Whether you're planning well ahead for your retirement, within months of retiring, or already enjoying your retirement, you'll face important decisions about how to organise your income.
Because you need to factor your plans around a myriad of unknowns, deciding your best approach can be complicated and stressful.
Read on to understand more about five common threats and steps you could take to help protect your financial plan.
1. Not knowing how long you’ll live
The biggest threat – and fear – for retirees is running out of money during retirement.
Frankly, planning would be infinitely easier if you could gaze into a crystal ball and know just how long you needed to plan for.
Without the benefit of being able to accurately predict what will happen in your future, understanding how long your money will need to last is one of the most important first steps when planning your income.
As a hypothetical, imagine you need a retirement income of SG$240,000 a year. Ignoring inflation, which we’ll get to in a moment, you’ll need:
- SG$2,400,000 if you live for 10 years
- SG$7,200,000 if you live for 30 years.
This is quite a significant difference.
You may find that you’re able to reduce this gap through lifetime pensions – such as the UK State Pension.
If you’re also able to secure other lifetime incomes, this can be very helpful. Anything that provides stability and underpins your income is highly valuable.
Annuities are a good example of this. In the right circumstances, they could offer certainty and remove a degree of risk.
If, on the other hand, you use savings and investments to top up your income, your first objective will be to see if you have enough to generate the required income for the rest of your life.
Read more: Why you need to plan for a 100-year life
To ensure your wealth will meet your income needs, you’ll need to start by considering how much income you want and then calculate how long your funds would last.
If your wealth doesn’t stretch for as long as you need, we can help you to understand ways you may be able to adjust your plan, or you may need to work for longer to boost your funds.
2. Overlooking the eroding effect of inflation
Again, because we don’t have access to a reliable crystal ball, there’s no way of knowing how much inflation will rise – either before, or during your retirement.
As such, the sensible move is to factor relatively high inflation into your plan when plotting your retirement income.
Because inflation can slowly erode the real-term spending power of your wealth, it can do serious harm to the value of your retirement income.
And it needn’t be rampant to cause a significant dent.
If inflation was sitting at a relatively “normal” rate of 3% a year, your income stream of SG$240,000 would need to increase to SG$374,000 in just 15 years.
Another problem to factor in is that the official inflation rate could prove misleading.
Your personal inflation rate won’t necessarily match the official numbers.
Read more: Why knowing your personal inflation rate can help you to protect your wealth
What you spend your money on in retirement is likely to differ from your expenditure while working. This means you need to keep a closer eye on areas like healthcare costs, care costs, and expenditure that is typically more prevalent in later life.
3. Failing to account for economic uncertainties
Only a generation ago, interest rates were over 10%, the highest rate of Income Tax was 60%, and many retirees had company pension schemes.
These days, retirement could last for multiple decades – in some cases up to 40 or even 50 years. As such, it’s likely that the economic background could be very different at several intervals throughout retirement.
Given this, if you plan your income assuming that interest rates will remain as they are, and make no provisions in the event that they rise, you could find yourself in trouble.
Interest rates, inflation, property prices, tax rates, and investment returns are all liable to significant increases and declines, any one of which could derail your plans.
This is why it’s important to stress-test your financial plans.
Using cashflow planning software, we can help you test your plan against a variety of “what if?” scenarios so you can visualise how major economic changes could affect your position.
4. Underestimating the effect of volatile markets
There’s a strong chance your income needs will involve some form of investment.
You may have a personal pension which you’ll draw from, ISAs, or a portfolio of investment funds.
Whatever your investment position, the wealth you have invested will rely on markets to generate returns and provide you an income.
As such, it’s crucial to plan for times when they fall short or, worse, cause unexpected losses.
Nobody knows how markets are going to behave and history is not a reliable guide. While investments tend to go up over time, there’s no reason to think that periods of sustained downturn aren’t a possibility.
If you experience a long period of downward spiralling markets during your retirement, it could be very damaging. Were you still in work, you may have the chance to rebuild value by saving more, and waiting for the market to correct, but this is unlikely to be an option if you’re retired and reliant on your investments for your income.
As such, it’s crucial to stress test your income strategy against what would happen if markets fell, or remained low for an extended period.
5. Forgetting to account for health problems
Sadly, there’s a chance that you may suffer from health problems at some point during your retirement. If so, you could face higher expenditure – particularly if you find you need to pay care fees.
Ultimately, no matter how well you’ve planned your income strategy, ill health could seriously derail things.
As an expat living in Singapore, it’s likely that you won’t be eligible for financial support from the government. If you don’t have permanent resident (PR) status, you’ll have to pay for your own care.
It’s important to consider this possibility and plan ahead so you have the means to cover costs, where required.
Remember, care fees aren’t the only possible healthcare cost you may face. So many health problems could crop up and mean you need to cover the cost of treatment.
Speak to a financial planner
Whatever stage you’re at on your financial-planning journey, it’s important that your plan is stress-tested against these and other potential risks.
If you want to enjoy financial security and a comfortable retirement, the very best advice is incredibly important.
