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Part 1: What is Retirement?

Retirement means many things to many people. If you make reference to Wikipedia, they describe “retirement” as:

Retirement is the point where a person stops employment completely. A person may also semi-retire and keep some sort of retirement job, out of choice rather than necessity. This usually happens upon reaching a determined age, when physical conditions don’t allow the person to work any more (by illness or accident), or even for personal choice (usually in the presence of an adequate pension or personal savings)…

Some see retirement as an age. “When I reach 55, 65, 67…”

Some see retirement as a place. “When I reach retirement…”

Some see retirement as an amount. “When I make enough to retire…”

So what, really, is retirement about? You can see from the above examples that retirement means many things to many people and is dependent on the circumstances that varies from person to person. Those who are on government pensions see retirement as an age when they qualify. If you are on the Central Provident Fund (CPF) system where your employer contributes along with deductions from your salary into your retirement account, then it is an amount as well as age as these two determines when and how much you can draw when you stop working. Those who are able to self-fund their retirement from personal savings and investment and who are truly financially free can retire when they hit their targets for having sufficient passive income purely from investments.

This is important because retirement is NOT THE SAME for everyone. Your subsequent decisions on how you are going to fund your retirement would vary based on what is your situation.

1. Retirement as an Age

This is the most common reference you use when talking about retirement. When you are in your teens, retirement is an alien concept and does not register on your conscious mind. When you are in your 20s and have just started working, retirement is when you see the older staff in your organisation being given a send-off (or not) when they hit 60, 62 or 67 as the case may be. When you hit your 30s and are coming to 40s, retirement becomes more serious as it’s likely your parents would have retired or semi-retired and you would have to juggle career, providing for your family and planning for your own retirement needs.

Age seems to be the predominant factor in deciding when we retire because firstly, many of us are on the CPF system where you can only withdraw some of your retirement savings after age 55. According to the CPF, you can withdraw your CPF monies if you have met the minimum sum requirement AND the Medisave minimum sum. These amounts will be $120,000 by 2013 (Currently $106,000 from 1 July 2008) for minimum sum AND $29,500 (currently $14,000 from 1 Jan 2008) by 1 Jan 2013 for Medisave minimum sum. Hence, you effectively have to have $149,500 (in 2013) being locked up by the CPF at age 55 unless you emigrate (leave Singapore or West Malaysia permanently) or are permanently incapacitated.

The other age is 62 (or 67 by 2013) as the draw-down age. That is the age which you can actually start getting monies from your own retirement funds. I will discuss more on this in part 2 on funding your retirement.

2. Retirement as Place (in your mind)

It is a place in our minds. Retirement conjures up images of sitting relaxed near a beach, watching the waves and taking in a tan while sipping your martini (shaken, not stirred). It is anything BUT your day-to-day grind in your workplace or office. It is about doing what you want with the time that you have without worrying about providing for day-to-day living expenses.

3. Retirement as an Amount

If you intend to self-fund your retirement outside of the CPF system, then you may be working towards retirement as an amount. The concept in theory is simple. Earn and save enough investible capital so that investment returns (%) x investible capital (amount) >= (more than or equal to) your living expenses. Then you are truly free. The beauty of this definition of retirement is that it is not time dependent. If you buy a lottery ticket and hit the $1 million dollar jackpot, then a 5-6% return gives you a cool $50,000 to $60,000 in passive income that is decent by most standards.

What is retirement to you?

For many of us, we realise that retirement is a bit of all of the above three concepts. We know it is about an age because we trade time (in working our jobs/careers/business) for the money we save in our retirement accounts to fund it. It is also an amount because the more you earn now and save and invest, the more you will have to retire on later.

My journey towards financial independence and to reach financial freedom makes me realise that retirement as an amount is a more powerful concept as it opens up your mind to the possibilities of earning more, saving more and investing more in order to accelerate the build-up of retirement income at an earlier age that the statutorily defined 55, 62 or 67. Given the dearth of company or state funded pension plans, the burden of providing on retirement in Singapore falls on the shoulders of you and I. We need to fund our retirements. As the oft-quoted saying goes, “There’s no free lunch”, especially in the Lion City.

Join me in Part 2 where I drill down to the nuts and bolts of getting at how you can fund your retirement.

Be well and prosper.

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Ask the Readers: What Does Retirement Mean to You? - Million Dollar Journey

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We have come to the final step in the journey of transforming your relationship with money from the book, “Your Money or Your Life”. If you have been following my series starting with Part 1, go pat yourself on the back for having the discipline, determination and daring to go the distance with me on this series. If you are reading this as your first post, do check out parts 1 to 8 (links given below).

