A month ago, I requested whether you could help me do a retirement income survey, and you happily obliged.
Originally, I said that there will be 5 book winners but I decided to bump it up to 15 so in the next few weeks, I will link up with 15 of you who are the lucky winners of Money Wisdom: Simple Truths For Financial Wellness and Estate Planning Made Easy.
As someone who paid attention to the financial independence, retire early (FIRE) space and a specialist whose day job is to craft & improve the solution in a wealth advisory firm, I wanted to find out the income preferences about you for sometime.
The you in this case, are the Singaporeans, PR and the expats living around the region who are more financially conscious. You would have more financial resources than the average Singaporeas but you are exposed to the importance of planning for your retirement (through Investment Moats any my peers). Therefore, you are also more aware of the different complications concerning planning for your retirement.
A total of 588 of you responded to my survey. While many of you would not win the books, I want to make the result of the survey as valuable of a gift that you have partly given yourself.
Each of us have different financial resources, difference in pace of retirement saving. We also have different perspectives about our desired retirement lifestyles, due to our money stories in the past.
Most of the other surveys are more bias towards try to craft a narrative that you have a retirement shortfall, or to scare you to planning for it early. Perhaps to call them and start planning.
In the questions that you have done, you would realize there is less focus on how you are going to accumulate that but more about what your previous money stories have lead you to the eventual income strategy choices.
In this survey, I hope that you may grow to understand that based on your income preferences, it will have profound impact on how your plan will turn out. In each of the question review, I will try my best to explain how your selection will affect your retirement income strategy.
Majority Can Accept More Volatility in their Investment Portfolio in Exchange for Inflation-Adjusting Income
There is seldom free lunch in this world. If inflation remains mild throughout history, we can all invest in bonds and worry less about volatility (even though in some parts of history, bonds are rather volatile as well.
Question: I can accept the volatility of an investment portfolio if it gives me inflation-adjusting income, compare to a permanent income product that gives steady income but no inflation adjustment.
This question is to find out your degree of comfort in a higher volatile portfolio in exchange to make sure your portfolio keeps up with inflation.
A portfolio with a greater allocation to equities or volatile asset classes has a higher expected return, which means the income should keep up with inflation (not hedge inflation).
A strong 94% of the cohort agree to accept higher volatility in exchange to keep up with inflation. However, 33% of the cohort sit on agree only, which may mean that they would prefer steady income and no inflation adjustment, but not sure if that is a good idea.
A strong 61% of the readers feel strongly that they had to have a higher allocation to equity to keep up with inflation.
Many could not make up their minds between having Stable Retirement Income versus Increasing their Net Wealth
I have three questions prepared that roughly test the participant’s preference when having to choose between retirement income and an increase in net wealth.
Stable retirement income and an increase in portfolio value are not mutually exclusive. You can have both if you have a large equity and bond portfolio but spend a conservative portion of it with little adjustments or setting an income floor.
However, stable income often is equated to having a large part of your income matched with individual bonds owned and spending the coupons, or a bond-heavy ETF or unit trust portfolio. The expected return of the bond portfolio historically is not as well as equities, and if inflation picks up, the retiree may be forced to sell some of the capital (if they could) to spend on inflexible essential expenses.
Here are the questions.
Question: Sustainable and stable retirement income is more important to me than my overall net worth in retirement.
This question positions retirement income considerations ahead of overall net worth. Would they willingly exchange some of their net worth for sustainability and stability?
The majority would (89% agree). However, there is 33% that hover at agree and disagree which shows some apprehension.
Question: I will sacrifice a stable retirement income for investment upside.
This question is phrased in the opposite way asking if they would sacrifice stable retirement income but investment upside. The growth in net worth is phrased in a more direct manner.
We have a split between agreeing and disagree and those on the fence (agree + disagree) is 71%. There are some with strong disagreement and equally strong agreement. 18% strongly feel like they would rather have investment upside than stable income. 11% strongly feel that they are unwilling to sacrifice stable income.
But the majority probably feel why can’t they have both or which to choose.
Question: I can accept an unpredictable retirement income stream as long as there is the potential for higher net wealth.
The last question tries to find out if the income is unstable but the net wealth potential is higher, would they accept it. The floor is still rather split but more would not accept having an unpredictable income.
70% are on the fence (disagree + agree) with more slightly unable to accept unpredictable income.
