Sunday, November 29, 2009

What is a retirement plan ?

Responses to my article have started on http://www.wallstraits.com/wsforum/showthread.php?tid=1719&page=21. I have tried my level best to respond to the feedback but I think the point on retirement plan is worthy of mention in this blog.

Retirement means a lot of things to many people.

Some people think that it's time to travel. Others think that it's time to stop work and start smelling the roses. To some folks, it is a time to spend the rest of their lives minding their grandchildren.

Reality is that many Singaporeans are unprepared for retirement. Many have too little cash assets and have to struggle along with the $300 from the CPF Board along with some allowance from their children.

In a research article by Moshe Milevsky and Chris Robinson entitled "A sustainable spending rate without simulation". A retiree should be spending no more than (Average return - Variance of returns + Constant inversely proportional to median future lifetime). In English, if you have an equity portfolio returning 9% and a variance of 4%, you should not be using more than 5% of your principle capital every year.

I would like to offer my definition for financial independence, which I think would make a better proxy than a retirement plan:

Financial independence is a state whereby your investment/passive/royalty income exceeds your personal expenses.

When your passive income exceeds your expenses, you are doing fine because you may be able to starve off job loss for years without eating into your principal capital. To ensure that retirement is possible, simply spend within your dividend yields and reinvest part of it such that you can live on about 4-5% of your capital every year.

But at the end of the day, retirement is not the point, you can be fully prepared to retire but a good life design to me is one where you can do something that you enjoy EVEN MORE INTENSIVELY. To many other people, it may be more time with grandchildren, but to me, it can be work.

Good investment management does not automatically earn you your happiness. It earns you the freedom to decide what you want to do with your life. And with that freedom, you can even choose to retire, not to retire, or even work harder.

That choice is yours.

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