The Covid-19 epidemic is an effective stress test to see how resilient and long-lasting our passive income flows are. For those on the cusp of retirement and those already enjoying their golden or freedom years, this is of paramount importance.
For instance, if you count on rental income to support your retirement lifestyle, and your tenants start asking for rent reductions or giving you notice because they’ve lost their jobs, you could find yourself in a difficult financial bind.
Phase of accumulation
Most of us are aware of the importance of making our money work harder so that it can keep up with inflation and generate profits so that our wealth can be accumulated over time while taking advantage of the power of compounding. Equity, unit trusts, robo-advisors, and investment plans all qualify as investments.
Phase of decumulation
When we reach retirement age, we transition from saving for our future needs to spending from our current assets. We want to do this as efficiently as possible so that we don’t deplete our savings too quickly. On the other hand, we want to be able to reward ourselves for our hard work and careful financial preparation with a decent standard of living. It’s possible that some of us would like to amass resources that will last well beyond our deaths and provide for our families.
You’ve probably heard of “decumulation,” which means turning our assets into income streams to cover our expenses once we stop working. The complexity of decumulation planning is becoming apparent to many. By the time we reach the decumulation stage, we will have either fully or partially retired. If we lost our jobs, we would have to rely more heavily on the passive income flows we can generate from our savings and investments. By then, we may be too old, have the wrong skills, or be too sick to work, all of which reduce our job prospects.
A higher life expectancy has prompted calls for retirees to keep their money working for them by investing it. However, it’s wise to remember that not all investments are created equal, and to diversify your holdings, create numerous streams of income, and think about the time horizon of your investments. The danger of a lesser return when withdrawing money from assets during a downturn can be avoided or mitigated in this way.
Invest in a method that allows your savings to grow while still allowing you to decumulate efficiently for a more stable financial future.
Consider these 5 things when decumulating.
1. Cash Flows and Expenses in Retirement
A realistic prediction of our income flows and expenses in our golden years is a crucial aspect of our retirement planning. Separate their wants and necessities and keep an eye on them. When doing a thorough analysis of your finances, don’t forget to factor in the cost of insurance, particularly medical and long-term care coverage. If you look at them on a regular basis, you may visualize and plan for your ideal retirement.
How much money do you expect to come in to cover all of your demands and needs? When will they start, and how long will they last? With an annuity insurance payment, for instance, you can take money out of your SRS account tax-free over a period of ten years or more. You can begin penalty-free withdrawals from your SRS account as early as age 62 if the statutory retirement age was 62 when you made your initial deposit.
We expect to spend more on travel during our first decade or so of retirement since we want to explore the world while we’re still healthy and able to enjoy it. Some people might wish to try their hand at entrepreneurship, but they lack the initial funding.
The timeframe in which we can attain financial independence and enter the decumulation phase with confidence and peace of mind can be better determined with the help of a realistic projection and the ongoing monitoring of our assets and liabilities.
2. Income flows with and without guarantees
Determining the nature and sustainability of your retirement income flows is one method of decumulation. How much of it will be guaranteed, and how much won’t be? How much of your essentials can you expect to be covered by stable income? And how much of your demands will be met by unpredictability in your income? If you are particularly risk averse, you may desire a bigger portion of your passive income flows to be guaranteed and/or reliable to be able to cover all your requirements and perhaps some of your goals.
Cash and near-cash assets such as Singapore Savings Bonds, some bonds, annuity and/or retirement income, money market funds, index funds, and so on are examples of liquid assets that can be quickly converted into cash and provide a steady stream of income. While rent collected from tenants may seem like a sure thing, keep in mind that it depends on the market and the availability of properties.
Equity, some bonds, alternative assets like commodities, private equity funds, and so on are all examples of high-risk financial instruments with potentially high rewards.
3. CPF payments
Many of us rely on our CPF funds as the backbone of our retirement strategy. Maximise your CPF savings by learning how the various CPF schemes work. The CPF Board, for instance, allows us to add to our own and our loved ones’ CPF accounts through the Retirement-Sum Topping Up scheme.
If we enroll in CPF LIFE, these payments will guarantee greater monthly payouts for the rest of our lives. If we are enrolled in the Retirement Sum program, our monthly payments will increase, and we will get payments until age 90. We (and our loved ones) can also benefit from personal income tax breaks of up to $8,000 annually if we add funds to our accounts in this way.
4. Preparing an Estate
Don’t forget to include an estate plan in your retirement preparations; it will help to prevent your assets from leaking away in the event of your incapacity or death. Wills, CPF Nominations, Lasting Powers of Attorney, Trusts, and Advance Medical Directives are the most typical estate planning documents.
5. Get your head in the game
Expect to shift your focus from saving to spending or depleting your possessions. This is a significant emotional challenge for savers. If we are unable to make this transition, we may never get to enjoy the benefits of our accumulating phase savings and investments. And we may risk leaving excessive wealth to our beneficiaries to a level that might not benefit them if it results in them leading irresponsible lives.
Ready to get going?
Get in touch with a financial advisor immediately to get advice on improving your financial situation and making plans for the future.