Many Singaporean’s think retirement is far away so they only care about building wealth and not so much about taking distribution.
I find that there are much retirees that needs something like this.
This is not a complete article now but will be a placeholder for me to consolidate resources on retirement. I hope that by the end of 1 or 2 year I have consolidate a great article to help readers.
Why do you want to ‘Retire’?
You came to read this topic because you want to know
- how to retire comfortably
- if you have missed anything out
- what you can do to speed to get to retirement
I believe one question on your mind is: Should you retire at all?
To answer that, I may need to point you to how retirement comes about:
In 1881 Otto von Bismarck, the conservative minister president of Prussia, presented a radical idea to the Reichstag: government-run financial support for older members of society. In other words, retirement. The idea was radical because back then, people simply did not retire. If you were alive, you worked—probably on a farm—or, if you were wealthier, managed a farm or larger estate.
But von Bismarck was under pressure, from socialist opponents, to do better by the people in his country, and so he argued to the Reichstag that “those who are disabled from work by age and invalidity have a well-grounded claim to care from the state.” It would take eight years, but by the end of the decade, the German government would create a retirement system, which provided for citizens over the age of 70—if they lived that long.
This was a big “if,” at the time. That retirement age just about aligned with life expectancy in Germany then. Even with retirement, most people still worked until they died. – How Retirement Was Invented, Quartz
Based on this account, the reason for retirement…. is rather political and wildly different from what we think.
We think that we all deserve to retire, that we need a good rest. That was not the normal needs last time.
Explaining CPF Life
Christopher Tan provides a very entertaining break down on CPF life in this video. It is in Chinese, but the value here is that since CPF life is such a complicated product, re-watching this video a few times is rather helpful.
Visualizing Retirement as Cash Flow instead of Pool of money
- Instead of thinking about retirement savings as this dreary thing that “will sustain you until you die,” he suggests focusing on specific things you’re saving for. How many times a week do you want to eat out when you retire? How about a summer in Paris, or a world tour?
- Think of your spending in terms of opportunity cost. Forgo new swimsuits this summer, book the savings, and you’re that much closer to adding a pool to your retirement dream house.
- Setting those kinds of goals makes saving much more enjoyable. “You’re rewarding yourself when you retire,” Norton says, “rather than just taking from yourself now.” Financial Finesse’s Carter says early retirement is a particularly motivating goal. He insists retiring early is often an eminently achievable goal as long as workers make small, gradual adjustments to savings rates now.
Understanding Sequence of Return Risk and its impact to your Financial Independence
Spending wealth down requires very different strategy from building wealth. Failure to understand this could subject your retirement fund from going down faster than you anticipate.
In this article we explain what is the sequence of return risk and some possible solutions to address it.
Exploring various Dynamic Retirement Withdrawal methods to make your Wealth Last
There are a few path’s to Rome when it comes to planning how to spend down your money in retirement or financial independence. How would we ensure that our money would last for as long as we live?
There are many ways such as purchasing annuities, building a bond ladder, having a stocks and bonds portfolio.
However, each of these instruments have their level of riskiness when we are solely focus on longevity risk.
Dirk Cotton’s article here attempts to let you understand some of the spending down decisions you have to make in order for you to not have high risk of running out of money.
The 4% safe withdrawal rate have been talked about a lot as the holy grail of retirement planning but it has some flaws. It is more important to understand the variable decisions that we can make during bear markets that can help boost our withdrawal rates.
In a further post, financial planner David Zolt explains his flexible variable withdrawal method and brings us through some worst case scenario and how we can increase our withdrawal rate and increase the duration our money lasts.
Wall Street Journal Explores why Dynamic withdrawals are the way to go for realistic retirement spend down instead of the 4% rule. Here, they briefly go through T Rowe Price’s 4% adjusted, Bengen’s Floor and Ceiling Rule, Guyton’s Guardrail Rule.
Micheal Kitces wrote up this piece sharing that in the case of an average economic situation, the withdrawal rate should be 6% instead of 4%. Bill Sharpe highlights that the 4% is highly inefficient as it is likely 2/3 of the time, the folks end up with double their wealth even after spending in a lifetime.
He propose a cautious way to ratchet up the spending if the current portfolio exceeds 50% of the initial portfolio amount
Action Script – To systematically spend your wealth in Retirement or Financial Independence
Now that you understand that balancing the objectives of making your wealth last for the period you and your spouse is around, and meeting your total annual expenses need, in a situation where your wealth will be volatile, how should you go about spending down your money?
I created a high level action script for the people that DIY, to plan how much they can spend the next year, and do this exercise on an annual basis. It provides majority of the things to think about.
Annuities and Retirement
Here is a good video on planning for retirement using annuities to supplement your various income producing assets.
- 03:58 – The three legged stool of retirement planning have become inadequate. Must shift the thinking to a pyramid of Social security, then 401k, then liquidating real estate, follow by part time work and lastly income producing asset
- 05:40 – The challenge:How to translate 401k to income that will last a lifetime.How long will you live
- 07:35 – Many don’t realize that they get an increase to their social security at 8% per year from 66 -70 years old if you wait a little longer to get your social security.That is 33% larger
- 08:30 – When you retire and when you start collecting your benefits are essentially 2 separate things
- 08:50 – Secured income for life through insurance.There should be a gap after the social security and assets income.People will look into annuities. The key is to NOT invest too much into it but to fill that gap.The rest you will still continue to invest it
- 10:44 – Ladder bonds do not provide enough income in a low interest rate environment
- 11:05 – How annuities work? Why are they able to provide more income than bonds (pooling of risks, immediate annuity)
- 12:19 – 4% withdrawal rate problem
- 13:30 – The key difference in mindset between accumulation and distribution
- 14:10 – Immediate Annuity in detail
- 14:57 – Variable Annuity
- 16:55 – Deferred Income Annuity
- 18:00 – Rising interest rate will solve much retiree problems (Fixed D and Annuities)
- 19:00 – Longevity Insurance – Pays only at 85 years old. You can modified your plan so that you can aim for your money to last till 85 years old.Long tail risk that you will live longer than more. Like deferred annuity. A hard sale. Its pure insurance
7 Annuity Mistakes to Avoid
Annuities are complex products and I believe the insurance company want it that way so that they can earn from you and make it hard to compare.
Kiplinger have an article that talks about common annuity mistakes
- Investing too much money
- Picking the wrong kind of payout
- Picking the wrong payout guarantees
- Switching to another annuity
- Withdrawing too much money
- Not making the most of the guarantee
- Jumping at an annuity buyback offer
Level versus Escalating Annuities
Monevator breaks down the trials and tribulations of 2 contrasting annuity scheme and how it affects your retirement.
Ultimately, a level annuity offers more flexibility, growth, and value for money, but it does not offer certainty, security, or safety.
An escalating annuity is the superior product if those are your retirement goals, and frankly who doesn’t want some of that in their retirement?
Retirement Spending could actually be Lower
David M Blanchett researched shows that what we know about expenditures in retirement may be rather different:
- Expenditures tend to go down
- Even after factoring inflation
- Even factoring in higher medical costs
You may wonder why do we need to talk about passive investing when we are talking about retirement?
Your retirement is rather long (30 years) and you would have to have a portion in equities so that they can grow within the retirement period as well so that you will not run out of money.
More Case Studies
- Doug Nordman: Early retired US military man in an interview at Wealth Mentor on simple lifestyle, passive investing and mistakes made during dot-com boom
More to continue….
Do you have other great retirement resources? Do share with me so that I can add to this great resource!
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