The Lifecycle Financial Planning Approach

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The lifecycle financial planning approach places all your financial activity into distinct time periods, or stages, with retirement acting as the final phase in the financial lifecycle.

This approach is powerful as it provides you a clear framework for evaluating different decisions. Here are the 5 standard financial life stages encompassed in the lifecycle approach. Keep in mind the stated age ranges are merely guideposts, some of you will pass through stages more quickly or more slowly depending on your circumstances.

1. Early Career
Ranging in age from 25 to 35 years old, early career phase adults are starting to build a foundation for a strong financial future. You may be planning to start a family, if you have not done so already. If you do not yet own a home, you might be saving for one. At this stage, keeping income in step with expenses is a struggle, but it’s important to lay the groundwork for retirement saving now.

2. Career Development
From ages 35 to 50, earnings rise, but so do financial demands. Keeping expenses in line with income is a challenge in this stage. Many families are concerned with covering college costs and paying for ongoing expenses while also increasing the pace of saving for retirement.

3. Peak Accumulation
In this stage, from the early 50s into the early 60s, you typically reach your maximum income level. It may be a time of relative freedom as your children have graduated from college. Without college tuition and with lower expenses, you can accelerate savings rates to position yourself for a more secure retirement.

4. Pre-Retirement
About 3 to 6 years before winding down professionally, you should start restructuring assets to reduce risk and increase income. By this point, mortgages are usually paid and children are independent. This is the time to evaluate retirement income options and the tax consequences of investments.

5. Retirement
The final financial lifecycle phase occurs for people in their mid-60s and beyond. Once you stop working, your focus shifts from wealth accumulation to income preservation. In this stage, the goal is to preserve your purchasing power and enjoy your desired lifestyle. Estate planning and legacy considerations also gain importance as you age.

As we transition through each life stage, we should adjust our focus each step of the way to ensure our financial plan remains appropriate for our risk tolerance, age and goals.

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2017: Try Budgeting Yearly

budgetingAs the year 2016 draws to a close, I invite you to try something different for the coming year: yearly budgeting.

If you’ve done any kind of budgeting exercise, you’ve probably made lists or spreadsheets of your monthly expenses. Things like rent or mortgage payments, utility bills, and student loan payments.

Why should we budget for a full year? It’s because if you set aside just enough money to cover your monthly bills, you won’t take into account all the unexpected or one-time expenses that are bound to happen. Such expenses do not only include bad stuffs like car repairs and medical bills. One-time expenses include holidays too!

Budgeting yearly makes it easier to save up for those expenses. By working those items into your budget, you can work backwards and save a little each month toward your goal.

If you’ve tried monthly budgeting in the past and found yourself coming up short because of unexpected expenses, try yearly budgeting to give yourself a cash cushion.

A Quick Guide To Retirement Planning

Many people work their entire lives with one goal in mind – retirement. It’s one of the most important life events that is experienced by most people.
From a personal and financial perspective, achieving an easy, well-funded retirement is a lifelong process that requires early planning and commitment to a long-term goal. Once you reach retirement age, you can then enjoy the benefits of a comfortable retirement in which you have more than enough money to cover your living costs.

Managing Your Retirement

When it comes to retirement planning, the earlier you can start in your career, the better off you will be.

The problem, however, is that most young people are not thinking about retirement. After all, when you are in your 20s or 30s, being 65 or older can seem like forever.

Even for older people, it can be daunting. While everybody would like to retire in comfort and financial security, the amount of time and complexity of creating a successful retirement plan can make the whole process somewhat intimidating.

As a matter of fact, retirement planning often can be done very easily. All it takes is a little homework, an obtainable savings and investment plan, and the long-term commitment to preparing for your retirement years.

How Much Do You Need for Retirement?

After you stop working, your expenses don’t stop. In fact, given the fact that you probably will be dealing with more health issues, they are likely to be higher.

So how much money do you actually need to fully fund a comfortable retirement? While an exact answer is impossible to give, there are some factors that should be considered:

Medical Expenses – If and when you become ill, you are going to want the top-quality medical services that are available. Most people don’t want to have to depend on charity or welfare. In Singapore, everyone is entitled to MediShield Life benefits. But this publicly funded program only covers minimal expenses. And there often is a gap between what the government will pay for and what you actually need.

Living Expenses – You are still going to have to live indoors, wear clothes, eat food, and have heat and fresh air to breathe when you are retired. All of these things cost money. Even if your mortgage is paid off by the time you retire, you are still going to have to pay property taxes, homeowners insurance, and maintenance costs.

Other Expenses – A comfortable retirement includes such non-essential expenses as entertainment, transportation costs, and other expenses that don’t fall into the other categories.

Add these all up, add the rate of inflation between now and your retirement date, and you have a general idea of how much money you are going to need for your retirement. Now all you have to is multiply that number by how long you expect to live!

Start Planning Now

Retirement planning is a process that takes decades of commitment in order to achieve the end result: The comfortable retirement you deserve. The concept of saving and investing money in a retirement fund may seem daunting, but with a few basic calculations and commitment to a realistic plan, you can achieve it.

