An Introduction to Retirement Planning
We can’t talk about retirement planning without talking about goals. What do you want to achieve in life? Having clearly defined long term goals – both personal and professional – will give you a direction and an aim. At the age of 30, I set myself a goal: to be a corporate CFO in 10 years. I got there at the age of 41, but having a goal meant that I was very selective about the jobs I took in my 30s, always asking myself if they would get me to where I wanted to be.
Today, the landscape of work is different. 60% of the jobs for the future workforce haven’t even been invented yet! So clear targets may not be as applicable, but having a direction is very important. Planning your retirement is a very personal exercise. Think about what kind of lifestyle you want to live when you no longer have to work. Where do you see yourself living? At what age do you want to retire?
Many young people want to retire by 40, and let me tell you, you’ll need a very aggressive growth investment strategy to get there, topped with a good dose of luck and some financial backing to boot. Your lifestyle also probably won’t be the healthiest. It’s a tough order, and while some people can do it, most of us won’t be able to.
A more realistic goal would be to retire in your mid 50s. I set myself a target of 55, but as I got closer to that age, I realised it might be a little ambitious and decided to retire at 62. Setting your retirement age will help you work backwards to figure out the mechanisms you need to have in place to achieve that goal.
The journey to the moon wasn’t a straight line, and life is always going to hand you a curveball when you least expect it. While the decisions you make should support your end goal, know that you will not get it right all the time. Markets are unexpected: as the global financial crisis and the tech crisis have taught us, big interventions will happen that we have no control over.
With retirement planning, accepting that your plans might need to evolve will help you stay calm and enjoy the journey. This could be due to the cycles of the economy or unexpected changes in your personal circumstances.
The Good, The Bad, and The Underrated
Let’s talk essentials. As you start planning your retirement, having sound financial literacy will make sure you’re not making any decisions that will get you in hot water. Some of you, like me, may already have a background in financial literacy thanks to your career. If not, or you simply feel that finance isn’t an area of strength for you, you can always consider seeking help. There are a lot of financial advisors out there whose knowledge and experience you can leverage on.
When working with financial advisors, you need to do your research. While you might be tempted to work with a financial advisor you’ve built a good rapport with, it’s worth testing the waters to seek a diversity of views. Talk to a few different advisors and get an idea of how they think and what value they bring before you choose someone to work with. Financial advisors can have many great ideas, but some of their ideas can be bad.
There’s no such thing as being too careful when it comes to insurance and financial planning. Most times, advisors are tied to particular product sales, which lead to commissions they earn. As a result, they might try to sell you a product that may not suit your needs or best interests.
I’d recommend that you focus on building a balanced portfolio. As much as we’d love to believe that there’s a silver bullet which will get you rich quick and allow you to retire early, having a diverse investment portfolio is a more realistic and achievable goal.
Location is another important thing to consider when you’re planning your retirement. For example, if you’re based in Singapore, retirement planning is going to look fairly different for you than for someone living in China. If you’re in a major tech hub such as Singapore, Shanghai, London or Israel, you can look at opportunities for investment in technology or fintech startups. Don’t just think about dollar investments! Many startups are willing to give you a 10% stake in their company if you contribute your time and expertise to their business. The rise of global tech giants has meant that some of the wealthiest people in the world have a background in technology nowadays.
It’s an Evolving Journey
Planning for your retirement isn’t going to look the same as it does now and ten years down the road. Like everything else, it evolves as you grow - both personally and professionally.
If you’re in your early 20s, you most likely don’t have the kind of cash flow available to make large investments. Most of what you earn would typically go towards your day-to-day expenses and renting a place to live. Your financial priorities at this stage in life are slightly different.
It also depends on the kind of responsibilities you’re shouldering in your 20s. If you have children, for example, you’ll have much less discretionary income than a single working professional. Look at your income, commitments, and be realistic about what you do with the remaining piece. Start by putting aside 10% of any excess funds you have, and increase that as your salary grows. Retirement planning is about understanding your priorities and working with them.
