Will You Receive a Card on Your 100th Birthday?

With the possibility of living up to 100 and beyond, retirement has a new face. Paul Stefansson writes about how to plan for and look forward to the second half of your life.

Karen and James Lim became certified scuba divers earlier this year and joined an expedition to dive with Minke whales. They enjoyed the trip so much that they have decided to make it an annual affair and to log 50 dives in the next 12 months.

The other highlight in 2004 for the Lims: they moved overseas from Singapore for James’ two-year stint as a consultant. Karen decided to have a complete change in career — from a communications manager to a travel writer.

Here’s an interesting fact about the Lims: James is 59 and Karen, 52.

Surprised? The retirees of today — the first wave of the baby boomer generation — starkly contrast with the stereotypical pensioners who while away their time playing chess with other geriatrics; they are not pottering around the house, knitting jumpers for their grandchildren and going on annual cruises. This hasn’t gone unnoticed: prominent publications such as The Economist and Financial Times covered this phenomenon extensively in recent surveys.

Will You Receive a Card on Your 100th Birthday?

People today are living longer and are healthier. Living to a hundred is no longer a remote possibility — Hallmark sold 85,000 100^th-year-old birthday cards last year in the US; this number is set to grow and Singapore is not far behind in the ageing population race (see Diagram 1).

With the possibility of living another 40 years or even more, life truly begins at 60 for the retirees of today. Many ‘retirees’ want to remain active, both physically and mentally. They may want to be able to carry on working, perhaps part-time; or like Karen, they might take a stab at a new career. Yet others may want to join volunteer groups or go back to school. It’s also the time to take up new hobbies and pursue old ones with greater fervour.

Can You Afford to Do What You Want?

Instead of plodding along a straight path, ‘retirees’ have arrived at a multi-pronged fork in the road — there is an abundance of post-career choices, but the question is, are the decisions made based on desire or out of necessity? Do they continue to work because they enjoy it or because they need the money?

The key factor that determines the answer: financial independence.

Very simply, financial independence means being debt-free and possessing a large enough nest egg that will allow you to live comfortably for the rest of your life. Is that easy to achieve?

Well, the boomers don’t have it as easy as their parents, whose plan (for a usually short) retirement was, simply, their large brood of children. With most boomer couples having only two or three children, it isn’t realistic to fully depend on your children in your later years, especially when they are struggling to make their own ends meet. With current trends — Singapore has one of the lowest fertility rates in the world — this simple ‘retirement plan’ is fast becoming a relic of the past. In any case, most parents are unwilling to become ‘burdens’ to their offspring in their old age.

According to a Wharton-SMU study, the average Singaporean will be living on 30% of their last-drawn income. To put things in perspective, if your last paycheck was $100,000, your post-career income would be $30,000. What would you cut out of your lifestyle to survive on this income?

Worse, if inadequate savings don’t hurt you, then mounting healthcare costs in retirement will kill you — in the 1990s, the cost of healthcare rose at 5% per annum while inflation rose only 2% per annum.¹

Ironically, this substantial decline in living standards means that while retirement may be long and healthy, most people will have only limited choices at this stage of their lives.

What Are You Doing After Work? — Goal Setting

I meet many couples like Karen and James in my line of work — financial planning — and they place retirement at the top of their financial planning priority list. While it might seem to make sense for such meetings with clients to start with the topic of money, we actually begin with in-depth conversations about their lifestyle goals — what they want to do in retirement or rather, what are their post-career goals?

‘What are you doing after work?’ may seem like a simple question, yet few have thought about it. Establishing post-career goals at the outset is crucial because money is but a vehicle to take you to that destination.

Further, articulating your goals helps you quantify them — you will know how much you need in retirement and whether or not your goals are realistic. I had to tell a client, after he outlined his retirement lifestyle goals, ‘Sure you can afford to do all this when you retire at 60, as long as you live only to 61.’

If you know you are not going to have enough to retire on, what can you do? Apart from winning the lottery, you really have four options:

1   Save more now

2   Work longer

3   Reduce retirement expectations

4   Invest differently

Which Route Would You Rather Take?

If you baulk at the idea of reducing your retirement expectations, especially if it is by 70% of the lifestyle you currently enjoy, and if working longer in the same job is not something you look forward to, saving more now and investing differently are clearly your best options.

Having covered cash flow and debt management in the May issue of the Singapore Law Gazette, I won’t dwell on the topic. Nevertheless, let me stress that saving is the first and most crucial step in planning for the second half of your life. It is also one that, with some discipline, you have the most control over.

However, just saving alone is not enough.

Do you remember how a movie ticket cost only $3.50 less than 20 years ago? Today, it costs $8.50 to catch a flick. Even the cost of a local postage stamp has quietly risen over the years (see Diagram 3).

Although it seems like the safest option is to leave the majority of your assets sitting in a bank account, you run the risk of inflation eating away the real value of your cash.

Saving should be complemented by sensible investing.

It also common amongst Singaporeans to have property take up a large portion of their investment portfolio, which is a gamble. Property prices rocketed when Singapore transitioned from a third world to developed country, making a number of Singaporeans very wealthy. However, this transition is a one-off, so the chances of a similar boom are pretty slim; locking up all of one’s investment assets in property is very risky.

