Ensuring there's money for old age

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#1
Apr 17, 2011
small change
Ensuring there's money for old age

Investment strategy for retirees needs to give priority to cashflow management
By Philip Loh

As we enter our golden years, we may face a different set of challenges or risks that may not have existed in the earlier stages of our lives, when our main aim was to accumulate wealth.

These risks can have a dramatic effect on our retirement income sustainability. With this in mind, let us explore one of these risks, called the 'sequence of returns' (SOR) risk.

Many senior citizens are aware that they are too old to start taking risks, mainly because they will not have the time to recover if they incur huge unexpected losses.

This is commonly referred to in financial planning circles as SOR risk. It is precisely because of this risk that I am often more cautious when recommending entry strategies for investors who are nearing retirement or already retired.

SOR risk emerges as we approach retirement

SOR risk is a very real one as we approach retirement, and failure to consider it could derail our retirement goals. This is because during the 10 years just before and after retirement, which I dub the 'vital risk period', an investor's assets are most sensitive to the damage from negative market returns. We call this 'sensitivity to poor returns SOR risk', which primarily arises from two critical factors.

First, the bulk of our funds is at stake just prior to and after retirement. As a result, the effect of dollar cost averaging - an investment strategy of investing equal amounts regularly to lower the overall cost of the investment - during this stage is limited.

And second, the impact of withdrawals magnifies the damage from initially poor returns after retirement. If negative or poor returns are experienced early on in retirement, the sustainability of our targeted retirement income will be threatened.

For example, let's assume you retired in early 2000 with a nest egg of $1 million. As the global stock markets had chalked up spectacular returns in the preceding 10 years, your financial adviser may have asked you to invest your $1 million in a global equity fund, with an expected return of 8 per cent per annum (reasonable at that time given the historical returns for global equity we were looking at then) and an annual withdrawal of 6 per cent ($60,000) to finance your retirement.

In this example, the bursting of the Internet bubble in 2000 would have obliterated a big chunk of your nest egg, while the ensuing credit crunch in 2008 would have wiped out your money totally. So, even though the market did rebound strongly in the subsequent two years, you would have had no capital base left to take advantage of the recovery.

How to insure against SOR risk

To avoid SOR risk, you should first manage your cash flow prudently, and then diversify your assets.

Financial advisers have long preached the importance of asset diversification to manage risk. This established doctrine is based on well-cited studies, which have found that asset allocation is the single-most important driver of investment returns, far outweighing the importance of selecting individual securities.

But once it is time to retire, and the withdrawal of income from your accumulated assets starts, the role of asset diversification diminishes in importance and cashflow management emerges instead as the core focus.

In short, to manage SOR risk during retirement, income planning surpasses asset allocation in importance, when success is measured in terms of lifetime income sustainability.

While a diversified portfolio of stocks and bonds will be important regardless of age and the stage of life that you are in, it is cashflow management that will take centre stage during retirement.

After all, the greatest fear of all retirees is that their money runs out before they die. They typically do not care what the investment return is, as long as their retirement income objective is met. Sacrificing 1 percentage point to 2 percentage points in compound returns to insure their retirement plan from failure seems to be the right thing to do for most.

The retirement income approach that I often advocate is designed to positively increase the chances that retirees can receive a sustainable retirement income throughout their lifetime. It involves a simple strategy of utilising a series of products to ensure stable periodic income payouts for their retirement lifestyle needs, and also to satisfy their legacy requirements.

Cashflow instruments to manage SOR risk

Apart from the core portfolio of bonds and equity funds, I usually suggest that older clients use a combination of three categories of cashflow instruments for the more liquid portion of their retirement portfolio. These are:

1. Short-duration endowment plans involving different maturities and payout sequences;

2. Singapore Government Bonds with two years to 10 years left to maturity; and

3. Fixed deposits or just plain vanilla saving accounts.

It is best for individuals and their advisers to determine the exact allocation and investment vehicle mix that will both balance their SOR risks and achieve their legacy planning goals.

Just as we have no control over the precise length of our golden years or the rate of inflation during our retirement, we also cannot control the timing of an inevitable bear market. Thus, rather than trying to predict when a bear market will strike, I believe we should just insure ourselves against adverse outcomes by using appropriate cashflow strategy.

In short, our objective should be to simply hedge against SOR risk, while keeping in mind our retirement income goals.

The writer is a chartered financial consultant and executive manager of financial services with Great Eastern Life. The views expressed are his own. Comments are welcome at http://www.opl.sg/contact.html#feedback
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
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#2
State the problem but did not really answer it.

I think a 30%-70% or 40%-60% bond-stock allocation should be a safer approach than using endowment plans, saving acct to draw down the capital.

A 4% yield on 60% of $1 million will easily give $24000 per year. Assuming that the rest of the 40% is getting a 1% yield, the yearly income is at least $28000.

Currently, it is not that difficult to get around 4% yield with Singapore blue chips. (SMRT, good Reits, singtel, singpost..)

