Flickr Image by johnmarcos.

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!

Image by orvaratli via Flickr

The more I read about the potential losses suffered by Lehman Minibonds and related structured products investors, the more I realise the importance of asset allocation as you grow older and nearer to retirement age or age where you would want to stop working.

Many of these investors who were near retirement age were looking for safe havens for a decent 5% return but instead are staring at potential losses of up to 100%.

The Monetary Authority of Hong Kong had already referred 24 cases of possible mis-selling to the Securities and Futures Commission for investigation and Singapore’s Monetary Authority of Singapore has also launched formal inquiries into allegations of breaches of law, inadequate internal controls by financial institutions or poor sales practices by their representatives.

One of the issues that has triggered complaints was why retirees or pre-retirees were sold on such risky products? If you were informed that the investment had a possibility of up to 100% losses in return for potential 5% returns, would you have invested?]

Probably not!

Asset Allocation for Retirement

Unlike investors in their 20s and 40s who have a longer time horizon in recouping investment losses (either realised or unrealised), retirees or pre-retirees are near to the end of their economic lives. Some choose to retire why others would be retired by their organisations. It is tough for them to recoup such losses at their age without taking even more extraordinary risks.

Thus, as you and I approach our financial freedom goal and especially if we are working as salaryman or women, you should consider your asset allocation of your investments as you approach the time when you want to stop working and start retirement.

Ideally, you would need to look for very safe investments, i.e. capital is guaranteed or virtually guaranteed which returns you regular income. The asset classes to be considered would tend to be virtually risk-free Singapore Government Treasury Bills or Government Securities such as bonds. These can yield higher tax-free returns than fixed deposits and yet are as safe as Singapore’s sovereign risk rating. I.e. unless the Government of Singapore goes bankrupt, the bonds will be redeemed and the coupons (interest) paid.

However, it is very difficult to find double digit returns on such safe investments.

Some blue chip companies listed on the SGX can yield more than 5% at current prices but the dividend payout is not guaranteed since the company can choose to not pay dividends to conserve cash and reinvest in the business.

Thus, in your quest towards financial freedom, unless you are able to accept the volatility of investing in high-yielding blue chip companies, you may need to rethink how large your investible retirement savings need to be in order to generate the $xx,xxx per year for financial freedom.

Be well and prosper.

Related articles by Zemanta

• Safe Investments in Singapore in light of Lehman Minibonds and DBS High Notes 5
• How to Retire During a Financial Crisis
• Where to Put Your Retirement Funds

Savings and fixed deposits are now even safer than before. Previously, under the deposit insurance scheme administered by the Singapore Deposit Insurance Corporation, your savings and fixed deposits were guaranteed up to $20,000 for each account with your bank. Now the Government has extended the guarantee to cover all your deposits exceeding $20,000.

That’s good news as it restores confidence. I don’t think the Government is doing it just to reassure investors. It is part of measures to keep Singapore’s wealth management industry competitive given that Hong Kong, Australia and New Zealand has given similar guarantees for bank deposits. If the Government didn’t do so, there is a risk of funds flowing out from Singapore to Hong Kong where the guarantee makes it less risky for savings there than here.

Singapore is just playing catch-up. The interesting bit is that foreign currency fixed deposits, which was previously not guaranteed under the deposit insurance scheme is now covered unless this government guarantee which will last until 31 December 2010.

If you are still parking the bulk of your cash in local banks savings deposits at the miserable 0.25%, consider putting your money to Maybank iSavvy which will be paying 1.08% interest for savings accounts $5,000 to $50,000 and 1.38% for savings exceeding $50,000. This is even higher than Fairprice Plus Savings that had been paying 1% interest on all balances. Even Finatiq’s investment savings account pays 1.2% for all balances.

Be well and prosper.

Related articles by Zemanta

• US Muses Backing All Deposits, No Deposit-Insurance Ceiling [Money Meltdown]
• Singapore Tops Hong Kong as Center of Commerce
• Singapore U-turn, guarantees all bank deposits