never let it sneak up on you!
Inflation is a silent thief that will eat away and reduce the purchasing power of the monies put into your investment vehicles. As such, If your investment vehicle fails to generate higher returns, or sufficient appreciation to offset the effects of inflation, you would have effectively ‘lost’ money. In other words, your money is not growing fast enough.
Therefore, for the sake of having a decent chance at retiring comfortably, even the most risk-averse person should consider taking on more risk by investing into investment vehicles that yields higher returns.
Portfolio Restructuring Stage (starting age 40 – 55)
The time to restructure an investment portfolio varies depending on the individual. In most cases, the portfolio restructuring stage starts somewhere between 5 to 10 years from the retirement age.
As the date of your planned retirement draws closer, you should fine-tune yourself to become less growth oriented and more risk averse.
It’s a bit ironic. When you are young, you have time on your side to stomach any side effects from ill ventures. But when you are almost at the finishing line, you don’t have the leisure of time to recover from any losses, let alone deal with major losses from investing in high risk investments. Therefore, it is only natural for you to be less willing to invest additional savings into high risk investments.
Meanwhile, it doesn’t make sense to continue to maintain an outdated investment portfolio that you have put together when you were in your 20s and 30s, as it no longer reflect your current situation.
The process of adjusting your investment portfolio, will lead you to owning a restructured portfolio that has significantly less risks than the ones held during the long term accumulation stage. As a result, your investments will experience smaller capital appreciation.
Therefore, as you approach your planned retirement age, you should expect a tapering off your total returns. This ‘recommended’ progression would have been perfect, had you made an advance attempt to invest and set aside money for your retirement (especially if you had started early during the long term accumulation stage). It gets very challenging, if you are already close to retirement age and have very little to show. It would be nothing short of a miracle – You will need to dramatically increase your annual savings and find ways to increase the return from your savings immediately from now. If necessary you may want to consider delaying your retirement.
Fortunately for most people who start their career and family at a reasonably early age, the shift in investment emphasis and risk tolerance normally coincides with a reduction in their other financial commitments. They may have finished paying off their mortgages, car loan and funding for their children’s tertiary education. If you fall into this category, you can redirect what money you have leftover from the reduced financial commitments to increase your annual investment for retirement purpose.
Non-monetary wise, if you and your spouse are both drawing salaries, it is important to start discussion on an agreed date to depart from the workforce. You may want to explore the possibility of having one or the both of you retire earlier or at the same time.
Preservation and Current Income Stage (age 60 and beyond)
This stage begins from the actual retirement age and continues well into your golden years. Your investment portfolio should shift gears to preserving your accumulated wealth. Another portfolio restructuring is in order to reflect your new risk tolerance level and the need to fund your retirement living expenses.
However, a portion of your total portfolio should still be allocated to offset the impact of inflation during the retirement years. As you can see, the threat of inflation never fully goes away. Make no mistake, those who choose to ignore this economic phenomenon will find this oversight a costly lesson.
There are certain financial planning disciplines that you may want to adhere while in your wealth preservation phase. Keep a proper system of recording to measure how much money you are spending and on what you are spending for. See how this lines up with your actual income, and where possible, make the necessary adjustments to your lifestyle so that your cashflow remains in the positive.
A comfortable and worry-free retirement do not just happen. There is always a serious risk that something unexpected will cause your plans to go awry. As such, common sense denotes that we should plan ahead and cover for every potential contingency. Perhaps you may get a a lower than expected investment return, or the sudden onset of a health issue may cause you to deviate from your careful retirement plan? You can withstand all these obstacles, if you have put in place the right meassures in your retirement planning.
Here are some hacks that you can adopt to your retirement plan:
Lastly, it is the time for you to enjoy yourself. You deserve it. After all, you have spent a good 1/3 of your ‘living’ years working to put food on the table, and ensuring that your dependents are well looked after. It is time you enjoy the fruits of your labour.
Also featured in The Star online – https://www.thestar.com.my/business/business-news/2019/07/27/the-timeline-for-retirement-planning/Back To Article Page Get Started Today