“Funding Your Retirement Pay Cheque”, as featured in Starbiz, The Star, on 7th September 2019
After a good 20 to 30 years of hard work, you are finally able to have redemption for the blood, sweat and tears you have put in for the most part of your life– Your Retirement! From now on, just like in a game of Monopoly, you may collect a small token every time you pass GO. Life should be how you have envisioned it to be; being able to have all the time to do what you love, go on holidays, and spend more time with family members. Theoretically, you should be able to live off the grand lump sum retirement money you have work so hard to accumulate.
Now, assuming you have accumulated enough of investment assets to fund your retirement years, have you thought about what should be the ideal asset allocation for your retirement nest egg? This question is particularly significant, as you will no longer be generating any active income. Hence any unfortunate mishaps on your carefully planned retirement nest egg may directly impact the diligent crafted plans you have for the future.
If you are nearing retirement and wish to get your asset allocation underway, below are some examples of how you may shape your asset allocation.
Malaysians are more inclined to lean towards properties, believing that ownership in one of these assets would lead to reaping some passive rental income, or capital appreciation.
The good news, i.e. the advantage from owning properties in your portfolio is that you will get to enjoy sufficient growth from the investment to hedge against inflation risks. Additionally, the rental income generated could come in handy to fund your on going retirement expenses.
The bad news is, there is not enough liquidity in properties, especially if there are outstanding mortgage to service. The process to buy or sell your property investment is arduous, not forgetting that you could potentially suffer a lost, if you needed to cash out quickly to settle an emergency. You may even be cash strapped to fund your retirement expenses if certain properties are unable to generate rental income or stop generating income completely. This situation is pretty real, as there is a lot of supply out there but very little demand from the market. The situation could be even direr, had you invested in land. Not only do land investment not generate income at all, but you would also be required to pay quit rent and an assessment fee every year.
All said and done, time and effort is required to manage and maintain a portfolio of properties. As you grow older, you may find it strenuous to maintain the upkeep of the properties if you have no one to assist you.
Contrary to popular belief, properties are not ideal as a wealth distribution channel for the next generation. Here’s why: Properties come in different size and values, which makes it harder to allocate equally among the beneficiaries. So, who gets what and why was it planned that way? If you wish to prevent discord from your beneficiaries, then think twice before you acquire another piece of property to add to your retirement nest egg. Property ownership may be an emotional tie for you, but for your beneficiaries, it could be a cumbersome asset to managed and maintain. Eventually your beneficiaries may choose to sell off the properties.
And then, we have another group of people who have saved all their lives, and have their hard earned money in the bank.
The good news is, cash is liquid. If you have done the planning in advance and have saved up enough cash to fund your retirement expenses, you would never have to worry about cash flow needs and where to find the money.
Cash is a good medium for wealth distribution to the next generation. Compared with properties, you can easily and fairly allocate your asset, in this case, cash, amongst your beneficiaries.
On the downside, if you use the interest income to fund your retirement expenses, your retirement nest egg won’t grow and would be eaten away by inflation over the years. If the inflation rate is high, your money may get depleted before your time on earth is up.
If you have dabbled in investments, especially high-risk investments, then you are akin to be living life on the fast lane. High-risk investments are like a double edge sword; it is the quickest way to increase your wealth, or the fastest way to wealth depletion. The question is, can you emotionally, and financially live with the consequences?
Examples of high-risk investments include investing into direct stocks, direct bonds, high-risk unit trust funds, private equities, commodities, p2p, equity crowd funding, crypto currencies, and money games.
Here’s the good news – If you played the investment game correctly and identified a winner, you will be able to hedge inflation risk with your investment gains. You will also be able to enjoy the benefits of diversification if you diversify your money into different types of investment.
The bad news, you will not have enough cash to fund your retirement expenses if your retirement nest egg is fully invested. As high-risk investment is volatile, you may even need to sell it at loss in the event that you urgently need the money. The situation is further exacerbated, if you happened to invest in a close-ended investment like private equity funds as withdrawals in these types of funds are only permitted during certain intervals. You may end up waiting for years before you can even see your money.
High-risk investments are highly volatile. We know that. To counter the uncertainty, or at least to keep things under some semblance of control, investors would need to put in effort to regularly monitor and manage the investment. If you are new to investing in high-risk instruments, do yourself a favour, and acquire the knowledge to master your investments.
If you have chosen to walk this line, you must make sure you go at it with your eyes wide open. But, as you age, do you really want to live life on a roller coaster of emotions knowing that the price can go up and down 100% within weeks or even days? Surely, it can be very stressful and tiring to do so.
Up until this point, we have talked about 3 types of avenues to fund your retirement lifestyle. Each method carries its own pros and cons. To me, the most ideal asset allocation for your retirement nest egg is having a diversified portfolio, which contains different asset classes comprising of cash, properties and unit trusts.
Here’s how you put together a diversified portfolio:
First – Let’s look at the cash portion. Having some cash in your nest egg, mean you will have enough liquid cash to fund your retirement expenses. You should allocate about 3 to 5 years of your retirement expenses into cash or cash equivalent investment to act as cash reserve.
Since you have some investments in properties, the rental income would help to cover part of your monthly retirement expenses. Monies in your cash reserve would then fund the balance of your retirement expenses.
Next, by allocating the majority of your retirement nest egg into various quality properties, and unit trust investments, you would be able to achieve capital growth that is sufficient to hedge against inflation risk without fear of capital loss. By doing so, you can be assured that your retirement nest egg would last longer, no matter how inflation moves during your retirement years.
When there is a need to dispose of any properties, your cash reserve and liquid investments should serve as a good buffer for cash flow needs, while you spend time searching for a buyer who is willing to pay the asking price.
Finally, a diversified investment portfolio serves as a good distribution model for the next generation. Any inequality caused by properties, can be easily resolved by using cash and other liquid quality investments.
There isn’t much downside to having a diversified portfolio, as long as you can limit the amount of property investment that you own to less than 5 pieces. This will ensure the manageability of these assets in the long run.
Meanwhile, volatility from unit trusts investments would be under purview of professional fund managers making the risk relatively lower compared to investing direct stocks and bonds. If needed, you can also engage licensed financial planner to help you monitor and manage your unit trust portfolio.
Many people make the mistake of underestimating what retirement entails. They are unable to comprehend the scenario because it is an unchartered territory. The truth is, your golden years need to be funded. As such, to enjoy your retirement fully and make the golden years really golden, you should spend some time to review the asset allocation of your retirement nest egg. Preferably this process should take place a few years, ideally 5 years before you retire and stop earning an active income, to ensure there is sufficient time to course correct and do the necessary restructuring.