Retirement Planning Part 6: Case Study 1

Christopher Tan

In the sixth segment of the 7-parts Retirement Series, we use a case study in Singapore to show how retirement goals can be achieved.

You can find the link to the other parts here:

This event was conducted on 5th of May 2016 by Christopher Tan, CEO of Providend.

So, I’m going to show you two case studies on how people of different net worth with different amounts of money can solve beyond CPF LIFE. Ok? Solve beyond the solutions that CPF LIFE gives.

So, now, the first one is people with more money. They’re higher net worth. They got more cash. They can do more things about it. Ok so, I’m going to use the case study of this person called David who is aged 59 years old. So, this is David’s retirement income objective. He wants to enjoy $10,000 per month for the first five years of his retirement.

Everybody goes “WOW!” $10,000 per month is quite a bit. But then as he ages, he wants to slow down. I mean that’s quite right. Ok because as we get older, maybe we cannot travel that much you know. So, he wants to spend lesser. So, we reduce it to $8,000 per month for the next ten years. And finally, reducing to $6,000 per month till age 83. I mean that’s still quite a lot.

Ok now, he wants to adjust this money for inflation 3%. The amount must last him at least twenty-five years from 59 till age 83. At least for the last twenty-five years. And at the end of the day when he dies at age 83, he wants to leave behind still $1 Million for his loved ones’, legacy. It’s quite huge I know but I did say that this is for people with a bit more money.

Now, this is David’s assets. Yes, cash on $900,000, shares $300,000, managed investments of $400,000 – managed investments is like your unit trust you know all that – total $1.6 Million. He has got CPF LIFE that pays out $1,000 per month from age 65. He has an investment property. So, he collects $2,000 per month, rental. Assuming a 2% per year growth. And then he, like many people in Singapore, buy endowment insurances which will mature 2016 and 2020. Both will mature with a maturity value of $100,000 each.

Actually, it is quite common for people who are what we call semi-affluent in Singapore, people with a good job – professionals, lawyers, doctors, you know quite common, they own another property. And you know, some investments and all that. So, now that’s David.

And his risk profile. Now, the risk profile for a retiree is quite different from a risk profile for an accumulator. The way we measure risk profile is different. Now, you must have been to the financial institution to buy certain products and you know that financial institutions by law have to do a risk profile with all of you right? You answer some questions and you add up and then ok you are conservative or you’re aggressive. Ok now, that is a risk profile done for young people, accumulating.

But when you are in retirement, the true measure or a better measure of the risk profile is actually what we call your saved retirement income floor. Meaning to say, out of the $10,000, $8,000 or $6,000 that David wants. What percentage of it die die he must have?

So David may say that “Ok, I want it $8,000 per month but okay $4,000 actually I need. That is my minimum that I need because I need to pay for my utility bills, I want to pay for my car blah blah. The rest of the $4,000, I accept that market well, I can have more. Market bad, I may not have $8,000. I may have $7,000.” Do we understand that?

That’s called the safe retirement income floor. And so, David wants a safe retirement income floor of between 40% or 50% so it’s moderate. If David wants a safe retirement income floor of 10%, that means he’s very aggressive. That means 10% of the $8,000, $800, die die must have. The rest fluctuates. But if he wants 90% of the $8,000 to be safe retirement income floor, he’s very conservative. Basically, he cannot accept any fluctuation of the market. He die die must have $7,000. All right. So that’s the measure. A retiree measures your retirement risk profile based on how reliable you want your income stream to be. It’s very different for younger people who are accumulating.

So, this is the background of David very quickly. Ok I know it’s a lot of numbers. And for the people at the back, my apologies really because I can’t make it any bigger. Because I want to show the whole screen. So, if you cannot see from the back, I would try to read it out for you.

A lot of numbers but please allow me to explain it line by line. So, follow me. So, based on what we have calculated, we realised that for David, he only needs to make use of $1.4 to $1.5 Million of his assets. This is excluding CPF LIFE. This is just his assets without CPF LIFE.

So, based on $1.5 Million, we will split it into different buckets. Income Bucket – $340,000 which is 23% of this. Bucket 1 – $329,178 which is about 22.3% of $1.5 Million. Bucket 2 is this, Bucket 3, Bucket 4, Bucket 5 and Bucket 6 accordingly. So, if you add up all these numbers 1, 2, 3, 4, 5, 6, 7, you get $1.478 Million.

How did you get this $1.47 Million?

This one is done by the optimiser. It’s basically an Excel spreadsheet that we create to run it. Yeah, I can’t explain to you the formula. It’s basically an optimiser that we put in, based on assumptions like the return, based on the cash flow that we need and then we churn that it needs $1.478 Million.

For retirement?

