When it comes to retirement it can actually be a very stressful period because that is a point in life where you're vulnerable. You may not be able to get back to work so easily. Even if you do, pay may be different.
And the fear is that your bank account can start to look less.
You may know that feeling especially if you have been retrenched before or been in between jobs before. You’ve seen that bank account figure sliding down. The fear lingers every time you have a big purchase.
That's why retirees in general fear running out of money. It is a very real thing.
There’s a study by JP morgan that found that 80% have still had the retirement savings they started with after two decades. They are not spending that money! Is it is the fear of running out? If it is, then it's very sad indeed.
Unless they are really happy just to consume dividends.
Or that their dividend income is way WAY bigger than their expenses!
But really, everyone really has one life. For those with too much wealth, have they retired too late?
The question is if we hold on to the retirement savings dearly and suddenly pass away, then it's just for the next generation. We've missed spending on possible life experiences that wealth could have bought.
But anyway, let's look at the retirement math.
If you want to have $5,000 retirement income through dividends, that means $60,000 a year. That means you need a $1.2 million investment port to consume $60,000 perpetually. If it’s dividends, your investment port is not affected at all. What can get you 5%pa? It surely isn’t bonds correct? Perhaps high yield bonds can but there is volatility there too.
What about for equities? Equities are great, in theory bank stocks and reits can pay you 5% in dividend yield and have it grow over time with inflation. However, stock investing has risk.
What if banks get challenged by digital banks and fintech firms in future?
What if the reit you bought starts to shrink dividends due to poor operations. By the way, there are many of them who have done so. It is actually harder to find REITS who have grown their DPU (dividends per unit).
How about investing into STI index instead to get banks and reits? Or how about funds focused on investing into high dividend stocks. They can even invest into companies listed outside of singapore and diversify for you. Wouldn’t it work?
I think it boils down to how comfortable you are with volatility when you retire?
Do note, it may be harder than expected because remember, we are retired. Protecting that capital is a bigger priority now. There may not be new income to top up into the investment pot.
Right now, markets are plunging.
A 30% decline on your starting $1.2m pot will leave you with $840,000 in value left. A 50% decline means $600,000 in paper losses...
Moreover, what if dividends get cut? Stock dividends unlike bond coupons are NOT fixed. We've seen that during the pandemic when banks were instructed to conserve capital and cut back dividends. We've seen REITs pay less because they were giving "rent-free" to tenants.
Hence, a mix of assets or a MORE thought out retirement approach is needed. We will cover it in a subsequent post…