If you are in your 20s, 30s and even early 40s, retirement may be something that is far away. It is a concept that is fuzzy, just as personal finance knowledge among the average person is also fuzzy.

The recent debacle arising from the collapse of Lehman Brothers’ resulting in derivative investment products such as Minibonds and High Notes sold by financial institutions and intermediaries has made me rethink about retirement now even as I have not hit the age of 40. It has made me think about the future using the framework of black swans, which are rare events that have a significant impact.

Why does retirement planning have to do with black swans?

All of us have to deal with retirement one way or another. Some of us may approach it by saying we will work until our CPF Life runs out or we die whichever comes first. Some of us may be betting on the Monday or Thursday TOTO ticket being our answer to the retirement funding issue. Others of us may just believe in living within our means, saving and investing, growing and protecting our means.

Whilst I believe in the financial freedom principle of being prudent, working hard and saving for the future, the pitfalls of not knowing what the future holds means that I should re-think about retirement planning.

Black swans are present in our retirement futures. Whether we can fund and enjoy our retirement really depends on a few variables. Our economic working life, our lifespan, our healths and our family lifestyle needs are all various factors that impact how our retirement plans can succeed or fail as dramatically as the recent financial crisis has resulted in many people’s retirement funds being reduced due to the fall in value of their investments upon which their retirement funds are based.

The current financial crisis is a black swan event many people who are in their retirement years now or soon would not have predicted. But even as the High Notes 5 investments are now technically worth zero dollars, those who put all their monies there thinking it was a safe retirement investment vehicle would have lost their entire retirement savings outside of CPF. Unless they are the ones who fall under the vulnerable category and get some compensation, the Lehman debacle has generated a negative black swan event that destroys their hope for a funded retirement.

How to rethink retirement in the light of possible blacks swans?

The risk of a black swan event happening for my own retirement (or semi-retirement) before the age of 67 means that I now have to invest in preparedness rather than in saving and investing and praying that the stock markets, bond markets or whichever markets upon which my retirement funds are placed do not crash.

Of the areas of [1] living within my means, [2] saving and investing, [3] growing my means and [4] protecting my means, I see that I have to continue with all 4 steps but pay particular attention to [3] and [2]. I had taken the approach of putting about 65% of my portfolio in equities (stocks and shares) but realise this is susceptible to market downturns upon retirement. This makes me increasingly favour an approach of putting more of my savings into more conservative places such as fixed deposits, treasury bills, government bonds. Equities have a volatility that as a future retiree I cannot accept.

I also am becoming more open to growing my means more in internet ventures. My tinkering in blog monetisation has started to yield some returns that can in the future pay off my daily subsistence (but not more). This makes me realise that the model is sustainable in the long-run but would require my commitment and continued investment of time, effort and energy into maintaining the blogs.

My experience in blog monetisation has strengthened my belief that you need to really tinker and experiment with small ventures before they take off. My own blogging efforts are close to two years before I start to see some growth. There’s still no substitute for hard work plus a dose of luck from playing around and implementing ideas online.

One of the factors pushing me towards this is the realisation that ultimately while black swans abound, you can still do something about it to make yourself more prepared and less likely to be killed by them. I hope that these experiments in growing my means plus rethinking my savings and investment approach would pay off when I do plan to retire in 15-20 years’ time.

Learning something new and doing something with it

What have you done to learn something new every day, every week or every year? Have you learn something new, put it into practice that allows you to be better at [1] living within your means, [2] saving and investing, [3] growing your means and [4] protecting your means?

Be well and prosper!

Flickr! photo by Angelrays.

Financial Planning is as much an art as a science

Financial planning involves a few steps. It needs to first establish what are your assets and liabilities. What are the lifestyle expenses you need to cater for and how much you intend to retire on giving your income and expenditure.

Panzer is NOT a financial planner, hence, his approach is just a quick bluffer’s guide to help you do your own common-sensical retirement nest egg planning in 10 minutes or less depending on whether you can decide quickly on a few key variables.

Follow my calculations at YOUR OWN RISKS!!!

Calculating your retirement nest egg amount

The concept is simple, but sometimes the experts make it complicated.

What is the principal amount for your nest egg (investment capital)

To retire, you need money! So the key question is HOW MUCH DO YOU NEED. Now why do you need money? You have to eat, you have to go out for your leisure, daily activities, medical, transport etc… Let’s say you can live on say, $2,000 a month living expenses excluding your home. So in order to generate $2,000 a month, you have to save up your retirement monies (CPF+cash savings/investments + insurance proceeds – guaranteed amount) to such a figure that xx% returns x figure = $2,000 per mth or $24,000 a year. How do you calculate that figure.. wait for a minute, let Panzer show you the returns thingie first!

What is the rate of return you can achieve?

Hey, what is this xx% returns? This is the returns your retirement nest egg or capital is supposed to generated to give you the income to live on (for eternity or RP90 whichever comes first!).

So assuming you can get 5% return (say from punting on SPC shares yielding $0.40 final dividend at $7.15 per share), in order to generate $24,000 a year, you need to save a FIGURE of $24,000/5% = $480,000. That is excluding your home. If you monetise your home, where will you stay?

Input rate of return + how much you need per month and viola!

It’s that simple. Of course, this computation excludes your home which I have assumed you paid off fully. Let’s say, rental costs you say $1,000 a month (for 1 room), so you need to live on $3,000 a mth, then at 5% returns, you need $720,000.

This is a quick and fast way to give you broad figures to play around.

I use this for my own financial planning, i.e. basically my retirement or semi-retirement is when I can reach my nest egg figure assuming my lifestyle is $x,xxx per month, realistic returns of 5% or so and my home is fully-paid for.

Using this simple model, you more or less can see that if you intend to retire earlier than 67, you basically need to live within your means or simplify your life. Save and invest, the higher the achievable returns, the smaller nest egg you need to save and set aside and the earlier you can semi-retire.

A sibling of mine remarked in today’s age, there is no such thing as retirement as once your purpose in life stops (i.e. working for a living), you will to exist ceases. Hence, plan plan plan for your semi-retirement to be financially free so that you can pursue your heart’s desires.

Be well and prosper.