Step 9: Managing Your Finances

Joe Dominguez and Vicki Robin shares how once you have hit the crossover point, where you monthly income from capital invested is more than your monthly living expenses, you are financially independent. You are able to get out of the rat-race and to determine how you want to spend your life-energy separate from your worrying or thinking about trading time for money. However, reaching that point and making sure your capital stays invested in safe instruments that provide you sufficient income for the rest of your life means you have to find safe and yet decent yielding assets.  They talk about the criteria for your investment capital:

1. Your capital must produce income.
2. Your capital must be absolutely safe.
3. Your capital must be in totally liquid investment. you must be able to convert it into cash at a moment’s notice, to handles emergencies.
4. Your capital must not be diminished at the time of investment by unnecessary commissions, or other expenses.
5. Your income must be absolutely safe.
6. Your income must not fluctuate. You must know exactly what your income will be next month, next year and 20 years from now.
7. Your income must be payable to you, in cash, at regular intervals.
8. Your income must not be diminished by charges, management fees or redemption fees.
9. The investment must produce this regular, fixed known income without any further involvement or expense on your part. It must not require maintenance, management, geographic presence or attention due to ‘acts of God’.

If you are conversant with personal finance principles and have started to manage your own monies, you will realise the above 9 criteria is not easy to meet. The authors suggest 30 year US Treasury Bonds as these satisfy the criteria. Joe and Vicki also share that you need to make sure your cash management allows for you to have capital (to generate your income), have sufficient emergency fund of 6 months expenses and also to provide for a little bit more of a buffer or “cache” to provide even more flexibility and cover for you to stay financially independent:

Capital: The income-producing core of your Financial Independence.

Cushion: Enough ready cash, earning bank interest, to cover six months of expenses.

Cache: The surplus funds resulting from your continued practice of the nine steps. May be used to finance your service work, reinvested to produce an endowment fund, used to replace high cost items, used to compensate for occasional inroads of inflation, given away, etc.

Panzer’s Takeaways

“Your Money or Your Life” is powerful because it brings a distinctly different dimension to how you should approach your personal finance. Most books teach you to maximise income and minimise expenses but the reasons behind it tend to be so that you can have MORE or RETIRE young. “Your Money or Your Life” brings a more human dimension because it features stories of people of varying backgrounds, income levels and lives who have managed to achieve financial independence in their own ways and truly live a life that satisfies them. A life that is truly about “making a living” instead of “making a dying” or working a job to put food on the table but losing your soul in the process.

I realised from this chapter that financial freedom is what we are striving for and even as we get there, we need to manage our finances to keep ourselves financially free. It does not mean to track the markets day by day but to identify safe instruments that provide a decent, regular income with safety in capital protection and continuing income streams. Singapore Government Bonds are the closest thing there is but the returns are nearer to the 3-4% level or near to Central Provident Fund (CPF) special accounts rates of 4% or so.

Financial freedom or financial independence (FI) as “Your Money or Your Life” terms it is achievable for us all IF we apply the 9 step program and are true to ourselves in terms of our values and principles. If our values are not of having “enough” but in “more is good”, then we will never be able to escape from the time-money trade-off that we all start out at some point in our working, adult lives.

After reading this book, I am more convinced now than ever that my dreams of being financially free before the age of 67 are more realistic but I need to re-double my efforts in building up my investible capital and make my life simpler in terms of materialism but richer in terms of relationships and happiness with family, loved ones and with myself.

Getting that extra gadget won’t make me happy. Seeing my daughter’s laughter every day does.

Do you want to be financially independent?

Do you want to know what is “enough” for you?

Do you want to get out of the time-money trade-off running in the rat-race?

Read “Your Money or Your Life” and practice the steps.

Be well and prosper.

Related Articles:

1. Your Money or Your Life - Panzer’s Book Review - Part 1
2. Your Money or Your Life - Panzer’s Book Review - Part 2
3. Your Money or Your Life - Panzer’s Book Review - Part 3
4. Your Money or Your Life - Panzer’s Book Review - Part 4
5. Your Money or Your Life - Panzer’s Book Review - Part 5
6. Your Money or Your Life - Panzer’s Book Review - Part 6
7. Your Money or Your Life - Panzer’s Book Review - Part 7
8. Your Money or Your Life - Panzer’s Book Review - Part 8