In part 1 of our guide, we covered the basic steps to a successful retirement plan. Let’s now explore a little more about savings and investing for retirement.
For a start, we need to recognise that it is important to have cash.
Cash is used to tide us through a rainy day or through sudden loss of income like retrenchment.
Financial experts usually recommend a buffer of 3-6 months of your monthly income. Having said that, we need to understand on why there is a need to have a diversified portfolio consisting of various instruments.
The reason is… it’s rather inefficient to plan for your retirement by keeping all your cash inside a savings account.
Even with the best interest rates currently available, global interest rates are at an all-time low while the average inflation rate in Singapore is about 4-5% per annum.
Therefore by keeping your money in an instrument that gives you returns lower than 4-5%, the value of your money is actually eroding annually.
By not investing, we would also be ignoring the power of compound interest which is defined by Investopedia as the “interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan.”
While CPF pays a fairly decent rate of 2.5% interest per annum, a simple comparison would show us the value of investing.
An initial $1,200 saved in your CPF over a period of 20 years with 2.5% interest versus an average return of 6% in shares, unit trusts or mutual funds could result in a big difference of S$2,517 versus S$6,892!
And this is assuming that there is no recurring investment on a yearly basis which is seldom the case.
Therefore, by investing in a variety of instruments that generally earn higher returns over a long period of time, we will be able to make our money work harder and more efficiently.
That said, it is important to do your homework before you start investing. Understand your own investment objectives and your risk appetite. Do you have a high risk tolerance or would you prefer a more calculated approach?
The age where one starts investing will also play a part in determining the appropriate type of possible investments.
This is because, a longer time horizon will generally help to ride out the market cycles and average out the returns. This is a concept known as dollar-cost averaging.
There are a variety of products that cater to different needs and different risks appetite such as Unit Trusts or Mutual Funds, Real Estate Investment Trusts (REITS), Commodities like precious metals and agricultural products to structured products and even warrants.
All products have their inherent advantages and disadvantages. Sometimes a bad choice could result in the severe disruption of your retirement plan. Choose wisely and speak to an independent professional.
Never rush into making a decision. Be sure you understand the product and read the fine print. Some products have high management fees that investment or fund houses charge as fees for them to manage the product for you.
This will have a direct impact on your final investment returns. Most importantly, only start investing after you have set aside money for your basic needs and have paid adequate attention to the points raised in Part 1 of this series.
Retirement planning may seem far away for many people today.
Far as it may be, it is important to start laying the foundation so that you can live your golden years to the fullest.
Start your retirement planning by defining your goals, ensuring adequate protection and finally learn to build your wealth after putting aside enough adequate savings.