Aligning your Retirement with D.I.C.E.

Contributed by Patrick Chang, Senior Financial Consultant, Financial Alliance Pte Ltd (The contributor can be contacted at patrickchang@fapl.sg)

Many of us, after years of hard work, look forward enthusiastically to the third phase of our lives: “Retirehood”.

We have started well in our childhood; pursuing life’s dreams and goals, fulfilling our obligations to our families, loved ones and the community in our adulthood; as time passes, we have reached the phase where we can, hopefully, live according to our terms, and end well for the time we have spent here.

However, for some individuals, retirement living can be less than ideal.

Yes, we want to be happy, healthy and enjoy more leisure time (as employment becomes a passing hobby and not a must-do) while pursuing our passion or continuing to contribute our time or finances to the community.

But not all of us can do all these.

In fact, some continue to work way beyond the official retirement age, not because they want to, but because they have to!   

Having financial security is still probably the single most important consideration for retirement living in any urban society. It is near impossible to live through a day without any financial expenses.

Many Singaporeans have financial concerns before and during their retirement years. A recent study by a local bank found that one third of Singaporeans are losing sleep due to constant worries over money. Another survey done by a financial institution in 2021 found that more than 2/3 of retirees regretted not planning for their retirement years earlier.

And more than half of Singaporeans aged 45-64 have yet to plan their retirement, according to another study by a wealth management services firm. The study further revealed that most of them (72%) are making lifestyle sacrifices now in the hope they can enjoy a better retirement, while those already in retirement said they are anticipating the need to make further spending cuts.

And for those who have planned early for their retirement, they have already set aside retirement funds and built up portfolios to cater to their retirement needs. Many of them seem to have good retirement plans, until closer scrutiny reveals otherwise.

Are their retirement plans aligned to reality, taking both inflation rate and interest rates into consideration? Are their retirement funds sufficient to cover any outstanding loans and/or unexpected emergencies? Are their retirement plans aligned to their intentions to serve others? Are they getting a steady flow of ‘passive income’ from their retirement funds? Are their retirement plans aligned to the goal of having a fulfilling retirement, while not sacrificing the current and future needs of their families?

One way to deal with all these retirement’s financial uncertainties is to consider and evaluate “D.I.C.E” and act on them accordingly.

What is “D.I.C.E.”? It is a framework that can help pre-retirees or anyone who plans to retire to focus on asking themselves some key questions on their retirement financial status, understand where they are currently, where they want to go, and what steps they can possibly take to reach the destination, peacefully, happily, and securely.

Let us now explore the components of D.I.C.E.

D is for Debt Management

Do you still carry large sums of debts or loans into your retirement years? Are you over-leveraged? Some have classified loans/debts into ‘good debts’ and ‘bad debts’. Good debt has the potential to increase your net worth or enhance your life in an important way, and these may include housing loans, education loans and business loans. ‘Bad debts’ involves borrowing money to purchase rapidly depreciating assets or items only for the purpose of consumption. These are your unpaid credit card amount and your personal banking overdraft facility. These debts charge a high compound interest rate, which can go up to 26% or more annually, and is detrimental to the quality of life if full payment is not made on time. Such debts can snowball into a horrifying monster if left unsupervised.

However, regardless of ‘good’ or ‘bad’ debts, shouldering loans/debts into your retiring years, is definitely not a wise move. Instead of setting aside the money for the leisure of retirement living, it is now set aside to pay for both the loan principal and its interest. Let me share with you the following calculations to explain what I mean.

Assuming you set aside $2,000 a month for your retirement, which is happening 20 years from now. Based on a moderate 6% annualised returns, in 20 years time, you should have accumulated around $930,000.

But if you are instead using the same monthly $2,000 to pay up an outstanding credit card loan of $100,000 on an annual interest rate of 26%, it would have taken you 20 years to finish paying up, with total interest paid at a staggering $423,000!

So, be wise about how you manage your debt. Spending below your means is always sound advice.

Here are some key questions you may want to ask yourself.

Are you still shouldering loans and debts? What’s are the interest amounts that need to be paid for these loans? Are they compound interest or simple interest? Can they be paid off at an earlier date?

I is for Insurance

Insurance can play a critical role in your retirement years, and I am not just talking about hospitalisation insurance. Yes, this is important, especially when studies have shown that while people tend to live longer, they are also spending more years with disability, be it physical or mental. As a person ages, medical expenses are expected to rise, maybe significantly – this will surely impact the retirement fund one has set aside. So, with proper medical insurance plans in place, such as those that cover hospitalisation, disability, and critical illness, you can have more peace and more cash-on-hand for your retirement years.

But that is not all. Often overlooked but possibly relevant for retirement years are general insurance plans.

I am referring to plans that cover Personal Accident, Home Content, and your other valuables. Why are these plans necessary?