My conclusion is… people wonder whether they can have their cake and eat it at the same time. There is definitely a stronger preference for stable retirement income, but if it means not having investment upside, some strongly cannot accept that.
In a way, we have our work cut out to come up with a strategy to have stable retirement income and growth in net worth of investments. This may be why people feel having dividend stocks and REITs will solve this problem.
There are an equal number of voices for Both Spending Early and Sacrificing to Ensure Income Last in Retirement
I asked two questions in the hope to find out the participant’s sequence of income preferences.
Technically, if you have limited capital, if you spend too much, you may run the risk of running out of money and not enough to last in your later years. But if you are too conservative, you save a bunch of money but fail to enjoy them while you are active.
Here are the questions.
Question: I want to err on the side of being able to cover my essential expenses later in retirement as I age, so I expect to spend conservatively early in retirement to preserve resources, rather than enjoy life earlier in retirement while I am active.
The objective of this question is to test how conservative the participants are and also how strong their will to live a good life is.
69% of the participants would be more conservative to ensure that they are able to cover their essential expenses in the later years. But about 55% are on the fence (agree + disagree), which to me shows the tension between trying to be conservative but wanting to live a good life after slogging for so many years.
38% have strong views to be more conservative in ensuring their essential expenses will have income that lasts. 7% have very strong views to live a good life in their most active years.
Question: I prefer to spend more earlier and decrease my spending later in my retirement rather than the other way round.
This question twists in the opposite direction by asking whether they are ok with the spend earlier than decrease scheme versus the other way round. By right, not many people should prefer the other way round.
But the floor is quite split for this one. About 58% of the people are on the fence, with slightly more preferring the other way round (spend less than more gradually over time).
21% have strong views that we should spend more first than spend less while 21% feel otherwise.
My conclusion here is… people have their own preferences and it’s important that advisers recognize that a variety of clients will feel differently.
- Make sure to successfully detect the conservative prospects/clients and address their needs to make sure the wealth would last.
- For those who wish to spend more earlier, don’t just give in to their plan! You need to still make sure that they have enough income for their essential expenses for their entire retirement. Let them know that there is a tradeoff between spending more earlier and how conservative their plans are, whether they would be willing to take the risk of having a potential shortfall in later life.
Large Majority Prefer Retirement Income Strategies That Has Flexibility Instead of Locked-in Products.
I have three questions that try to detect participants’ preferences for more flexibility in their retirement planning.
Not everyone prefers to plan that way. And that is one of the objectives we wish to find out.
What will embody inflexibility in planning are financial products such as income-based unit trust, insurance endowments that focus on retirement and other income solutions that lock you into the plan, give you income based on fixed parameters and cannot change much. The lock-ins are usually hefty surrender charges or taking back bonus units given upfront.
Here are the questions.
Question: I cannot commit to a retirement income strategy that is difficult to reverse.
The first question tests their peeve for solutions that cannot be reversed. 80% of the participants agree they cannot commit to such a retirement income strategy. 39% have strong views they cannot accept such a strategy. 20% feel that they can do a strategy that is difficult to reverse still.
Question: I prefer more flexible retirement income strategies to accommodate my changing preferences as I age, compared to strategies that lock in longer-term (which will protect me from the uncertainty of my ability to make sound choices as I age)
The second question wishes to find out the strength of their flexibility preferences, if we tell them why they need to be flexible, as well as why lock-in long term will help in the later years. Still, an overwhelming number of participants prefer to have flexibility in their plans.
Question: I value being able to consider my retirement income withdrawal options on an ongoing basis rather than favouring the simplicity of a protected retirement income product.
In the least question, we tried to highlight that a protected retirement income product is simple. Still, the majority prefer flexibility in their retirement income strategy.
I think the questions asked are less about whether the participants are willing to adjust when times are tough but whether they agree life will change and they need their assets to be constantly re-allocated.
And the answer is overwhelming yes.
The majority can see themselves using an Investment Portfolio to Cover both Their Essential and Discretionary Needs
I added this question to test if participants would be able to see the difference between essential and discretionary expenses.
Question: I prefer to have retirement income drawn from my investment portfolio to cover both my essential and discretionary needs for the rest of my life.
You would appreciate this question more as it contrasts against subsequent preferences.
In general, the majority of the people see an investment portfolio covering both their essential and discretionary expenses but there is also 26% who disagree. Perhaps they see two different strategies for tackling these two different expenses.
