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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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.

3 Mistakes in Retirement Planning

retirementIt is common for young working adults to delay saving for retirement as they feel that they still have a long time before this stage in life.

Suppose you are 25 years old now and intend to retire at age 65. Given the average life expectancy of Singaporeans of 85 years old, you would have about 40 years to accumulate wealth and live the remaining 20 years without a working income.

Among the younger Singaporean parents now, most are only having 1 or 2 children. Due to the fact that the standard of living will increase in future, it is getting harder for our children to survive and take care of us when we turn old. It is not sensible to depend on our government too. Hence, the best way is to prepare now on our own, so that we can enjoy our old age without worries. Here are 3 mistakes you should avoid when planning for your retirement:

1. Saving too little

saving too little

Many people save around $100-200 per month. This is not sufficient if we want to retire at 65, and live a decent lifestyle (eg. travel once a year and eat out once a week). If you save $200/month at 6% growth per year, you would only have $400,000 in 40 years’ time. Naturally, if you intend to retire earlier at say 55, you have less number of years to save and need to thus save more.

2. Starting too late

When we are in our 20s, we save for marriage and our first house. In our 30s, we save for our children’s education. It is only when our children are much older, we begin to start saving for retirement. By this time, we are likely to be in 50s. Even if we begin at 40s, to meet our financial goal, we may need to turn to investments with higher yield. By not managing these higher risk investments properly, we may even lose our savings.

3. Playing it too safe or too risky

If we keep our money in the bank, the low interests paid are grossly insufficient to help us beat inflation. Hence, the purchasing power of your money is actually shrinking. On the other hand, if you do not know how to invest and just plunge into the stock market, you are likely to lose a lot of money. Depending on their risk appetite, there are different forms of investments which are suitable for each individual. The 3 most common forms in Singapore are shown in the following table:

Holding period Investment (low to high risk) Expected returns Risk of Loss
1 year Fixed deposit 1% Very low
5-10 years Bonds 3-5% Very low
17-25 years Stocks 7-15% Very low

For these 3 types of investments, the risk of loss can be minimised with their respective holding period. The riskier the investment, the longer the holding period required, and naturally you can expect higher returns. For younger people, there is an advantage with stocks because they have a longer time horizon to invest before retirement. Hence, it is also important for you to know which stage of life you are at, understand your purpose of saving & investing and select a product which fits your risk appetite.

At age 25, retirement may seem to be something so much later in future. But the later you start saving for it, the greater the amount you need to save. As an article from Lifehack suggests, one of the top 10 regrets (Point 8 in article) in life among people who are about to die is not saving more for retirement. Remember the saying, “You are the young person that can take care of yourself at old age”.

4 Smart Steps to Financial Freedom

Financial freedom is defined as the state of not having to work actively and be able to sustain a desirable lifestyle. You will have the ability to make choices, to spend time with your family and loved ones, to travel the world or to pursue a lifelong interest which you haven’t been able to. All these can be done without worrying about money. Read on to find out what are some steps which you can take in your pursuit of financial freedom.

1. Create a budget

budgeting

If you are earning an average annual income of $50,000, in 35 working years you will earn a total of $1.75 million in today’s dollars. If inflation averages 3%, this becomes $3 million. But how much are you likely to save? Some people may say, “If I earn more in future than what I get now, I will be fine.” But in reality, this is easier said than done.

Whether we earn $2,000 per month or $20,000 per month, we ALL have a problem with saving money. The more we earn, the more we tend to spend. People who have worked for at least a few years can testify to that. Some fresh graduates earn about $3,000 per month. Three years into the workforce, some of them draw as much as $5,000 to $6,000 per month. Guess what? They feel poorer than they first started out. This is naturally so when you have multiple credit card bills, a car loan to service, a family to support, gym membership fees and many other expenses.

Therefore, it is wise to do a monthly cash flow budget, so that you know where your money goes. It is perhaps the first step to finding the extra dollars for saving and investment.

2. Protect your family and yourself

Our government consistently sets aside 20% of national budget on defence. Without a doubt, protection is of utmost importance. Isn’t it only appropriate that we allocate 5% to 10% of our income to defend against untoward circumstances?

Once you have set aside an emergency fund of 3 to 6 months of your living expenses, you should get down to taking care of your protection needs. This essentially means insuring You, because You are your greatest asset. We should be buying as little insurance as you need. But for most people, these protection needs are quite a lot.

3. Live well below your means

frugal

Being frugal is the fundamental of wealth building. Yet, too often, we have the false impression that all millionaires lead an extravagant lifestyle, which is exactly opposite from the truth! People whom I talk to who are financially carefree are usually living well below their income. They still pamper themselves with the occasional indulgence and frequent holidays. But trust me, these people do their sums.

You should always discuss with your spouse on both your spending habits and hopefully arrive at a consensus. A couple cannot accumulate wealth if one of them is a spendthrift. Few can sustain lavish habits and simultaneously build wealth. Singaporeans generally build wealth by keeping a tight budget and controlling their expenses.

Remember, “The lower your lifestyle, the greater your true wealth”. How so? Say A earns $50,000 a year, spends $20,000 in a year and has $200,000 in saving. B earns $300,000 a year and spends $250,000 in a year and has $1.5m in saving. A is wealthier than B because if both of them lose their income, A can survive for 10 years based on his saving of $200,000 whereas B can only live for 6 years. Wealth is the duration your savings can last based on the lifestyle you are used to if you stop work now.

4. Don’t plan to save cash

Look at your monthly budget. You should have $600 left over every month and save $7,200 a year but where is the money? From my experience, Singaporean can’t save cash, or they simply save only to spend it all later. These folks faithfully put aside $600 every month, only to wipe it all off with a long December holiday. Some prefer to splurge on furniture and electronic gadgets, others on cars and home renovations. The money disappears naturally.

A typical Singaporean worker’s mindset is “I work so hard so I need to spend money to pamper myself.” Notice the logic, work hard and spend hard, work harder and spend harder. The only solution to this vicious cycle is to ensure that you have some form of disciplined and regular savings to help you set aside a certain percentage of your income every month.

Some practical tips are listed below:

  • Get yourself started in a profit participating insurance policy, variable life policy or “Buy Term and Invest the Difference”. Just get started on “something” and see it through!
  • Be persistent in setting aside at least 10-15% of your income every month; never waiver in this.
  • Immediately invest or allocate any unexpected windfall you receive, like a bigger than usual bonus. Chuck it away before you spend it away.