As we get older, we are more prone to accidents, such as falls and burns. Most of them are not serious, and no hospitalisation is required. Yet, outpatient treatment could still be needed, and so a personal accident plan can defray some of these additional costs.

Our residence is probably our single most valuable asset. Any damage to it could cause a big hole in our pocket to make it whole again. Likewise for our collectibles and those precious items, such as the wedding ring or that branded watch. When these items are damaged, it could cost a lot to repair or replace. With the appropriate insurance coverage, you do not have to ‘dig’ into your retirement funds to cover these repair costs.

Questions:

When is the last time you reviewed your insurance coverage? Are you sufficiently covered financially for unexpected events or for events that have high chances of occurring? Do you actively seek lower premium while getting your insurance plans? Do you read the fine print of the terms of insurance coverage?   

C stands for Cash Flow M.R.I. 

One of the most feared concerns relating to retirement is ‘Money Not Enough’ or outliving our retirement funds! Another concern is to see the retirement sum shrink in value due to inflation.

We have been told that we can live with an amount that meets our basic needs during retirement. Fair enough. But is that what you want? Are you prepared to downgrade significantly during your retirement years, so that you can have what you need, but forgo what you want? And how would that impact your loved ones?

To ensure that we can keep our current lifestyle during retirement, we should create a steady Monthly Recurring Income (M.R.I.). So, what constitutes a good M.R.I.? I believe that it should have the following characteristics:

• Be Consistent,
• Be Certain,
• Be Passive,
• Have returns that beat inflation,
• Come from a diversified portfolio of different asset classes.

Your diversified portfolio could include dividend-paying blue-chip stocks, investment grade bonds, or even funds that pay monthly or quarterly dividend. Alternative investment vehicles, such as REITS, which are required to distribute 90% of its profits as dividend to investors, can be included as well.

If you are looking for something that has much lower risk and more certainty, consider retirement endowment plans issued by insurers. These plans have fixed monthly payouts for a stipulated period of between 15 and 30 years, coinciding with your retirement years.

And if you are concerned with disability issues during retirement, you can consider retirement plans that offer higher monthly payouts when diagnosed with disability. Such an option helps to cover the possibly higher cost of living caused by the disability.

Here are some questions to ponder:

Do you have a diversified portfolio? Is the portfolio focused on capital gains or dividend? Is your investment liquid or illiquid? Do the portfolio returns exceed inflation? Are the assets in your portfolio made up of more higher-risk or lower-risk components?

E refers to Estate

Two of the biggest concerns for most people in retirement are: living too long and dying too early. To solve the former, proper cash flow planning for retirement is crucial. To provide peace of mind for the latter, one has to consider what to do with the retirement funds left unused due to early departure.  While most people view retirement planning & estate planning as two separate activities, I would strongly encourage planning for both together. Focusing on just one of the two may result in overlooking the missing pieces of the bigger picture.

Have you thought about what might happen if you were to leave this world before you finish up all your retirement funds? Have you planned what to do with it in such a scenario? Do you plan to leave the funds to your loved ones? Have you willed it? If not, do you know the consequences of leaving this fund ‘unaccounted for’?

Your loved ones or your intended beneficiaries may not be able to lay their hands easily on the ‘leftover’ fund if there had been no clear instructions given in writing. So, this fund becomes regarded as “intestate”, even if your last valid will contains clear instructions to distribute the rest of your estate.     

If you have dependents, such as aged parents, young children and disabled siblings, setting up a trust could be beneficial too. It can protect the estate from creditors’ claims.

So, an unutilised retirement fund, without proper ‘treatment’, would have the unintended consequences of prolonged delay in reaching your intended beneficiaries. And worse, if you are still carrying loans, creditors can claim the owed amount from your estate if your assets or funds are not housed in trusts. After the creditors are done, there may be nothing left for your loved ones.

Here are just a few more questions:

Do you think a trade-off exist between financial freedom of retirement and legacy for loved ones? Have you written your will and when was it last updated? Do you know you can grow your estate to meet both your retirement wants and leave your family without financial concerns?

So, while you have a grand plan mapped out for your retirement, do not ignore the nitty gritty details. If overlooked, they could derail your retirement plan.

Preparing for retirement is like planting a fruit tree. It takes years to grow and to harvest the fruits.

The best time to plan for retirement was 20 years ago. The next best time is NOW!

Financial Alliance is an independent financial advisory firm that provides its clients with sound and objective financial advice to protect and grow their wealth. Providing top-notch services to both corporations and individuals, Financial Alliance is a trusted brand in Singapore and has been navigating its clients’ financial future for 20 years. For more information about Financial Alliance, click on the link.

Important: The information and opinions in this article are for general information purposes only. They should not be relied on as professional financial advice. Readers should seek independent financial advice that is customised to their specific financial objectives, situations & needs. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.

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