Category: Core Modules Offshore

Do you know that by just reducing your monthly expenses by a few hundred ringgits at the onset of your retirement, (and then increase it progressively with inflation of course), you are actually buying yourself a few more comfy retirement years?

Else, the other option is to save another RM 200,000.

Is it easier to accumulate an extra RM 200k, or is it easier to live with a few hundred lesser every month?

This is the power of scenario modelling analysis.

The lecture below demonstrate this using a simple example.

It is not about how much you have in your retirement funds.

It IS about how you manage your retirement funds post retirement.

Also, understand the 2 important things which conventional retirement calculator may fail to take into account.

First, is the capital liquidation vs capital preservation method in computing your retirement lump sum needs.

Second, how to compute inflation-adjusted investment rate.

It will be folly to assume it’s all bed of roses when it comes to investment return during your retirement. Again, the most crucial thing is how to manage your investment loss intelligently so that your other financial goals are kept as intact as possible.

Having said that, the order of occurence this investment loss matters a lot. The impact is very substantial at the start of your retirement, while it is somehow “softer” late into your retirement landscape.

Let me rephrase this to highlight its importance.

It matters A LOT how your investment performs in the first few years of your retirement. It is known as the sequence of return problems and best illustrated by an example below.

Traditional retirement model DON’T consider this. Real world retirement planning must address this problem, so Retire Method aims to accomplish this.

Sequence of return can dramatically impact how much you can safely spend from your savings.

Same compound return percentages, different sequence of returns, vastly different results.

The Retire Method Scenario Modelling is based on the following 3 pillars:

1. Investment asset Preservation & Growth which beats inflation, without utilizing the capital itself
2. Sustainable Spending from Income generated by Investment Asset
3. Creative Life Planning

Conventional retirement plan or calculator is built on the assumption that you incrementally withdraw your annual expenses during your retirement years, in tandem with inflation rate, to, so-called, sustain your retirement lifestyle.

This is absolute nonsense. Nobody lives this way, and we don’t have to retire to know this.

In real life, whether we are retired or not, we adjust our spending based on the success or failure of our careers and the income generated by our job/business.

Why should retirement be any different?

If you retirement nest egg got hammered by negative investment return during the first few years of retirement, are you going to still increase your annual expenses withdrawal that few years?

Of course not, that would be foolish.

You would reduce your spending based on adverse circumstances in the first few critical years at the onset of your retirement. It is a prudent, common sense thing to do, but it is not included in conventional retirement planning because it is difficult to model.

The point is, increasing withdrawals in tandem with inflation cannot be applied blindly.

Similarly, do retirees really spend more in living expenses (excluding medical expenses) each year as they get older?

Actually, the opposite is the case.

It is likely that retirees reduce spending as they age. They spend more in the early years of retirement, perhaps with all the travelling, etc when the health is still strong (touch wood!), and then reduce spending as their energy and health decline with age.

Another thing is about the magic of compounding returns, but the truth is, that it is less relevant post retirement compared to 10-20 years pre retirement. Retirement time horizon is usually relatively short, so spending and saving plays a bigger role. The issue is how much can be saved and reinvested, and how little you can be happy spending. It takes many years for a 5% increase in investment return to demonstrate its value, and then again, potential higher return translates to higher risk – something you want to keep in check during retirement.

Also, it is a flawed recommendation to be not growing our investment assets (example, bond funds) if you have like 20-30 years to go in retirement.

Flexible spending opens up so many possibilities not modeled in conventional retirement.

Let’s start with the 4% withdrawal rule. The rule states that , if you never spend more than 4% of your investment asset balance each year, then you increase the odds of living your retirement life with lower risk of running out of money.

But that is just a guideline, not a rule. It is not a guarantee, but in increases the likelihood.

Note that the huge part of our post retirement financial risk is determined by the sequence of returns and inflation during the first few years, or the first decade, if you may. As covered previously, one need to adjust the strategy based on actual performance of his or her retirement/investment assets and certainly should not blindly increase the amount spent every year by the inflation rate.