4 Reasons Why People Underestimate Their Retirement Savings Need

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DBS survey of 800 people in 2014 showed that:

  • 73 per cent of the people polled plan to retire between 55 and 65, with an average savings of $571,715.
  • At the same time, more than 85 per cent of those polled expect to live on a retirement income of $3,500 per month for the next 15 to 20 years and more.
  • However, there is a big gap between both sets of numbers as the average retirement savings amount would only last 13 years and not 15 to 20 years.

These statistics are worrying but fret not! The rest of this article explains the 4 reasons people underestimate how much retirement savings they need, which will give you greater clarity in planning for your future.

1. Length of retirement

Two things determine our length of retirement – life expectancy and retirement age. According to Department of Statistics Singapore, our life expectancy is 83 years. This means that if you desire to retire by age 60, your savings will need to last for 23 years. This is a huge 10 years difference with DBS’s survey findings!

However, when you actually retire might vary as many people choose to work part-time even after they stop full employment. For instance, many retirees become private tutors or piano teachers, or work part-time in their professions as consultants.

2. Not adjusting for inflation

It is important to note that the final sum you will actually need depends on when you will retire and the actual figure you will need to save because of inflation. Let’s say you desire to retire 30 years from now and will need to spend $3,500 monthly in today’s dollars, assuming an average inflation rate of 3%, your monthly expenses will grow to $8,500 in 30 years’ time.

On the other hand, if you’re planning to retire tomorrow, you won’t need that much as expenses today are definitely much less than they’ll be in a few decades’ time.

3. Overestimating investment returns

Some people belong to the group of more aggressive investors. Being human, they may tend to have optimism bias in terms of investing. Since your stocks have been performing well on the market over the past few years, you start to expect to enjoy a steady 5% return per year for the rest of your life. And everyone just assumes that property values will accrue over time, never mind that there’s a downtrend in the property market now.

When estimating your investment returns, it is best to project modest gains or you would risk getting a rude shock when you investments do not perform as well as expected and you have to delay your retirement plans.

4. Not accounting realistically for discretionary expenses

We may be able to survive on a few hundred dollars a month by eating bread and drinking water every day. But I’m sure nobody would think of living life like that when calculating how much we need to retire. Other than healthcare expenses and insurances, you might also want to spend on things like travel, stuff for your kids or grandchildren, your hobbies or simply the finer things in life. As much as you want to retire as early as possible, you have to be realistic about your spending.

4 Life Insurance Myths Debunked

Life-Insurance

Do you have a contingency plan that can protect your family just in case something bad happens to you? Assuming you are the main income earner in your family, it will be difficult for your loved ones to pay for school, food and other amenities in the event you pass away. Let’s be honest, it’s a rather scary thought. If you don’t have life insurance ready, you could be leaving your family in serious financial distress. Having life insurance can help support your loved ones.

However, if you’re not familiar with life insurance policies, it can be difficult to distinguish what is true about life insurance and what is a myth. To help clear up confusion, here are some common myths about life insurance.

Life insurance is too expensive

To the uninformed, life insurance can seem costly, but this is one myth that can be debunked. The cost of a life insurance policy varies, as it depends on several factors such as your entry age and medical history. Life insurance costs less than what most people think. Depending on your situation, you can tailor your insurance and lessen your costs drastically. Keep in mind that insurance is cheaper when you’re young, as you get older, premium prices become higher.

If your employer provides coverage, it’s enough

While many companies do provide employees with life and health insurance, this benefit only lasts as long as you are still employed under that company. While you’ll be covered, this coverage is only temporary and the benefit that is put into your insurance policy isn’t much. Furthermore, the policyholder in this case is your employer which means they reserve the right to amend the terms of coverage with their chosen insurer. This leaves you with uncertain coverage.

It’s advisable to separately apply for your personal life insurance plan to ensure that your family will be able to receive additional funding long after you are no longer able to provide for them. Additionally, you’ll have peace of mind knowing that your loved ones have a reliable means of obtaining funds in the future.

Life insurance is only for those who have children

If you’re not married and don’t have any children, it’s still important to seriously consider getting life insurance. Keep in mind that you still have dependents—your parents or siblings, for example, could from life insurance, as it can still cover other costs such as funeral expenses, unpaid bills and debts. If you were to unexpectedly pass away without a life insurance plan, your loved ones will be left to pay for these costs. So, even if you’re single, do consider obtaining life insurance as early as possible.

My health condition can exclude me from getting life insurance

Even if you have health conditions you can still have life insurance, although you may need to purchase a policy with lower coverage limits. Essentially, life insurance isn’t restricted to people of a certain age, health or even salary. You can always adjust your policy based on all these factors. There are plenty of insurance options that can suit your needs and budget.

These are just some of the many myths about life insurance which can make it difficult for people to fully understand and appreciate it. This often leads to confusion for some people on whether they need insurance or not. While the idea of having life insurance seems intimidating, doing so will bring plenty of benefits for your loved ones.