Wednesday, July 02, 2008

Personal Finance Part 8 - Defining your investment and retirement goals

On the topic of retirement, many books and articles on the Net have been written about this but truthfully, one must always apply the principles to one's own unique situation and circumstances in order for it to be relevant. Most books can only give a guide as to what constitutes a proper retirement when it comes to finances, planning and budgeting; but each person has different needs and time horizons; thus it can be a pretty difficult topic to properly advise on unless one does a mental self-reflection first.

To start off the topic, please see Panzer's post on retirement which I think sums up the idea of retirement very nicely. Retirement can be defined as "one stopping work as he has enough passive income to continue to support himself through his golden years". Of course, many of us may have our own interpretation of what constitutes a proper and satisfying retirement. As I was discussing this with my wife, it occurred to me that no two people can have exactly the same definition of retirement. On one hand, one may wish to continue doing something he enjoys while being "retired", while another may consider retirement as travelling the world and enjoying the sights and sounds which one never had the chance when one was working in the ratrace.

For myself, retirement is more of a financial situation where I have achieved financial independence, rather than a specific age such as the government-mandated retirement age of 62. As Panzer rightly pointed out, at a certain age we can have access to our CPF monies; and assuming we have the minimum balance in place, can enjoy a "windfall" gain. My opinion is that CPF is hardly sufficient to tide us through retirement and our senior years; even as the Government introduces CPF Life scheme which promises to pay an annuity to us till the day we die. The CPF, being a compulsory savings plan, cannot tailor itself to meet the needs of every single citizen as it is just a general plan catering to the man on the street. One definitely needs passive income sources and his own cache of cash to tide him through the years after he officially stops earning active income.

The idea of financial independence is not new and I had mentioned this before in several posts. Basically, your passive income sources from dividends, rental or interest need to be able to sustain your current lifestyle; thus one technically can stop working and yet enjoy the same quality of life without compromising anything. This is, of course, easier said than done. With uncertainties such as illnesses and inflation, one's carefully built nest egg may suffer sudden "shocks". Hence, it is always good to maintain a buffer when one is planning for retirement; which means getting it in surplus rather than doing an exact computation. This is to provide for contingencies and unforseen events (which usually do tend to crop up as one goes through life !).

Investing is one method I use to grow my net wealth in preparation for retirement. By ensuring I have steady dividend income as well as capital appreciation from my investments, I can slowly but surely move towards building up enough funds to ensure I can have a comfortable and worry-free retirement !


wisdomw said...

Hi Musicwhiz,

It seems that im now a regular on your blog, haha.

Speaking about a worry-free retirement, what is your view on insurance? I know guys are generally hot-blooded for investments amongst other things (cough) but how much of a role should insurance play?

Thanks for your comments.

musicwhiz said...

Hi wisdomw,

Interesting that you should ask, cos I was wondering if I should blog about the three pillars of wealth-building, but decided to push it to a subsequent post as I also wanted to feature Panzer's post. :)

My 3 pillars of wealth (or what I call my 3 "I's" would be:-

1) Income (hence, savings)
2) Investments (hence, growing)
3) Insurance (hence, protecting)

I believe that I should focus on all 3 aspects in order to grow, maintain and protect my wealth. Hence, I ensure that me and my wife are adequately covered in case of any unforseen circumstances; and I also "invest" in a regular savings plan through my insurance plan which pays a regular dividend annually; so in a way it's a little like a savings account with very high interest rates ! Note that this amount is withdrawable at any point in time, but my aim is to let the magic of compounding grow it to a sizeable amount by the time I am 55-60.

Insurance should generally cover against loss of income and for critical illnesses, so remember to get a life + term policy. I do NOT recommend ILP or endowment policies we I had negative feedback on them from friends. Hence, I stick to life + term + savings component (to augment my income + investments).


PanzerGrenadier said...

Hi Musicwhiz

Thanks for linking to my post "Are You Ready for Retirement?" ;-)

To me, CPF is the gahmen's way of assigning responsibility for citizens to take care of our own retirement as our country does not provide any retirement benefits/govt pension. This lightens the load of for the future generation of taxpayers and allow for more taxpayers funds in the future to be allocated to what's important in Singapore, namely more high-tech toys for the SAF, ministerial salaries and investments by Temasick and GI-si.

To rely on CPF is to allow the Govt to take control of your life. Given that the State had taken 2.5 years of my life plus 10 years of IPPT, ICT and other crap, I think I want to plan my own retirement, thank you very much. :-)

Be well and prosper.

Anonymous said...

Hi Misicwhiz. I see you are vested in Ezra. Can you briefly explain why the stock has been sold down so fiercely the past couple of days? Cheers.

Derek said...

Hi MW,

Another well written article. Any idea how many chapters on Personal Finance that you will be writing? I'm thinking of compiling a E-book on personal finance in Singapore from your articles, Panzer and from the various authors in my site. Of course, I will require theirs and your permission first. Oh, and the E-book will be distributed free.


jeflin said...

When it comes to such a serious topic like retirement, I agree with Panzer's view that we don't depend on CPF money in our retirement plans.

While CPF is not exactly a "scam" like the US Social Security, the rules keep changing. At the very least, it shows our government is very creative.


musicwhiz said...

Hi Panzer,

You are most welcome. Thanks for your comments on the CPF Scheme; most Singaporeans will think it is sufficient for retirement but you and me know better. Even my financial planner tells me to plan my own retirement and not to let the Government do it for us.

Enough said ! I am taking charge of my own life and retirement too. Hehe...


musicwhiz said...

Hello Anonymous,

I receive numerous questions on why "Stock X is falling/rising very rapidly". My standard answer is that I do not know (neither do I care haha); I cannot fathom the mood swings of Mr. Market and how he can so severely under or over-value companies most of the time.


musicwhiz said...

Hi Derek,

Thanks, as yet I am unsure how many "chapters" of each series I will write. I try to leave it open-ended so I can always add another post should I feel like it (and if a topic under that category comes to mind).

Actually, to be honest, if you are looking for quality posts on personal finance then Panzer's blog is the one for you. For me, I blog mainly on value investing and only occasionally on personal finance; while Panzer does mainly personal finance and some investing. If you plan an e-book for personal finance, then he is the man ! :)


musicwhiz said...

Hi Jeflin,

Yes, I thoroughly agree with you that CPF is very "fluid" and keeps on changing and adapting itself. The Government is indeed finding creative things to do with our money; including locking more of it up for longer periods of time ! I guess I concur with Panzer that we should build our own nest egg instead of waiting for the Government to do it for us.


Anonymous said...

you've left out giving in retirement plan... other then save, grow, protect, sharing your wealth is an important pillar in wealth planning. what comes around goes around to paraphrase the more common what goes around comes around. building a better world from what the world has given you is one of the greatest satisfaction for one that has ever lives on earth.

musicwhiz said...

Hi Anonymous,

I agree with you absolutely, and I must apologize for omitting this important aspect of retirement and also of being "wealthy". Giving, donating and sharing our riches is one way we can help to contribute to our own well-being, as being a human being is not just about accumulating material wealth, but also to live a fulfilling and satisfying life. If people around you love and respect you, then life would indeed be more meaningful than just having money alone.