From The Invest Editor

A sustainable retirement

Magic retirement sum? I've shifted focus to ensuring lifelong cash flows or income sources

Owing to rising living standards, yoga is a lifestyle option that the writer now regards as a "must have".
Owing to rising living standards, yoga is a lifestyle option that the writer now regards as a "must have".PHOTO: EUROPEAN PRESSPHOTO AGENCY

When I was in my 30s, retirement planning to me was all about reaching a certain magic number of dollars, before I would start drawing down my nest egg.

This number depended mainly on two factors: my desired retirement lifestyle and when I expect to kick the bucket. I've come to realise that this approach is no longer sustainable nor is it a fail-safe measure to plan for my golden years.

As life expectancies increase, one retirement risk we face is the danger of outliving our nest egg. Statistics show that about half of Singaporeans aged 65 today are expected to live another 20 years - to age 85 - while a third will live beyond 90.

This makes it so much harder to determine this magic retirement sum. How much of this lump sum is enough? What if we get our sums wrong? What about inflation? Did we factor in the cost of long-term nursing care? Do we have a buffer in case we live longer than expected?

The thought of being elderly but with seriously depleted cash reserves can be scary. We wouldn't want the last chapter of our lives to be a burden on our society, family and friends.

As life expectancies increase, one retirement risk we face is the danger of outliving our nest egg. Statistics show that about half of Singaporeans aged 65 today are expected to live another 20 years - to age 85 - while a third will live beyond 90.

As I have grown older, the sort of lifestyle I wish to have in retirement has also changed. Lifestyle factors once seen as "wants" have become "must haves" owing to rising living standards. The changing goalposts go to show the danger of targeting a fixed retirement lump sum, particularly one that may be insufficient.

Examples of the sorts of lifestyle options that I now regard as "must haves" include yoga lessons, nutritional supplements and hair treatment sessions.

Also, efforts to ensure good health do not come cheap. Eating well - and I'm not referring to fine dining - can be costly. Consciously reducing the intake of white rice and noodles, and focusing more on brown rice, wholemeal bread, meat, fish and vegetables, including healthy snacks such as chia seeds, fruits and nuts, can add up to a sizeable budget.

For frozen food that I buy in bulk, I go to Fassler and Song Fish where cod, scallops and other seafood are sold at lower prices than wet markets and supermarkets.

To mitigate the risk of underestimating my retirement sum, I've shifted my focus to ensuring lifelong cash flows or income sources - which we can call an income goal - that will fund my golden years.

Having income flows, which ideally are inflation-protected, throughout my golden years is now a measure of my success in retirement planning.

This income goal has a few important characteristics:

•The cash flows should be regular and sustainable.

•They should generate enough income for me to live on regardless of whether the economy is up or down.

A good way to get started is to work out the cash flows you need, followed by the crucial step of matching the investments or near cash instruments to generate income to fund the desired cash flows.

To make it easy to work out my cashflow needs, I pictured a money pyramid, much like a food pyramid, with the basic category of "needs" at the bottom.

Here, I would include essentials, such as food, housing, medical, insurance, utilities, and allowances for parents.

It is prudent to project realistically how much you would need (say, $3,500 a month) to cover these retirement essentials. And I would want to ensure that the income flows required to fund these needs are safe, predictable and guaranteed.

Next, list the regular, sustainable and guaranteed recurring income flows (say, $2,500) that you already have and work out the cashflow gap ($1,000), before deciding how this gap could be closed with a "safe" investment tool.

That is why I forked out $100,000 to insurance cooperative NTUC Income in 2011 in return for some peace of mind in securing a stable income flow in my golden years.

The money paid is for Income's Guaranteed Life Annuity plan, which will give regular guaranteed payouts - about $720 per month or $8,685 per year - from the time I turn 65 till I die regardless of when that will be. So the longer I live, the more payouts I enjoy from the insurance policy.

This plan would be on top of another annuity plan, the compulsory national annuity scheme called CPF Life (Lifelong Income for the Elderly), which Singaporeans or permanent residents born in 1958 or after would be placed on when they reach age 55. Under this scheme, members get a monthly income for life, starting from their drawdown age. If you are now a 50-year-old male and have the Basic Retirement Sum of $80,500, your CPF Life monthly payout is estimated to be $660 to $720. And if you can meet the Full Retirement Sum of $161,000, your payout would be from $1,220 to $1,320. From next year, there is an option to commit higher amounts to CPF Life up to an Enhanced Retirement Sum of $241,500. This will provide a higher monthly income stream of $1,770 to $1,920.

Both the CPF Life and my Income annuity would come in handy as they would provide two streams of guaranteed income flows totalling about $2,500 per month when I hit 65, assuming I opt for the enhanced retirement sum.

Other financial instruments that would qualify to provide sustainable income streams are bank savings, Singapore Savings Bonds (which will be made available soon), insurance proceeds and investments parked in my Supplementary Retirement Scheme account, dividend payments from real estate investment trusts, coupon payouts from bonds and preference stocks, and rental income from investment properties.

The next layer in the money pyramid is the category of "wants" or non-essential items that I could do without if I couldn't afford them, such as cable TV, fine dining, shopping, gifts and luxury vacations. The income flows channelled to satisfy these wants would be generated by investments that offer growth and capital appreciation, and may be volatile. Examples are stocks, unit trusts, commodities and hedge funds.

In summary, they would be less safe, less predictable and less guaranteed compared with the investments you match with the cash flows of your essential needs.

The rationale is that as I have taken care of my essentials or needs, I can take more risk with a portion of my retirement savings to upsize my income flows.

This would also depend on your risk appetite, capacity and time horizon.

Be mindful of matching the right investments with the different layers in the money pyramid so as to generate the appropriate cash flows. For instance, I wouldn't expect my investments in single stocks to fund my essential needs.

After the financial meltdown in 2008, many retirees who primarily invested in stocks found themselves caught in a situation where they either liquidated their portfolios with huge losses or gritted their teeth and tried to stay invested for better days. When their stock investments were unable to immediately generate the cash flows they needed, they faced the dire choice of either going back to work and/or cutting down on expenses drastically.

In a best-case scenario, if I could successfully achieve my income goal, I could live off that income during my lifetime and bequeath my principal savings and assets to my beneficiaries.

Now, that would be planning my retirement sustainably.

In the coming weeks, Invest will be exploring topics such as the Singapore Savings Bonds, CPF Life, MediShield and legacy planning - all of which affect our financial planning. I look forward to hearing your views and concerns in these areas.

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A version of this article appeared in the print edition of The Sunday Times on July 19, 2015, with the headline 'A sustainable retirement'. Print Edition | Subscribe