.::. Retirement Planning – Where to start? .::.

Although retirement planning has been on my mind for a long time and I have started my CDP account years ago, I only started my own portfolio this year. One of this year’s resolution is to consciously grow my portfolio for financial freedom and retirement. I revisited a lot of stuff that I’ve learnt from my finance and accounting background to look into companies’ balance sheets and spent a lot of time reading financial news. My initial capital for my portfolio was from the ILP that I bought as a 21-year-old student – that has made me 1% p.a. for the past 7 years with dollar-cost averaging. Investment-linked-plans has got to be one of the worst investments to get most of the time because of the high fees, non-guaranteed returns and expensive insurance component involved. No real finance person would actually recommend ILPs, although many insurance agents are actively selling it. I wanted a regular savings account then, but the banker sold me an ILP instead. It didn’t turn out bad for me, since I would have probably spent all those money during my year in Europe if not for the ‘forced’ savings.

It’s a universal rule that the rich will always get richer while the poor will find it difficult to get out of their poverty cycle. Of course, there’s always exception to the rule, but the lack of financial literacy, even among educated graduates is almost appalling. How many actively manage their money and do financial planning? Most do not want to spend time learning or simply dislike even thinking about it. It has become a reality that we can’t retire or become comfortably ‘rich’ without actually investing in one way or another. It’s getting tougher to be comfortable in Singapore, but one can continue complaining or choose to find ways to get around rising cost. Without good finance management, it’s going to be very difficult to be survive in Singapore. It doesn’t mean having a finance degree, but simply learning the basic skills and knowing the importance of managing one’s own finances.

Singapore has many millionaires, and what is interesting is that many of them (let’s not count the imported ones) are actually working professionals who have worked and saved hard throughout their working-life to get there. It isn’t that difficult to become a millionaire really, because of the power of compounding interest over time. If you save about $700 a month at about 8% interest p.a., you will become a millionaire in 30 years. And if you save about $1700 per month at about 8% interest p.a., you will become a millionaire in 20 years. $700/month or $8400 a year isn’t that difficult if you take into account 13th month and bonuses for most people, since medium household income is at $7,870 in 2013 – simplistically, becoming a millionaire household would materialize by saving the 13th month pay conscientiously for about 30 years with an interest rate of 8%.

Singapore is also a great place to invest or start a business due to our laws. We do not need to pay tax for dividends received, we do not pay tax for capital gains from investing in stocks and property. There are people who actually receive more dividends monthly than their salary and do not pay tax on those dividends. If you start a business as a private limited, you only lose what is invested. If things don’t go right, you simply close the company and open a new one without having to pay your suppliers/customers (and people charge their expenses such as car and meals to the company).

So, the millionaire question – where do we start?

There’s only one answer.

Save.

Spend less than what you earn and save conscientiously. The earlier in life and the more you save, the quicker you can be financially free.

After that, you can learn how to make your money work for you.

Li Ka-shing’s article has been a great hit some time back and teaches many useful principles, although I don’t exactly agree with the networking one. Basically, he recommends one to split their income into different buckets – for daily expenses and necessities, savings to invest, for self-enrichment, for travel and re-charging and for networking. The main concept as I read is to be frugal early in life and only spend what is needed, then learn how to grow your wealth. You can then do whatever you like when you become rich.

Step 1: Save

Always put aside some money from your paycheck every month that you do not touch. What I do is to have a few bank accounts and set automatic transfers a day after my payday. Part of it is transferred to my savings account that I do not touch, part of it is transferred to our joint account that we do not touch (with the exception of some holidays and bigger ticket items for our home), and what’s left will be what I can spend. I’m quite flexible with what is left for spending and not too frugal day-to-day. This works for me because I can spend freely from my spending account, and will still have a good amount of savings every month that ‘I do not see’.

Step 2: Insure

That’s what people usually recommend, and the basic would be to get a term plan and a health insurance. I think a good health insurance to cover your healthcare costs is important as any huge hospital bill can derail all your plans. I also have a term insurance that my mum got for me a long time ago. Both of them cost me about $100/month currently. Our housing insurance is paid to HDB through CPF, and if anything happens to me the housing loan is ‘free’. I don’t see a need to get any other plans such as critical illness plans now since I have no dependents and my parents do not need my support, neither do my husband. If anything happens to me, the flat is free and there’s the term plan, my endowment plan, plus my investment portfolio to generate some passive income. I would rather use the money to grow my portfolio and self-insure at this point of time. It might be different if you’ve parents to support or someone that has to depend on you. And hey, instead of spending so much on insurance, why not spend some time exercising and being more health-conscious!

Step 3: Invest

When you’ve put aside an emergency fund of at least 6 months to a year of your expenditure, and have some money left idle, it’s time to make your money work for you. I think it’s important to have some concept of investing and know what you are investing in. It may be daunting for those without finance background, but with interest and some reading, it’s possible to develop financial literacy. But if you do not want to spend much time on it, buying an ETF (exchange traded fund) such as our Straits Times Index might be a good start. There are monthly saving plans into the STI available, meaning that money is deducted from your account to invest automatically every month. The cost is low and you gain from dollar-cost averaging over the years. Other stocks like Singpost, SPH and  our telecommunication stocks – Singtel, Starhub, M1 also pays high dividends and have remained quite stable over the years. REITS can also be a good source of passive income. Investing is a whole huge topic by itself and it takes some time and effort to learn.

Some local financial bloggers to check out:

Here’s one blog that I really like and find useful. His income from S-REITS dividends alone was S$ 118,081.02 in 2013 and S$ 123,873.80 in 2012 . He’s in his mid-40s and have remained anonymous. He shares many of his trades and views on financial literacy but does not give disclose specific details of his portfolio. There are many easy-to-read posts dedicated to new investors and may be a good starting point.

http://singaporeanstocksinvestor.blogspot.sg/

This other blogger who received >$1000/month in dividends before he turned 30 and shares all details of his actual portfolio:

http://dividendsrichwarrior.blogspot.sg/

There’s a lot of information and analytical articles, and a tracker for high-dividend Singapore stocks:

http://www.investmentmoats.com/

This guy is my age, and have saved a larger portion of his tuition income than me and tracks his monthly expenditure and portfolio:

http://www.my15hourworkweek.com/

 Start now!