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Retirees across the globe face the same key challenge: how to save enough of their income — and build up the value of their investment portfolio — so that they can retire comfortably one day. Ask any financial advisor what their older clients fear most and the likely answer will be: “Running out of money before they die.” With people everywhere living longer, the proverbial nest egg has to last a lot longer. Now, more than ever, a happy retirement depends on meticulous financial planning.
Christopher Tan, chief executive and co-founder of Providend Ltd., a fee-only financial advisor based in Singapore, told delegates at the 66th CFA Institute Annual Conference that in the wake of the global financial crisis of 2008, what retirees want most out of their retirement plan is assurance of retirement income.
“ROI is no longer return on investment,” said Tan. “It’s reliability of income.”
In his session on “Investing and Withdrawal Strategies during Retirement,” Tan said retirees today face five key risks:
- Inflation risk: In Singapore, headline inflation is 4.5%–5%, with core inflation of about 3% per year.
- Investment risk: the volatility of the markets.
- Longevity risk: the risk of living too long. In Singapore, the average life expectancy for men is about 79; for women, it is about 83.
- Withdrawal risk: the risk of overspending, especially in the early stages of retirement.
- Health care risk: the risk of having to pay a lot in medical expenses (the top four killers in Singapore are cancer, heart attack, pneumonia, and stroke).
Tan said retirees want a plan that helps them cope with all of these risks. They also want a plan that allows them to retain control and maintain some flexibility.
How does one ensure reliability of income, especially when market returns are volatile? The answer, says Tan, is the “retire well” bucket approach: “We allocate the client’s total assets — say, $1 million or $1.5 million — into six or seven different buckets, with the earlier buckets being the lower-risk buckets and the bulk of the client’s money, and the later buckets — the fifth, sixth, and seventh buckets — holding on to the minority of the client’s assets,” he said. “The bucket that holds the minority of the money is usually higher-risk, higher-return investments. The earlier buckets invest in instruments that are lower returns but a lot safer.”
The way it works is that you start with an “income bucket” that is mainly used for annuities, earnings, dividends, and the government pension plan. This bucket ensures that the client gets a minimum income flow. The remaining buckets provide the rest of the income needs. The buckets are all run concurrently — in other words, the money is allocated across the buckets, and every five years the money is shifted to “bucket 1,” the “very safe” bucket.
Tan told delegates that it is important to review the client’s retirement plan on an annual basis to ensure the sustainability of the income stream.
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