My first priority was to buy the family home – that was our first investment. Of course, this is country-specific. In some countries such as Switzerland, renting is the norm. Whereas, in Singapore and Australia, most families go on to own their homes. In Singapore, high property costs means that it is difficult for first-time home buyers to bear the costs on their own. Usually, you’ll need some kind of help from your family to make your first property investment. Is home ownership your priority? If not, you could consider investing in a pension or superannuation scheme.
Look up the pension or superannuation schemes that might be available to you in your country. I’d encourage everyone to put 5% of their income into superannuation. The Singapore Government controls the CPF very well, and you can even use your CPF to purchase property. Ultimately, superannuation is a highly tax effective investment. The funds you channel into superannuation schemes will be invested in a range of portfolios, and in most cases you have the option of choosing a portfolio that is low, medium, or high growth. Usually, low growth means low risk, and vice versa.
If you’re in your 20s and 30s, you can afford to put your funds into a high growth portfolio and buckle up to ride the ups and downs of the economic cycles. For example, if you started working in 2007 and put money into superannuation, it was all probably wiped out during the 2008 financial crisis. The smart ones just rode the cycle. By 2010, they were probably back where they were!
However, as you grow and you’re around 10 years away from your planned retirement date, you shouldn’t put all your superannuation in a high risk portfolio. That’s when you should move from growth to preservation. That is, a balanced portfolio that will allow you to safekeep the equity that you’ve built over the years. As you get closer to retirement, you need to start thinking about sustaining an income for yourself when you stop working.
Let me share my story with you. I started off with a home loan to buy our first family home in my 20s, and also invested in superannuation. Those were my first two investment vehicles. In most countries, the first home you buy is usually quite tax effective: you usually won’t get taxed on capital gains or sales.
Our next step was to build equity in our home. As the value of our family home rose, we used that equity to get into the investment property market. Our 30s saw us building our investment property portfolio across Australia, diversified across various regions with different growth rates. Eventually, we expanded to investing in various properties across Europe as well.
My superannuation fund was diversified across Australian and international equities, property trusts, some in cash, as well as in emerging markets. My word of advice? Take your blinders off and look at what’s growing. You might find the best opportunities in unlikely places. As I progressed in age, I shifted my superannuation from high growth to a more stable portfolio that allowed me to protect my capital. This would give me stable earnings I needed as I planned to retire.
Investing in Businesses
As you move from your 30s and into your 40s and 50s, another vehicle that you can consider as you plan your retirement is business investments. While many of us like the idea of investing in businesses, there are many factors you should consider before you take the plunge.
If you’re going out to buy into a business, ask yourself if you have the funds available to put towards acquiring a significant portion of the business. Ideally, you’d have some knowledge or expertise in the business you’re choosing to invest in. If your goal is financial freedom, you should be able to have a firm grasp on the kinds of decisions that are made in the business, and having a background in the industry would be of immense use.
There’s a risk involved if you can’t quite understand how the business works or add value to it. You’re simply putting yourself in the hands of the management and board. While it helps if you have had a prior relationship with the management and can trust them, but I would always recommend investing in businesses that you have some background in. This way, you’re in a better position to assess the business and decide how you want to invest.
For me, it was property. My wife and I bought into real estate companies because we had a good grasp of how the industry worked. It was a natural extension for us: while we didn’t start off fully knowing the ropes, we learned a great deal along the way. What are some adjacent businesses that you have a good background in? Look at investing in these businesses first.
Protecting Your Interests
The mechanics of business investment also differ if you’re buying shares in a publicly listed business that can be traded on a stock exchange versus owning a stake in a private business. In a private business, make sure you start with a 20-25% stake in the company and work your way up.