A Healthy Investment Strategy

The key to successful investing is not to avoid risk but to manage risk sensibly. While international shares and bonds may seem very risky when compared to cash, the returns over the long-term, historically, have been substantially higher (see Chart 1).

The history of investment markets has shown that the markets do well; it is investors who do poorly. A report by US research group DALBAR demonstrates the average investor’s bleak experience in equity markets. Between 1984 and 2002, the Standard & Poors 500 index delivered annualised returns of 12%. DALBAR’s study showed that the average mutual fund investor’s return from that same equity markets was a dismal 2.6%. That means that the average investor gets a return of less than inflation!

It seems from this research that the investors suffered the consequences of chasing performance: they sold funds that had recently slumped, just before they rebounded — and they bought funds that had recently done well, just before they slumped. In other words, these investors succumbed to greed and fear; as a result, they bought high and sold low.

So how can one invest successfully?

Warren Buffet, chairman of Berkshire Hathaway once said, ‘To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What is needed is a sound framework for making decisions and the ability to keep emotions from corroding that framework.’

To establish a financial plan and an investment framework:

•    Set retirement goals clearly and concisely

•    Target return to achieve chosen lifestyle

•    Take appropriate risk level

•    Establish the expected time horizon

•    Select asset classes for portfolio

•    Document investment methodology

•    Set a strategic implementation plan

•    Agree on the means for making periodic adjustments

Planning for retirement might seem like a daunting task, but it gets a lot easier once you start, especially if you do so earlier, rather than later. (The questions in Diagram 2 provide a quick test on how prepared you are for retirement.)

In the 21st century, the best strategy is to depend on yourself; consider anything you get from your kids or the government a bonus.

This is the advent of an evolution: retirement, as we know it, is no longer about the ‘twilight years’; rather, it is the second half of your adult life.

It is going to be an exciting ride and it could last a while, so plan it well.

How Can You Manage Risk Sensibly?

•    Diversification into uncorrelated multiple asset classes by country, industry and fund manager.

•    Dollar Cost Averaging.

•    Appropriate asset allocation (the mix of equities, bonds, property and cash — determines 40% of investment returns over time).³

•    Ignore the noise from the investment industry, media and friends.

•    Long term focus — monitor your globally diversified portfolio with a five to 10 year perspective.

Paul Stefansson

ipac Asia

E-mail: paul.stefansson@ipac.com.sg

Diagram 1Top-heavy: A 21st Century Phenomenon

A century ago, the concept of retirement was alien — people worked hard to earn their keep and not long after they stopped working, they died. As a result of better nutrition and education, medical advances and growing prosperity, we’re living much longer today (see Chart 2). There are currently 70,000 centenarians in the US. This number is projected to hit 700,000 in 2050 and a corresponding one million in Japan. This means that we could possibly have retirements that stretch over more than 30 years, equalling the number of years we spent working!

At the same time, birth rates have declined drastically in developed countries; in some places, they are below replacement level. This has set the stage for a greying population and the socio-economic concerns that come with it.

In Singapore, about 8% of the population is aged 60 or over. While this is relatively low, compared to Western nations, this number is increasing at one of the fastest rates in the world at 3.1% per annum.² Back in 1970, this group made up only 3.4% of the population (see Chart 2). It is estimated that by 2030. this group will make up 19% of the population.

According to Singapore’s Department of Statistics, ‘Singapore’s life expectancy is among the highest in the world. Our growth rate in the proportion of elderly aged 65 years and over is one of the fastest. In 2030, Singapore would join countries like the US and Australia, experiencing high life expectancy and high proportion of older persons.’

Governments of developed countries face strong resistance to pension scheme reforms, even though it is obvious that there will be an uphill battle to support the baby boomers when they start retiring in droves in the coming years. In spite of the high savings rate in Asia, there are structural problems, such as low contribution rates and inexperience in managing large funds, which could put the public pension funds in jeopardy.

This combination of longevity, plunging birth rates and inadequate pension schemes has serious implications: depending on one’s children (if any) or the government for financial support, over a long retirement, will simply not be enough.

Diagram 2

Key Life Questions

•    What are the most important goals and priorities I have for the rest of my life and how much money do I need to achieve them?

•    When will I be able to retire, what will life be like and what can I spend?

•    How do I use and invest my funds more effectively?

•    How do I deal with a bear market, especially after retirement?

•    How will changes in my savings, investment earnings, retirement date or health affect my future lifestyle?

•    How do I deal with changes in my circumstances, the world economy, tax law, investment markets etc?

If you can answer these comprehensively, you are ready for the second half of your life.

If not, you are living in hope. Hope is not a strategy!

How much will a local postage stamp cost in 20 years? 

•    Cost of local postage stamps over the years:

•    1959 – 4 cents

•    1969 – 10 cents

•    1978 – 15 cents

•    1991 – 20 cents

Today, it costs 23 cents to post a letter locally. What will it cost in 20 years?

I

An initial investment of $10,000 in December 1982 reaped very different results in each asset class. While international shares are more volatile in the short term, they tend to do well over time.

Female life expectancy increasing in an almost linear progression.

Endnotes:

1   Source: Singapore Department of Statistics.

2   Source: Singapore Department of Statistics.

3   Financial Analysts Journal: ‘Does Asset Allocation Policy Explain 40, 90 or 100 Percent of Performance?’ by Roger G Ibbotson and Paul D Kaplan.