What not to do when planning your retirement

Sun, Jan 20, 2008
The Straits Times

RETIREMENT planning is not a topic that gets the heart beating faster, and sadly it is all too clear that Singaporeans do not want much to do with it.

However, with 20 per cent of the population expected to be over 65 by 2030, it is equally clear that people here need to start planning early for their golden years.

No one can claim they have not been reminded of the need to start planning as such wake-up calls are constantly aired in Singapore.

And it is not as though Singaporeans lack financial options. Many of these were outlined at the recent Silver Industry Conference and Exhibition (Sicex) at Suntec City.

The event explored opportunities for an ageing Asia and tackled issues like how to make financial plans for a long life.

It was apt that the inaugural event was held in Singapore, given the urgency of the problem facing Singaporeans.

An annual AXA survey found that Singaporeans lagged behind Americans in retirement preparation, with only about half of the working people in the Republic preparing for the time when they would have to stop working. Those who do start planning, do so at an average age of 34.

In the United States, 79 per cent of working Americans start their planning from age 30. In Asia, Filipinos begin retirement planning the earliest - at just 28.

Financial experts at Sicex point out some of the key challenges: Singaporeans now live longer and have heightened health and lifestyle aspirations; yet, most want to achieve financial independence early.

It is all easier said than done, so take note of these eight mistakes to avoid:

1. Not writing out goals or defining your dreams

HOW often do we hear of someone whose idea of retirement planning is to toss some money into a couple of investments and hope for the best?

Such laid-back attitudes are common among those who have not taken the time to consider where they are headed.

Financial planner David Strege, who participated at the Sicex, said people need to understand why they are working and what they want to accomplish.

Conference speaker, Dr Robert Merton, a Nobel laureate in economics, says people should first focus on their life goals when they plan for their golden years - how much they want to leave their kids and the quality of life they want in retirement.

Investors should diversify their portfolios, making sure to keep costs down, Prof Merton said.

2. Not understanding where you are at

THIS means defining your assets and liabilities and knowing your cash flow - income and expenses.

It is a basic step in money management. You cannot plan for the future without knowing where you are now.

It also helps if you work out how to plug the gap between where you are now and where you want to be in the future.

3. Not understanding how to manage expenses

FOR most people, financial independence starts from being able to manage their expenses.

Choosing to increase income or decrease expenses, for example, will yield excess funds for investing purposes.

4. Not investing for the long term

WE ARE usually our own worst enemy when it comes to investing. When people get nervous, they tend to follow the herd, sell up and exit the market. Or often, they enter the market too late after a major rally - and pay the price.

Research shows clearly that if you miss out on too many of the market's big days, you can severely damage your long-term returns.

So, it is no wonder experts believe that, for most people, the way to beat the market is to stay invested instead of moving investments in and out in a bid to time the ups and downs.

5. Not factoring in accurate assumptions

WHEN working out their retirement sums, people typically make certain basic assumptions about the higher cost of living and their longevity.

Mr Strege says many underestimate the impact of inflation on their living expenses.

'If the inflation rate is 4 per cent, the cost of living will double every 18 years. This means that for someone retiring at 65, it will be twice as expensive to live when he turns 83 than at 65,' he says.

And health-care costs typically rise faster than general inflation, which can hit retirees particularly hard.

Financial planner Ian Heraud, the executive chairman of Australia-based Heraud Harrison, says it is dangerous to assume that one needs to spend less than they used to after retiring.

In conventional thinking about retirement income, many assume that 75 per cent of their last-drawn pay will be enough to sustain a comfortable lifestyle in retirement.

This might be true for some people, but future health-care costs could be higher than what most people assume.

Mr Heraud says: 'You shouldn't aim too low when deciding on your nest-egg goal. It is a lot more than people think.'

Another assumption is how many years one will live. Many people underestimate the number of years and thus the funds they will need.

6. Not managing your risks

A LOT of factors can derail your best- laid plans, including premature death, health concerns, property, loss of job, disability and liability.

The good news is that there are ways to manage some of these risks, for example, by transferring them to a third party through insurance or by having emergency funds for rainy days.

Experts typically advise setting aside three to six months' worth of emergency reserves to cover unknown expenses.

7. Not reviewing your financial plan periodically

MANY variables affecting a financial plan do not stay constant, such as personal goals, investments, markets and longevity.

Experts advise people to revise their plans once a year and make necessary adjustments.

8. Not identifying the right financial adviser

HERE are some warning signs that you should be alert to when selecting a financial adviser:

# He is not employed by or does not represent a licensed advisory business.

# He does not identify the client's needs and goals and does not adequately explain the complexities.

# He promotes a product without explaining the risks, while his costs are hidden in small print and not explained clearly.

And if you get an unexpected call from a stranger selling advice or products, be extra vigilant.