Posts Tagged ‘Retirement’
Retirement Planning. How to Plan and Create an Income during Retirement?
Retirement Planning is one of my pet peeves and even though I have not been posting for quite a while does not mean I am off the subject J. Over the last few months, I have been re-organising my finances and taking on new challenges of managing a new organisation that have taken up most of my time.
I know most of us do not think about retirement planning most of the time and that planning for retirement can sometimes be one of our last priorities when we are faced with loads of work and family issues; myself included. However we should engage some of our time for this activity and anyway planning for retirement should not be a worrisome activity and it can actually be fun thinking about what we want to do after years of working. Retirement with at least one million dollars would certainly be fun.
In this post, I want to address the issue of planning for your income during retirement. For many of us, our plan is to save sufficiently so that we can draw from the nest egg, with whatever we can also withdraw from our corporate pension plans or Social Security, to last us for 20 to 30 years. For others, their plan is to be able to create an additional income source that could either be passive such as rental income or investment returns, or from a home business or even online business such as Ebay or general internet marketing.
My thinking about planning for retirement income is bias towards an income from small businesses and property investment. Small business, especially businesses which provides basic necessities to the people staying in your neighbourhood, are more resilient against market movements but the returns may not be spectacular.
Cafes serving students in the local university or college, local unpretentious hair saloons serving the local community, grocers and even a magazine shop can provide a nice little income while keeping ourselves active. Taking the idea further, this would mean an investment into several of such businesses with or without a few active partners. Even in businesses, I believe in diversification and investing in a variety of businesses, providing essential services, will be a strong component in our retirement plan.
Go look at what the local shops are doing. Talk to the ladies running the hair shop and understand their operations, talk to the manager running the college café and you will see that creating a few little businesses is not a daunting tasks. The income you derive from such small businesses, after paying all your staff, may not buy you that Ferrari but it will be more than enough to pay for that holiday in France and a great bottle of pinot noir in Burgundy. Go try the Boeuf Bourguignon in Beaune and you will love your retirement. We want to enjoy our retirement so go plan for how you will create that retirement income.
How much do I need to retire? Is One Million Dollars Enough?
As you probably know from my previous post, my retirement target is 1.5 million dollars in 11 years time. How did I come up with this magic number for retirement? How much do I need to retire? Is 1.5 million dollars the amount that is needed to live a comfortable retirement? What about for yourself? Do you also need 1.5 million dollars in order to retire? Does it mean that if you are short of the 1.5 millions, you got to either rob a bank or slog till you drop?
First of all, 1.5 million dollars is a personal target. How much do I need to retire is dependable on my situation or context as well. My context is likely to be different from you. My country of residence is Singapore and while I may move to another place when I retire, I have to make sure that in the event I decide (or my wife decide) that we should still stay on in this highly expensive country to live in, we have more than sufficient to live comfortably.
Retirement Expenses
My expected retirement expenses will be reduced but unlike many whom have preached that all of us should see a significant cut in spending when we retire, I expect only a marginal reduction. Rather my expenditure patterns will change when I focus on different things in life and spend my money and time on different things. The key is that I will not be eating out less nor will I be shopping less for gadgets. Dun even bother telling my wife to stop buying those hand bags of hers, we are already running out of shelf space.
My key expenditure will be on Food, Transportation, Leisure and Medical/Insurance. For Food, I expect myself to continue to eat out often. This will incur about $2000 per month. Eating is one of my leisure activities as well ? and I seek out good places to eat as one of my favorite past times. For transport, cars in Singapore are horrendously expensive and I do not fancy large fuel guzzlers. I will likely buy a compact fuel savings Honda or Toyota and this will likely cost me $1500 per month; fuel included. As for medical or insurance, I have a hospital plan and term life insurance that cost me minimal currently but I expect the costs to go up to about $500 per month. And on top of these expenses, I intend to spend up to $2000 per month on leisure; travel, shopping, golf etc. These numbers seem general but I have made numerous calculations and predictions (using inflation data) and these numbers should be pretty close to what I will need. All in all, $6000 per month will be just nice. If you asked about my kids’ education or my housing mortgage, I have catered a savings and investment plan separately and will have sufficient funds for a local university education for my child and will also see my mortgage paid fully in 11 years time.
The numbers that I present above will differ for you as our priorities are different. But the key message that I would like you to take away is that we should not be planning retirement as a life in rags but rather we should be planning for a 20 to 40 year vacation. Otherwise we might as well continue to work. I am not saying that working during retirement will be taboo. I am likely to continue to keep myself active by starting businesses and taking part in more social work. Getting an income or profits will also allow me to splurge even more, although the target is to achieve $1.5 million dollars or a $6000 per month withdrawal rate at the age of 45.
How much do I need to retire? How to have $6000 per month during retirement?
Reading the above paragraph, you will probably understand how I arrive at a target of $1.5 million dollars. The goal is to create an investment fund size of $1.5 million dollars when I hit 45 years old so that I can see a withdrawal of $6000 per month or $72000 per year. This is a 4.8% withdrawal rate, which I perceived to be sustainable without drawing down my principal amount of $1.5 million dollars.
The retirement plan will be to continue to be aggressively invested while putting aside 5 years of expenses aside. This will allow me to keep
$1,140,000 in a moderate to aggressive investment portfolio (mainly equities)
$360,000 for 5 years expenses
I will further breakdown my $360,000 into 2 pool. $72,000 for the first year’s needs and keeping the remaining $288,000 in foreign currency deposits. Currently Aussie and New Zealand currencies are attracting the highest return of 8% with relative stability without even taking into account the appreciation. By taking this retirement strategy, I will foresee a need for my main investment of $1,140,000 to return 6.3% annualized over 5 years in order for my retirement to continue without eroding my principal. I expect this to be not only achievable but to also surpass this target. Otherwise I will fire my financial planner 
Ok. I hope I have articulated why I think I need $1.5 million dollars to retire and hopefully this let you also start to think about how much you will need for retirement. Start thinking about it early so that you can plan ahead. If I had started 5 years ago, I would probably be able to retire by 40 years old, but 45 years old is still not too shabby. I am going to write another secret cheque to myself to keep my inspiration alive ?
