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  • Writer's pictureDaniel Lee

Intro to retirement planning: what forms up your passive income during retirement

When it comes to the topic of retirement, the majority of us will always focus our attention on the topic of: “How can we achieve enough passive income from our investments to be able to stop relying on our day-job for an income”

But retirement planning is more than just having a passive income. It is about achieving the right proportion of guaranteed and non-guaranteed passive income (or cash flow) to meet your retirement needs.

What do you need to have when you retire?

When we plan for our retirement, you have to understand that there are two categories of expenses that you need to account for during your retirement and they are:

  1. Basic living expenses – food/utilities/transport

  2. lifestyle expenses – hobbies/travel

In order to ensure that your retirement portfolio or plans are not easily disrupted or affected by the ups and downs of the economy, you need to first ensure that your basic living expenses will be financed by guaranteed passive income/cash flow sources.

This includes financial instruments such as:

  1. Liquid cash savings

  2. Private annuities or retirement plans from insurance companies

  3. CPF life

By doing so, you would already have recession-proofed” your retirement plans to a degree where your daily lifestyle will not be affected by market downturns.

What’re the most common mistakes in planning for retirement?

Most Singaporeans are often too focused about the non-guaranteed passive income/cash flow sources when planning for their retirement which results in disastrous outcomes during financial crisis such as the 2008 financial crisis as well as the current economic downturn caused by COVID-19 situation.

Their retirement portfolio will often only include financial instruments such as:

  1. Bonds

  2. Equities

  3. Physical property

  4. REITs

As a result, when the market enters into recession, when companies start to cut back on their dividend pay-out, when the rental market dries up, many of the retirees are forced by their circumstances to return back to work. That is not an ideal situation that you would like to get yourself in when planning for your retirement.

The ideal retirement portfolio

An ideal retirement will be one that you get to, at the very least, have the guaranteed income to pay for your daily basic living expenses regardless of the economic conditions AND the non-guaranteed income to finance for your desired lifestyle – e.g. travelling, hobbies, etc.

By detaching your needs and your wants and accounting for them separately, you will be able to achieve a recession-proof portfolio.

So how should you go about planning for your retirement?

Firstly, you should first understand how much you will need, during retirement, for your daily living expenses and your lifestyle expenses.

Secondly, you should understand what the suitable types of instrument are that you need to accumulate or acquire to provide you with the income you need for the respective expenses.

Thirdly, find out how much you will need to have in the respective financial instruments by your desired retirement age, in order to generate the level of income you need.

Lastly, identify any short-fall and come out with an actionable plan as to how you can allocate your current assets and savings to achieve your retirement goals.

Of course, retirement planning is much more complex than just going through the above four steps because different people have different expectations and financial situations. Furthermore, we need to account the effects that the Central Provident Fund has on our retirement, and plan our retirement in a way that maximizes the use of our CPF.

In the next article, I’ll go more in-depth as to how you can quantify your retirement expectations and how you can structure an actionable plan for your own retirement.

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If you would like me to help you short cut your retirement process and come up with actionable plan that you can implement for your retirement today, you can reach me here.

Daniel is a Licensed Independent Financial Consultant with MAS and a certified Associate Wealth Planner, who specializes in retirement and investments planning. Find out more here.



This article is meant to be the opinion of the author and is for information purposes only.

This article should not be seen as a financial advice

This advertisement has not been reviewed by the Monetary Authority of Singapore

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