Even when you are no longer drawing an income, a retirement portfolio allows you to continue to pay your bills.
The process of building a retirement portfolio typically involves a combination of regular saving and long-term investments.
When should I start building my retirement fund?
Planning for your retirement journey can look different in your twenties versus your forties. However, one thing stays the same –it is never too early to start planning for your retirement. The thought of it may sound daunting, but with discipline and determination, you can be on your way to get closer to your retirement goals after years of hard work.
How do I calculate how much I need to retire?
The first step to retirement planning is to set a goal for your retirement funds. This requires you to determine how much retirement income you need when you stop working. The following questions here can help you to have a general idea:
At what age do you plan to retire?
How many years of retirement income do you need?
What is your desired monthly retirement income?
To calculate your desired monthly retirement income, one method is to use 70% of your last drawn salary. If not, you can use an absolute amount you have in mind, taking into consideration the type of lifestyle you would like to lead during your retirement. Multiply this sum by twelve to determine how much you need a year.
After calculating the amount you need annually, multiply it by the number of years you plan to stay in retirement to get an overall goal for your retirement funds. For instance, if you need S$4,000 a month and plan to be in retirement for 25 years, the amount will be S$4,000 X 12 X 25 = S$1.2 million. It is also crucial to note that this goal for your retirement funds as above is only an indicative amount! It does not take into account any of your current liabilities, assets, and the inflation rate.
How do I reach my retirement goal?
Most people think that keeping your money in a bank savings account will help you reach your retirement goal eventually. However, this might not be true as the value of your money might get lower over time due to the effects of inflation.
More importantly, you want your money to work harder for you, which would mean taking a certain amount of risk for higher potential returns. But a retirement fund needs certainty as well - you need to preserve your capital because you need it as a stable income. So how can one balance between the need for growth and the need for preservation of capital when building a retirement fund?
The following 6 factors need to be considered:
1. Risk appetite Your risk appetite might change depending on your commitments and goals at different points of your life. Generally, the younger you are, the more risks you may afford to take since you would have fewer commitments at a younger age and more time on your hands to recover possible losses should you take a higher risk with your investments.
With that said, every individual is different, and you should assess your risk appetite depending on your own lifestyle and goals rather than following the crowd. Changing priorities at certain life stages may also influence your risk appetite.
There is a variety of insurance solutions in the market that may address your financial needs and suit your risk appetite. As with all investment products, you are exposed to the risk that your investment returns underperform expectations.
2. Time Horizon Generally, if you are of aggressive risk profile, a bigger portion of your retirement portfolio may be set aside for higher-risk investments if you start younger (e.g. in your twenties). As you progress closer to your retirement, your portfolio can increasingly focus on solutions that are of lower risk and provide relatively stable potential returns.
You can consider allocating your investments into products of different time horizons (i.e. short, medium, and longer-term) depending on your risk appetite. For instance, you can include some riskier assets such as single equities or investing in a fast-growing specialty fund in your portfolio. However, always keep in mind that with higher potential returns comes higher risks.
For longer-term investments, you can consider a retirement investment-linked plan to help you accumulate wealth for your retirement fund.
3. Inflation If you leave your money idle, you will most probably lose purchasing power over time due to inflation. To ensure that your money preserves its purchasing power during your retirement years, you need to make sure that your money is growing at a rate higher than inflation. Hence, select investments that can give you potentially higher returns than the inflation rate, on the condition that you are able to accept the accompanying level of risks. 4. Diversification Just as how you shouldn’t put all your eggs in one basket, it might be a good idea to ensure your retirement fund portfolio is diversified. Not only does this help you manage the risk of your investments, it also allows re-balancing of your portfolio to maintain the risk level over time.
For instance, an insurance plan with a “capital guaranteed” feature will ensure that your initial investment will be preserved. Such plans can be a part of a larger and diversified retirement portfolio with a mix of higher and lower-risk investments.
5. Affordability Building a retirement sum is a long process, and many people put it off until later. This may also be the reason why only two out of five Singaporeans feel confident about retiring comfortably.
By starting later, you may need to set aside bigger sums to reach your retirement goal. Work with us to assess your current financial situation and make working towards your retirement goal a sustainable habit, as well as explore other available products if needed.
6. Payout mode Many people neglect the payout mode in their retirement planning. With investments, you may not have the liquidity you need if you need to commit your investments for a certain number of years.
So, you need to consider when you are likely to need cash for your commitments, and whether you will have quick access to the money. For instance, certain endowment plans require you to lock in the amount for a fixed number of years before you may get a potential lump sum payout, whereas others may provide a yearly guaranteed payout.
Make sure you are clear as to the payout mode of the insurance plans, and select the ones that meet your needs best.
Conclusion Planning for your retirement may look like a daunting process, especially when there are no exact rules on how you can build your retirement portfolio successfully. Hopefully these 6 factors gave you some good ideas on how it works.
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