About 54% of the people were on the fence, which may tell you that they were confused with this question (I think this is a mistake on my part.)
Still, 42% of the participants felt rather strongly that their investment portfolio should provide income for both their essential and discretionary expenses.
The majority has a lot of love for the Floor-and-Upside Strategy
The floor-and-upside strategy is the one at the bottom of the image above. You have a layer of a very predictable income stream that provides you with the income for your essential expenses. This allows you to have peace of mind knowing that your most essential spending is hedged.
You can then have a more risky portfolio to take care of your discretionary expenses based on flexible withdrawals.
I pose this question to test participants’ preference for this.
Question: I see my essential retirement expenses funded, to the extent possible, from protected income sources (guaranteed products, CPF), with the rest of my expenses funded by my investment portfolio. (Essential retirement expenses are expenses that absolutely needed in order to survive during your retirement)
An overwhelming 90% of the people are for this retirement income strategy. 68% of the participants have strong views to prefer such a strategy. However, there are 2% that strongly disagree with this strategy.
I take it they either do not like to rely on protected income or that they prefer to rely heavily on an investment portfolio for all their income needs or all protected income.
The majority could Accept Being Flexible In their Discretionary Income When Markets Are Tougher
Some readers would be aware that I started my financial independence journey by deep diving into various flexible spending strategies to see if I could be financially independent with $500,000.
Some of you may be open to spending less on some types of expenses when the portfolio is under duress or when the market is not doing very well. If you are able to be flexible to adjust your spending, then you might need less capital.
You can read these three articles on the subject:
- Variable Withdrawal Strategies for Financial Independence- The Definitive Guide
- Flexible Passive Income Strategies Can Help Reduce the Money Needed for Retirement – Morningstar
The question is, would people be open to spending flexibly when times are tough?
Question: I would prefer to secure my essential retirement expenses so that they last throughout my retirement, and only spend on my discretionary expenses when the economic environment is decent.
I posed the question as an addendum to the floor-and-upside strategy. I want to find out if we can focus on ensuring our essential retirement expenses are secured by being very flexible with our discretionary expenses spending.
An overwhelming 92% agree to be flexible. 59% strongly or fully agree to focus on securing their essential expenses and foregoing their discretionary expenses if needed.
We only have 1% with strong views otherwise.
The majority wishes to have a Perpetual Income Stream
For some time, in conversations with others, I got this feeling that there is a strong preference for dividend portfolios and buy-to-let investment properties because they want to create an income stream that last generations.
This is partly legacy but also partly to hedge longevity risks. When you wish to do that, it is as if you are creating your mini-family office, foundations, and university endowments that provide a stream of income for a group of people.
You can read my past articles related to perpetual income and university endowments:
- Generating Perpetual Passive Income – Contrasting the American and British Way of Measuring Wealth
- Could we Model Our Retirement Spending like Endowment Funds?
I wonder how strong is this, so I added this question.
Question: If I have the resources, I hope to create a perpetual income stream, that lasts for generations, like a foundation or university endowment, for my family.
81% of the participants felt that if they had the resources, they would like to create a perpetual income stream. 54% have a strong view to create a perpetual income stream if possible. Of course, we have 19% who do not have this aspiration.
The majority wish to leave some Legacy for their Loved Ones but do not Actively Do So
I always wonder how strongly my fellow Singaporeans feel about leaving something behind for their loved ones.
Question: Leaving something behind for my loved ones is something I would like, but it is not something I will actively try to do.
76% agree that they would like to leave something behind, but not actively do it. 39% felt strongly about this. However, there are 8% that strongly disagree. They either must leave something definite or must not leave something behind.
I feel that with 15% in the disagree camp, people really wish to leave something behind. However, it may be the minority that really wishes to leave an absolute sum for the next generation.
The majority are confident of having enough to generate income for essential needs
Finally, how confident are you to provide income for your essential needs?
Question: I am confident I have enough money to successfully generate retirement income for my essential needs.
I was surprised that 79% were confident to do that. I wonder if everyone understands what are essential expenses but if they do, this is very good.
I see 56% of the people on the fence. I guess a group have a confidence issue about whether they are on track to cover their essential needs.
People are most concerned about Healthcare Costs in Retirement and Having a Steady and Long-lasting Income
I decided to ask participants to pick two out of the following as the biggest concerns in retirement.
I was honestly shocked the top was healthcare cost in retirement. I guess it’s the most concern perhaps because healthcare cost is something everyone can feel even when they are not in retirement but also not actively written.