It means at his age which is 59 years old, actually, he has got more than that. He has $1.6 Million here. He has got about $300,000 coming in right? But we’ve calculated, he doesn’t need the full $1.8 Million. Basically, he needs only about $1.5 Million. Thanks for that question.

So, you add up altogether, as I say is $1.5 Million. And this is the allocation percentages. Now, you will realise that under each bucket, there is this return assumption 1.5%, 3.5%, 5.5%, 6.5% return per year. Now, these are assumptions and these assumptions also mean the kind of instrument that we are going to invest in.

So, if you’re investing in a 1.5% instrument, it’s like your Singapore Savings Bonds (SSBs), you know. Or a money market fund. Something that is very low risk but cannot even beat inflation. A 3.5% return instrument is probably a portfolio of mainly bonds with a little bit of equities. A 5.5% return per year instrument is probably like 60% equities-40% bonds kind of instrument. And then 6.5% will be more. Maybe 70% or 75% equities. The remaining in bonds.

So now, are we okay so far?

So, this amount of money, $329,000 will be invested in the money market. This amount of money, we’ll invest into a very conservative, mostly bond portfolio. This amount will be mostly into equities kind of portfolio. So on and so forth.

Now, you’ll realise that under this income bucket, there is nothing. That is because the income bucket doesn’t invest at all. The money – $340,000 – It is not invested. This $340,000 will be used to buy an insurance annuity. It’s not an investment. It’s an insurance annuity.

This income bucket is also used to collect CPF LIFE payments at age 65. Think of it as a bank account. Your CPF LIFE monthly payment will pay into this income bucket account. The insurance annuity that you used $340,000 to buy per month will also pay into this account. This income bucket is also where you collect your rental of $2,000. It’s like a bank account that collects income.

This income bucket is a very safe income stream, income source. It shouldn’t fluctuate based on the market especially your insurance annuities and your CPF LIFE, it doesn’t fluctuate based on the market. Ok so far? This is your safest bucket. Die die will have. And this bucket, for the first five years of David, he’s going to retire at 59 years old right? And David says that for the first five years, he wants $10,000 which is $120,000 a year.

This bucket will collect from the rental income plus the annuity payout to pay David about $38,400 per year. He’s still short of the difference between $120,000, about $80,000 difference.

Now then, listen carefully. This Bucket 1 started with $329,178 investing at 1.5%, we will begin drawdown at Year 1 already. When David is at 59 years old, we will withdraw about $80,000 per year so that this $80,000 plus $40,000 will give him $120,000.

The $40,000 is the die die will have. The $80,000 will fluctuate a bit because it’s 1.5%. And you see that from $329,000, it draws down $251,000, $169,000, $93,000, $83,000 and then finally it becomes zero. Can you see?

Now, you will notice that between. Ok, I will not explain this first. I’ll explain in a short while. But, in effect, I hope I’m not losing anyone of you because there are a lot of numbers here. In effect, the income stream, that means your annuity and your rental income will give you about $40,000 a year. Then the first bucket will start to withdraw about $80,000 a year until it becomes zero on the fifth year. Your Bucket 1 is finished.

Ok so far? Yes, sir?

The line how come from $83,000?

Yeah. I was about to say that. I’ll explain that in a short while because I wanted to explain but then I didn’t want to disrupt the flow and then we get confused.

Ok, but very sharp. Can you see $83,000 – $93,000? Actually, it goes down but then there’s a jump. And this year is 2016 right? The insurance came in. A $100,000 came in. So, that’s why it jumped. So now, then it becomes zero. So, finish. This one finished. And this bucket finish already. No more money. This will continue to pay because this is an annuity and this is rental income right?

Now, however, this is the fifth year. 2017 already. Bucket 2- $183,936 would have been growing at 3.5% and they are mainly bonds, very little equities. It will grow from $183,000 and it grows all the way until $218,000. Just when this bucket finish, zero. This thing will be $218,000. Ok so far? You then transfer. We will then transfer these $218,459 into Bucket 1. Because this is money needed immediately for the next five years of drawdown. We are trying to reduce the fluctuation as much as possible. So, we transfer from this, even though they are mainly bonds, it’s still risky, still a bit of risk, we transfer to the Bucket 1 that is growing at 1.5%.

Ok so far? So, look at this shaded one. You assume that they are actually in Bucket 1. The drawdown begins – $218,000, $151,000, $92,000 – Then again another jump, right? Because it’s 2020 right? Then the insurance also came in. It’s 2020. Okay? Then it comes down and by the end of year ten, Bucket 2 money also completed. Finished.

When you draw down that time, is it 3.5% still?

