Pre-Retirees – Is Your Money Working Hard For You?
Pre-Retirees? Who are they and what are their concerns?
I will define ‘pre-retirees’ as the group with another 5-10 years left in the professional tank before retirement. They often question whether investments, in equities and bonds, suit people running on the final bend towards the finishing line.
Apathy towards investing inflicts many Singaporeans, but I will zoom in on the pre-retirees in this article. In a BlackRock global investor pulse survey in 2015, with 1000 Singapore residents between the ages of 25 and 74 taking part, the respondents expect 8.4% target return per annum.
However, the very same survey reveals all groups, including pre-retirees, allocate a disproportionately large amount into cash. Pre-retirees for example, have 46% of their assets in cash. So, while Singaporeans want to generate income and investment growth, there is clear misalignment between aspirations and actions.
Retirement, and pre-retirement, present the ultimate challenge in financial planning, as no single instrument is adequate in terms of meeting all the financial needs involved. There is a need for financial protection against adverse life events, like disability and hospitalisation. There is a need for liquidity and emergency fund. Importantly, having sufficient wealth and income is a pre-requisite so people get to enjoy their golden years, free from the shackles of monetary worries.
Many Singaporeans, including pre-retirees, are torn between generating enough wealth and savings for retirement, and protecting their resources. Many err towards the latter, preferring to take shelter in the perceived security of financial safe havens, like fixed deposit and savings accounts.
Investment risks? Real or fallacy? Do we fear them? Need we fear them?
So, are there investment risks? Of course there are. Investing, much like most activities, entail risks. We face the peril of being hit by a car when we cross the road. When we walk up or down a flight of stairs at the MRT station, we may trip and topple over.
What do pre-retirees do when their investments decline in value? Panic, get out of the market and lick their wounds? How should pre-retirees handle market volatility, and take market swings in their stride? As pre-retirees have the finishing line of their careers within sight, should they just take the safe approach?
Another concern among pre-retirees may be the short runway, which results in little or no margin for error. As they draw the curtains on their careers and walk into retirement, they want an assurance their financial resources will be waiting for them when they transition into retirement. Do investments rank high in that regard? Can investments function alongside other instruments like annuities, and liquid assets like savings accounts in the pre-retirement years?
Also, pre-retirees want to understand if the yields from an increased level in risks undertaken, can really help them muster more resources for their golden years. Low-interest bearing instruments like savings and fixed deposit accounts set out to preserve, not generate wealth. The preservation of wealth is in fact, a misnomer.
Non-promotional fixed deposit interest rates hover well below 2% per annum, and struggle to keep pace with inflation (MAS core inflation for Year 2018 is 1.7%). Can investments then, do a better job in really preserving and generating wealth? What investments are suitable? Bonds versus equities? Investing by sector or geographical market? Why do we hear of people losing money in investments, even when the markets are doing well? Which part of the script are they not following?
Valid concerns the above are.
Let’s embrace and manage the risks. No risk no gain!
Let us look at the yields from investments. The Morgan Stanley Capital International (MSCI) indices, which provide a measurement of equity performance and benchmarked against, fared positively in the 10-year period leading up to April 2019, highlighting how stellar equities in global and Asia Pacific markets have performed.
Sceptics may point out that the good performance in the 10 years leading up to April 2019 leaned heavily on the recovery which commenced in 2009 from the housing and financial crisis the year before, which had precipitated a market meltdown.
However, even if we strip out the effect of that pronounced recovery and place our focus solely on the last 5 years preceding April 2019, which included a severe market correction in end 2018, the MSCI All-Country (AC) Asia ex Japan index and the MSCI All-Country (AC) World Index, still fared well, far outstripping inflation and bank interest rates.
We should look at annualised returns in another context. A person who invested $10,000 in April 2014 in Asia Pacific equities, would have seen the value of his investment rise to $13,836, around $2,800 better off in April 2019, compared to a similar sum placed in a fixed deposit account at a comparatively generous 2%. $2,800 difference on a mere $10,000 invested!
This superior return would have provided a fillip to his retirement planning. Even the most conservative bond funds, like the ABF Singapore Bond Index fund (5-year annualised return 2.39%) which invests in primarily Singapore government bonds, beat the returns from fixed deposit comfortably!
Investment risks, pertaining to namely market, political, default and other adverse investment conditions, are ever present. We need to recognise that risk, and potential reward, go hand in hand.
However, just as we mitigate our risks on the road by being more vigilant before crossing, and holding onto the handrail as we navigate a flight of stairs at the MRT station, we can manage investment risks by:
- Choosing the right portfolio in keeping with our risk appetite, and importantly, with our savings time horizon. Funds which we require in the immediate period post-retirement, should be in lower-risk investments compared to resources we will only need further down the road. As we approach retirement, there is a still a window period for us to park money in higher-yielding asset classes which have higher volatility. When we retire, that option may no longer be suitable considering our reduced risk appetite, and demand for liquidity. Some investments though, can also be an asset post-retirement, as they provide regular dividend pay-out which can be used to supplement income from other sources, like CPF LIFE and annuities.
- Using a disciplined, dollar cost averaging approach when investing, thereby reducing ‘timing’ risks, and capturing opportunities during market downturns. As tempting as it is, avoid timing the market. Let the market cycle take care of itself.
- Diversifying across asset classes and markets to limit specific risks
- Selecting the best-in-class funds for each asset class and market based on key quantitative and qualitative parameters.
- Having a trusted financial adviser to assist with the above. Follow the script, with the help of the trusted advisor.
Conclusion: Work the money hard!
Many of us have worked hard throughout our lives for money. With safeguards, the right investment approach and behaviour, we can turn the tables, and have our money work hard for us. Investments can be a very helpful friend, working alongside such other mates as insurance (protection), and annuities, in providing the financial means towards securing a fruitful retirement.
In football terms, while we move into the 70th – 80th minute of a match and we lead 1-0, we hope to protect the lead but at the same time, find ways of scoring another one to secure an unassailable lead and win the game. The pre-retirement years present a ‘last chance saloon’ to work our money to the max.
We work hard for our money, so why not hold our money to the same exacting standard?
Article by Leon Loh
The writer is a financial adviser representative representing GEN Financial Advisory Pte Ltd