Smart financial planning beyond 50

HDB owners may consider the Lease Buyback Scheme, which lets them unlock the value of their home to fund their retirement. ST FILE PHOTO
HDB owners may consider the Lease Buyback Scheme, which lets them unlock the value of their home to fund their retirement. ST FILE PHOTO

With retirement looming and less room for making investment mistakes, The Sunday Times looks at eight issues to consider when planning for the golden years

1. AVOIDING THE SEQUENCE OF RETURNS RISK

When we are in our 50s, preserving what we have accumulated is crucial as we have less time to recover from big investment losses.

Yet, we cannot be too conservative or our nest egg will be eroded by inflation.

The sequence of returns (SOR) refers to a phenomenon where a high proportion of negative returns occur in the first few years of our retirement, assuming we have started withdrawing from our investment portfolio. This can have a lasting adverse effect, as there will be less investments available to generate returns in later years.

To avoid SOR risk, we should employ cashflow management tools to ensure sustainable flows of retirement income, in addition to the core portfolio of equities and fixed income. Retail investors can look at cash flow instruments for the more liquid portions of their portfolio, such as having fixed deposits, bonds like Singapore Savings Bonds and endowment plans with different maturity periods so that the payouts are staggered.

Financial advisory firm Providend's retirement income strategy uses a RetireWell "bucket" approach. This involves placing assets in several retirement income segments or "buckets", each with a different growth potential due to varying asset allocations and time horizons. Each bucket is meant to provide income over progressive five-year periods.

The first bucket holds cash and near-cash assets that can be used for immediate income needs.

There are also five buckets that are invested progressively from low to higher risks, with the holding period for each one increasing with higher levels of risk.

As each bucket nears the end of its investment horizon, the proceeds are transferred to the cash bucket for withdrawal. This is expected to generate growth and enable you to have a bequest for the family or a "live-on" amount.

Singapore at 50 would be considered young for a nation, but it's a far different story if you have just reached your half-century with retirement looming.

If we liken our lives to the North-South MRT line from Marina South Pier to Jurong East, those in their 50s are somewhere between Ang Mo Kio and Yishun stations. If you haven't started planning for retirement, you have only a few stops left to get your finances back on track.

You also have far less margin for error or "leakages".

The Sunday Times highlights the top eight financial issues you should look out for at this stage of your life.

2. FINANCIAL STOCKTAKE

To know what we have already amassed for retirement and to identify the gaps, do a financial stocktake exercise.

Mr Daniel Lum, Aviva Singapore's director of product and marketing, says we need to take into account our insurance policies, including savings plans that are maturing and their payouts, our Central Provident Fund balances, assets and any outstanding loans and liabilities.

We also need to determine our desired retirement lifestyle and how much is required to fund it, so we must decide when we wish to stop working.

"Knowing when your income stream will stop will enable you to establish how much you need and the time horizon you have to grow your money," says Mr Lum.

3. SANDWICH GENERATION

If you are in your 50s, you are likely to be sandwiched between your children and ageing parents - in what is known as the traditional sandwich - and perhaps also between grandparents and grandchildren, in a club sandwich. While the primary responsibility of raising your children is almost behind you, you may want to contribute to their wedding expenses or home purchases, and give gifts and allowances to your grandchildren.

With increasing longevity, you may need to balance the needs of your ageing parents and grandparents. So do remember to budget for these potential expenses in your retirement plan.

4. MANAGING DEBTS AND SAVINGS

Citibank Singapore's head of investments, Mr Zal Devitre, suggests minimising or eliminating large debts, even if loan rates seem favourable.

As it is, mortgage rates here have started to creep up as the threat of a rate hike in the United States becomes more imminent.

OCBC Bank's head of wealth advisory, Mr Gregory Choy, says we should be prudent when taking on additional long-term obligations. In fact, the debt servicing period should not extend beyond one's desired retirement age, he adds.

As people get closer to their retirement age, Mr Devitre also advises them to set aside at least 12 months of liquid savings, and preferably more if possible.

5. REDUCING PORTFOLIO VOLATILITY

As we progress from our 50s to our 60s, Mr Apelles Poh, head of Eagle's Wings branch representing Professional Investment Advisory Services, says it is wise to allocate more to bonds in the investment portfolio to avoid excessive volatility.

However, some equities are still needed in any portfolio, even after age 60, to achieve returns that can beat inflation.

Asset manager BlackRock reckons a top priority for those in their 50s is to own a diversified portfolio. In today's environment of lower rates and heightened volatility, retail investors are encouraged to cash their net wider in the search for yield, including seeking growth in different geographical markets.

A BlackRock spokesman says: "Consider dividend-paying equities, high-yield bonds and multi-asset funds such as BlackRock's Global Multi-Asset Income Fund, which can combine traditional assets with other innovative sources of income, to generate differentiated sources of return and diversification for you."

Traditionally, investors looked to bonds as the primary source of their income needs.

But with lower yields, investors need to go into more "opportunistic" areas for income and returns, such as high-yield debt or emerging markets fixed income, it noted.

In recent years, investing in dividend-paying equities are a popular way of generating additional income. You should seek quality companies with enough cash and earnings growth to raise their dividends over time.

6. INSURANCE

While the need for death coverage reduces as dependants become financially independent, it is the reverse for health issues that tend to surface as we age.

So do ensure that you have a hospitalisation and surgical cover that matches your needs and budget. Long-term care for disabilities can also be very costly.

Mr Patrick Lim, associate director at financial advisory PromiseLand Independent, advises coverage for long-term care, such as with the ElderShield scheme. He notes that according to the United States Department of Health and Human Sciences, seven in 10 people turning 65 can expect to use some form of long-term care.

Mr Marc Lansonneur, DBS Bank's managing director and head of investment products (Singapore), recommends adding a personal accident plan to help protect you financially against accidents and injuries.

7. PROPERTY

Aviva's Mr Lum suggests that if your children have moved out and you no longer need such a large space, you can consider downsizing to a smaller house.

The profits from the sale will help to build up your nest egg.

HDB owners can also consider the Lease Buyback Scheme, for elderly households in four-room or smaller flats.

It allows them to unlock the value of their home to fund their retirement, even while they continue to live there, Mr Lum adds.

8. ESTATE AND LEGACY PLANNING

If you haven't done so, remember to do up your CPF nomination and a will, so your assets can be quickly distributed to your loved ones according to your wishes, says Mr Poh.

People with bigger assets can consider a trust that can stipulate the passive income from an asset to be given to a younger child for a period before the whole asset is transferred.

It is also important to compile a Lasting Power of Attorney so that in the event of mental incapacity, your financial and non-financial affairs can be handled by someone you trust.

A version of this article appeared in the print edition of The Sunday Times on August 16, 2015, with the headline 'Smart financial planning beyond 50 1'. Print Edition | Subscribe