Yes, it’s still growing. Yes, it’s still growing. The remaining amount is still growing. Of course like I said, this is all assumption. Because it is possible it’s not growing at 3.5%. It is possible it’s more than 3.5% or lower than 3.5% right? But it’s a plan. And this plan has to be adjusted on a yearly basis. Because I mean you can’t control the market right? The markets are good and bad. We’ve got to make adjustments accordingly. But, you understand how it works behind right?

So this by then, in the tenth year, this is zero. Bucket 3 – $219,473 growing at 5.5% would have grown for ten years. Now, this is a 60% equities in stocks, 40% in bonds. We need about ten years. That’s why it is ten years because it gives it enough time to ride the stock market fluctuation. You need at least ten years. So, you see, it would have grown ten years, this amount $219,000 would become $374,891. And then we will transfer also to Bucket 1.

Because again, money needed for the next five years. So, cannot take risks anymore. So then, it comes down, draw down $308,000, $237,000, $163,000 and zero. Fifteen years have passed. By then, this is even higher risk than this. It would have grown for fifteen years. We need that time for a 6.5% portfolio to fluctuate. To negotiate their volatility.

So, fifteen years later, it will be about $266,000, from $103,000 to $266,000. We transfer to Bucket 1 again. So, it draws down – $219,000 all the way until zero. This would have grown for 20 years. We transfer to Bucket 1 again- $275,000 to zero.

At age 83 years old, Bucket 1, 2, 3, 4 and 5 finished. Income bucket is always money because it’s an annuity. And in fact, age 65, you will see a jump here because CPF LIFE has paid. So, the only bucket left when he reaches 83 years old is income bucket and Bucket 6.

Bucket 6 would have grown twenty-five years, $1 Million. Now, this is the legacy amount that David wants. If everything goes according to the plan of course. As I said, it might not because the market may change. But if everything goes according to plan, it’ll be $1 Million.

And if David is obedient. He’s a good client. He should die at age 83. His children would be very happy, “YEAH! You know, I will get $1 Million from daddy!”

But unfortunately, David is a very disobedient client and he continues to live beyond 83 years old then the children would be very sad. But David would have enough because this is still paying. This is still paying. And he has the $1 Million and he’s 83 years old. The only concern he has is medical but he should have MediShield LIFE or his other insurance you know and all that.

It should be enough for him. I mean if this guy has not enough, I think many of us may not have enough. And he still has a property remember? Yeah. In fact, we haven’t used all his money. He has about $1.8 Million, you know. But we only use $1.4 or $1.5 Million.

Ok, so this is, I know there is a lot of numbers and it’s not the best time to do this at this time of the day. But it’s an example of how people with more should plan. But I hope you see the complexity of withdrawals. It’s not so simple.

That’s why sometimes it’s very difficult. You know when I do media interviews or when I go on panels and people ask, “Is it true that as we become older, we should invest less in equities and more in bonds? Yes or no?”

The standard answer is yes. Because when we get older we should not be so risky right? But if you look at this, it’s not true because David still has a lot in equities you know. Because if you put everything in bonds or low instruments, the money may not last you. You have to put some in equities but you have to space it out. So that the money that is in equities, you don’t need it so soon. You drag it until fifteen or twenty years because it has been shown that if you stretch your investments into the stock market over a long period of time and you don’t try and play around too much, you don’t trade in, don’t trade out, you invest in a diversified portfolio using ETFs you know and all that, you will get the average return. But you need that time.

But monies that you need immediately then you cannot, unfortunately, you cannot beat inflation so be it.

In the near two decades that we have worked with retirees, we understand one thing: Reliability of income is more important than return on investment at this phase of your life. As such, we have developed a proprietary methodology called RetireWell®, that can help you draw down strategically from your retirement nest egg.

Our Retirewell® methodology was featured in The Business Times every month for almost a year in 2017 and has 11 parts to it, namely:

• Part 1: Drawing Down Retirement Money
 Part 2: Offering Retirees Security and Peace of Mind
• Part 3: Low Cost, Consistent Results
• Part 4: Counting on low-cost Index Funds
• Part 5: Investment Philosophy for a Retiree Client
• Part 6: Ensuring a ‘Safe Retirement Income Floor’
• Part 7: Remain Invested Over the Long Haul
• Part 8: Purpose-Driven Retirement Planning
• Part 9: A Tale of Two Retirees And Their Fortunes
• Part 10: Stock Markets Always Rise Over The Long Term
• Part 11: Retirement – It’s About The Kind Of Life You Want To Lead

With Retirewell®, we will design a plan that will give you a safe and reliable stream of income for the rest of your life, with provisions for legacy in the event of demise, so that you can live up your retirement with peace of mind.

We do not charge a fee at the first consultation meeting. If you would like an honest second opinion on your current investment portfolio, financial and/or retirement plan, make an appointment with us today.

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