The idea is to own at least a third of the business: this is a meaningful stake in a small company. In your research, look into what percentage of shareholding you need in order to be a director or appoint one of your own? In most companies, a 20% stake will allow you to appoint a director to look out for your interests. This will allow you to have oversight of the governance of the company.
However, the fact of the matter is that you can’t call the shots if you own less than 50% of the company. In fact, some people will look specifically for 51% ownership because they want to be able to steer the ship – that’s a lot of money to invest in one company.
You don’t have to make that much of an investment to have influence. Who are the other shareholders? Try to get a sense of how they think and what their perspectives are. If you can align with one or two shareholders, together you would have a majority. This would allow you to get something through if you need to.
Prospects For Growth
How you invest in a business is tied closely in with the growth prospects involved. If it’s a boom or bust speculative situation, you should start with a smaller stake that can grow over time if you choose. For example, my initial stake in a tech company was much lower than my investment in a real estate business where I went for a third of ownership. As you can see, having background and knowledge in the industry will allow you to invest with confidence.
Think about how you can sell your stake in the company. Unlike publicly listed companies, private businesses will need you to find a buyer for your stake. Consider whether your existing shareholders will buy you out or whether you’ll have to find an external party to do so. Ideally, you’ll have a good working relationship with the other investors and directors. This will help you not only evaluate the growth prospects but also sell your stake if you choose to do so.
The bottom line? Is the company successful enough to deliver an annual dividend? At the latter part of your career, you want to think about investment vehicles that will guarantee you a passive income when you are no longer able to work.
Adopt a diversified approach. Think about investing in companies that will give you dividend flow which may not have high growth, and other companies that will give you capital gain such as tech companies.
As you inch towards your retirement age, you should lean more heavily on businesses that will give you a regular income flow. It’s all well and good to have high capital growth stocks in your portfolio, but they won’t put food on the table until you sell. Find a balance that works for you.
I’d recommend that in the early stages of your career, capital growth can be your priority. However, as you come closer to retirement, look at preserving capital and lowering your risks. Your priority at this stage is to gain yields. You should also think about how you can become increasingly tax effective as you near retirement. Look at trusts and companies in your jurisdiction that can help you shave off your taxes.
A Fine Balance
Of course, managing your various investments will take a lot of time and effort. My wife is a director of three companies we have invested in, and I am a director of one. This is all on top of my demanding corporate day job.
Ask yourself if you’re able to commit the time and effort to your various investment vehicles. One option is to appoint alternate directors whom you can trust. For example, my daughter is a director in one of our companies, and she takes the lead on key decisions that are made. You have to be realistic about how much you can actually do.
My wife and I have a little Sunday morning ritual, where we give each other a financial update over our coffee. As you build investment streams over your lifetime, your portfolio will be diversified and need your attention. When you fail to keep your eye on them, things can go wrong very fast. Whether it is property, equity, businesses, or tech stocks that you choose to invest in, you’ve got to periodically be thinking about each asset class and make tweaks along the way.
If this is something you cannot do, don’t even go there. You could instead appoint a trustworthy financial advisor to manage your portfolio for you. You would have to pay their fees, of course, which would be deducted from the income they generate for you. Obviously, you will gain a lower return than if you’re personally involved in your portfolio.
It all boils down to the life you want to live. You are the best judge of your strengths, and certainly you know best what you want. Retirement planning is all about putting the pieces in place today that will allow you to shape the life you want to live after you stop working.
Steps to Take in 24 Hours
- Set Your Retirement Age
Set yourself a realistic target age by which you’d like to retire in an ideal world. Let that goal inform the decisions you make in the years leading up to it.
- Envision Your Ideal Lifestyle Post-Retirement
Plan where you’d like to live, and how you’d like to spend your time post-retirement. That will give you a sense of how and where to make your investments.
- Embrace Resilience
The pathway to achieving your goals for retirement will never be a straight line. You won’t get it all right, all the time. Learn how to take the unexpected in your stride.