The second on the list is whether they can have a steady and long-lasting income stream (which is the topic of discussion in this article). The third is having an income stream that keeps up with inflation.
117 people cite not having a coherent income plan despite having many products. This is probably the biggest retirement income problem out there.
If more products are the solution, then why would 20% of the people cite this as a big problem.
I was surprised and encouraged that 110 of you recognized that sequence of return risk is a problem. You can read more about why sequence of return could be a real problem in retirement here. In fact, for me it is one of the main problems to tackle.
In my expert opinion, what made retirement income a tough problem to tackle is inflation and sequence of return.
We also note that for some, leaving behind something for their loved ones is pretty big.
Your preferred Income Strategies
Finally, I let you guys pick the top 3/4 income strategies you prefer.
To be fair, these are not income strategies but ways to generate income. An income strategy is more like a coherent way to extract income to fulfil your expenses.
These are rather standalone.
People really believed in CPF Life annuity income. People really like managing their own dividend stocks and REITs. That ends up as the 3rd and 4th highest.
I was surprised that the second-highest was a globally diversified equity and bond ETF or unit trust portfolio. I was surprised for the low response for some options such as income from investment property, income-focused unit trust and retirement income products.
I always thought they are the more popular choices but perhaps if we are asking more financially savvy Singaporeans, this is their preferences.
In any case, people have a lot of different preferences for income. Each of these has its pros and cons and it is important for you to realize that these are streams of cash flow and you would still need a more coherent strategy.
What is the Dominant Income Strategy Theme From the Retirement Income Survey?
If we were to summarize what we can learn from the survey, here are the dominant preferences:
- Can accept greater volatility in their portfolio, in order to have inflation-adjusted income
- Prefers flexibility in their retirement income strategy, as opposed to lock-in products
- Comfortable using investment portfolios for both their essential and discretionary expenses
- Have a strong affinity toward the Floor-and-Upside strategy
- Are able to be flexible with their discretionary expenses to ensure essential expenses are protected when markets are tougher
- If they have the resources, they prefer to have a perpetual income stream
- Does not work actively to have more to give away to their loved ones but feel like they want to give some away
- CPF Life, dividend and REIT portfolios, as well as globally diversified ETF or unit trust portfolio
Advisers will need to go deeper with their clients on:
- Why they should focus less on net worth or investment returns in retirement
- Finding out their preferences to spend more early in their retirement versus being more conservative to ensure the money lasts long enough
- Finding out whether they have strong legacy needs
Perhaps it is our group of readers, but it is quite encouraging that participants are comfortable using these paper assets for retirement income planning.
Recognize that Retirees Can Have a Range of Preferences
While we know there are dominant themes, what makes it challenging for DIY people planning their own retirement is that they may fail to grasp the context of general retirement income articles.
There may be many paths to Rome but if you read an article, it might force you to accept that there are only a few paths.
We need to recognize that not all retirees have the same model for retirement income.
- Some do not wish to set up a perpetual income stream if they have the option
- Some would rather spend more early when they are active
I think one of the key takeaway for myself was how differently each person would look at their own retirement income preferences and this is something we take note of.
And this is a challenge that product teams will struggle to recognize and fulfill because to be honest, they do not have the time to sit down and figure this out along the way with the people. For example, some would eventually figure out that having majority of their retirement income in an investment portfolio can feel rather uneasy and struggle with that fact but feel trapped because they think there are no other alternatives.
By the time they realized that, they were locked into products that suit them less for a while.
The takeaway for you might be that depending on your preferences, the strategy to tackle retirement income and legacy may be different from others. That, and having individual investment products does not mean you have a coherent financial strategy.
A coherent strategy might be one illustrated in the diagram above where all your different products are well integrated to tackle your goals. Many have lump sums coming online here and there, due to CPF monies, and maturing insurance products (probably bought for the wrong reasons) and people struggled to think about how to visualize this in their plan.
I think the biggest issue for all of us is to have a safe strategy to tackle our essential expenses needs (strategy 2). For early retirees, CPF Life annuity will only come online for you at 65 years old and most products are not indexed to inflation. It will be challenging to keep up with inflation and most investment products might be too volatile to address the stable needs.
I thank you again for helping with this survey and hope you gain something out of this article.
You can check out my thoughts on financial independence and retirement planning in my retirement planning section here.
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