In the bad years, the 30% or 40% of bond fund can easily be used to top up blue chips. As long as the dividend yield remains relatively consistent, a hit in the net worth is not something that cannot be stomached.

The diff part is to hit an amount that allows the above strategy to be used (at least S$1 million??)
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#3
The up and down seems to be getting steeper with Electronic trading, Inflation, Sophiscated Instruments and simply more Traders in the Market. Bust and Boom trend will be short an unlikely to last very long. So I would say even at 60-70s we need to continue to manage our Portfolio, Spare and Reserve to support opportunity and medical needs. Is going to be lifelong and my children can have the leftover. I think they will seriously need it not to fall to the bottom.


Cory

Just my Diary
corylogics.blogspot.com/


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#4
Hedge against 'sequence of returns' (SOR) risk.
Hedge against Inflations

To me, the best is property investments….i not asking you to buy ppty now.

Well...have a timeline for the payouts.
You may spread across these investment modes:
1. Put some in CPF - 2.5%, 4%
2. Short term endowment - 2.5% -3.5%
3. FSM money market. - 1.5% - 2.0%
4. Short term SG govt bond - 2%
5. Preference share, DBS 4.7%, OCBC 5.1%...hmms Hyflux 6%...
6. Blue chips stocks -- as Yeo san had indicated.
7. FD in CIMB or Stand chart - 0.9% and 0.928% respectively
8. Buy enhance hospitalization protection/ annuity / elderly shield..hehe, espicially those above 55.
9. If still got balance 'cash' ..join venture with me look for Industrial and Commercial properties not affected by SSD...buy a few cheap cheap 1..(500k -700k), hehe thereafter shake legs liao...

10. over to you...please add on
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#5
It's interesting. I think we are becoming more westernised (not that it's a bad thing).

I guess the old chinese adage that have children for retirement does not apply anymore. Kinship and family ties have been relegated to a footnote.....

I think I am in deep Sh**. Single and no children.....
Just google singapore man of leisure
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#6
(17-04-2011, 01:32 PM)koh_52 Wrote: Hedge against 'sequence of returns' (SOR) risk.
Hedge against Inflations

To me, the best is property investments….i not asking you to buy ppty now.

Well...have a timeline for the payouts.
You may spread across these investment modes:
1. Put some in CPF - 2.5%, 4%
2. Short term endowment - 2.5% -3.5%
3. FSM money market. - 1.5% - 2.0%
4. Short term SG govt bond - 2%
5. Preference share, DBS 4.7%, OCBC 5.1%...hmms Hyflux 6%...
6. Blue chips stocks -- as Yeo san had indicated.
7. FD in CIMB or Stand chart - 0.9% and 0.928% respectively
8. Buy enhance hospitalization protection/ annuity / elderly shield..hehe, espicially those above 55.
9. If still got balance 'cash' ..join venture with me look for Industrial and Commercial properties not affected by SSD...buy a few cheap cheap 1..(500k -700k), hehe thereafter shake legs liao...

10. over to you...please add on

Property is indeed one of the best investments around if one knows how to invest. I have an auntie in her late fifties who owns a few properties (mixture of residential, commercial and industrial units). She is now a retiree and manages her properties herself (collection of rents, organising maintenances/ repairs for her properties and administration such as signing of any documents). She also does her ongoing research on property investment, looking at property prices and rentals on different properties according to regions and property natures. She is drawing a monthly cash flow from rentals of around $7000 from all her properties. Apparently, she enjoys managing her properties and doing property investment research as a retiree. It gives her work to do at this retirement phase of life.
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#7
There is no such thing called the best investment.
Nothing stays static and nothing is absolute.
The thing about karma, It always comes around and bite you when you least expected.
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#8
When you are old and feeble and maybe senile, all the money you have can not do anything for you. It's the relationship you have nurtured for years with the people who are going to be around you that matters. i feel personally, it is the worst and saddest case if you landed up in old folk's home.
Therefore, no matter what, i try my best to keep my mom at least staying with some relatives; with a maid taking care of most of her needs. And i am the most distanced from my mom. My mom is now 90+. She can't recognised some of us already. So suppose if my mom is a multi-millionaire, do you think her money will do her any good? i doubt? So it's going to be the same with us, when we are old and senile. We are at the mercy of our minders.
i don't think Stanley Ho's billions do anything good for him in the end either; Looking at a picture of him sitting on a wheelchair helpless, at the mercy of his minder.
WB:-

1) Rule # 1, do not lose money.
2) Rule # 2, refer to # 1.
3) Not until you can manage your emotions, you can manage your money.

Truism of Investments.
A) Buying a security is buying RISK not Return
B) You can control RISK (to a certain level, hopefully only.) But definitely not the outcome of the Return.

NB:-
My signature is meant for psychoing myself. No offence to anyone. i am trying not to lose money unnecessary anymore.
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