In summary:

• Only increase your spending if your investment asset is growing. Else, keep your previous year expenses.
• Reduce to 3% spending of investment asset during bad times, when asset not growing.
• Reward yourself to 5% spending of investment asset during good times, during economic boom.
• You could spend more in your early years then reduce spending (forego inflation increases) in later years when you don’t need as much money
• You could spend more in the early years and reduce your spending if you are unfortunate enough to endure an adverse returns sequence in the first decade.

These are the mix-and-match variations on how to approach withdrawing money. The bottom line is, you don’t have to be a robot and mindlessly follow the inflation rate into eventual financial tragedy. Adjust spending based on actual results (growth or decline) of investment portfolio, not based on behaviour or conventional retirement model.

To rephrase the points above, the strategy employed now is annual withdrawal tagged to a fixed percentage of your principal (aka retirement asset balance). This virtually eliminates risk of failure but causes variability in income based on portfolio value fluctuations. As the retirement balance rises, you will withdraw more and as your assets fall you will withdraw less. Whether or not your spending keeps up with inflation would be determined by the growth of your assets.

Flexibility and rationality are the keys. This will alleviate the risk of running out of money.

One-size-fits-all is a static concept used in conventional retirement plan or calculator. They are naive and dangerous. Don’t buy into it, even sometimes it is conventional wisdom.

With everything thus far combined, we have the Retire Method Retirement Scenarios Modelling system.

Conventional retirement model often has this downfall – you get big variations in the amount of savings required to retire by changing the assumptions you put into the model. The fault is not the model itself, but the assumptions, which is static for many years in question.

But it don’t have to. You can adjust your assumptions on-the-fly, throughout your retirement years, each year independently.

In this lecture, this video will explain what each and every of the column is about the Retire Method model, and how to go about keying in the required input for subsequent tutorials.

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If you need guidance, do give me a call @ 012-8111096

Throughout this module I only use a conservative 6% per annum return, compounded over the years. Why?

It is the yardstick for real estate investment – 6% rental income yield, at minimum.

But today, I will show you exactly how to confidently get 6 percent or more from your investment even during downturn. No bold promises of huge return, just very down to earth rate of return which makes sense. Reinvest this absolute amount during downturn, and pave the way for capital gain when market bounces back.

Another thing I want to mention, before you watch the video below, is average return.

You CANNOT just take the average historical return of the stockmarket or a unit trust fund over a period of time to use as your assumption in your retirement planning/management.

For example, if the market is up by 30% this year and then down by 10% next year, can you assume that your average return is 20%?

Hell NO. Your return is 17% instead, by using the absolute value of return. Here’s how:

You have $1,000, with 30% return, you will have $1,300. Then, you lose 10%, your money will go down to $1,170

So over a period of 2 years, your return is 170/1,000 = 17 percent.

Seemingly small percentage different like this make huge difference when compounded over a long period of time.

Here’s another analogy, for the fun of it:

If you are a man, suppose I kick you in the groin now. The impact lasts 2 seconds. The pain will be excruciating right?

Now imagine that impact is averaged out over a period of 24 hours. It is like a gentle touch (by your wife or girlfriend, hopefully) every single hour for 24 times.

Click on the below article to Enlarge (Don’t squint your eyes!)

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  Worksheet Illustrating Simple Average vs Compound Average Return

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  Worksheet 97 – 2003 Illustrating Simple Average vs Compound Average Return

Side note: No investment or financial instruments are totally commission free. We can only minimize it, but not eliminate it. In this example, we have not take into account the brokerage fees when you buy/sell the stocks. It could range from 0.05% to 0.6%, depending on brokerage and your transaction size. Take this into account too when computing your absolute returns. The worksheet attached already has the columns for you to fill in your investment-related expenses which would effectively reduce your total investment income.

Disclaimer:

This is not an invitation to buy or sell. The ideas expressed above are best-effort simulation. Any action that you take as a result of the analysis above is ultimately your responsibility. You may want to consult your investment advisor before making any investment decisions.

Bonus Video:

Previously, I conducted an interview with Mr Lai Seng Choy, the author of the book titled Freedom. This interview is about an hour long, talking about mindset and how he manage to retire earlier than his intended age of 45 years old.

I put this video here too is because of his unbiased view on REIT investment as an income-generating instrument. Skip to 39.30 mark to listen to this.

But I’d say the whole session is worth listening a few times over.