An investor may consider to change the usual way of cash saving for retirement fund (100% cash based). There is an alternative retirement fund plan which is stock investment based (could be 80% in 10-20 giant stocks + 20% cash as emergency fund). One has an option to do saving or fixed deposit through stock market, not simply saving in bank with lower return.
Cash from active income (decades of working) could be converted into a portfolio of giant stocks with growing business (best during financial crisis with significant discount in share price with the same value), generating free cashflow, giving dividend (which also supports the rising price in future if one could wait patiently). A retiree could depend on a portfolio of stocks in retirement fund to pay for expenses with dividend, if needed, partial profit taking from capital gains without reducing the initial capitals. A yearly review is required to replace weaker stock (if fundamental or economic moat is weaker) with stronger stock. Usually for retirement fund, defensive growth and dividend stocks in growing sectors with stable country economy are preferred.
Let’s compare 2 types of retirement funds:
1) Conventional Retirement Fund (100% Cash from saving)
– Growing fund by cash deposit with bank interest rate or very safe investment (eg. Singapore Saving Bonds) with 2-3% return, barely offset the long term inflation of 2-3%.
– Depleting fast, requiring huge amount of initial capital due to low return with no income after retirement.- Require huge initial capital (eg. over $1M) to maintain a reasonable quality of life after retirement with low interest which is comparable with inflation rate.
2) Retirement Fund (80% in Giant Stocks, 20% cash as urgent fund)
– After retirement, portfolio of giant stocks (10-20 for diversification to minimize unsystematic risks) could continue to generate an average return, typically capital gains + dividend yield > 10%-20% yearly, actual return depends on individual strategy and market condition. During the downturn of market (assuming not selling stocks) during crisis (could be 1-2 years), 20% cash or dividend from stocks could help as buffer if there is capital loss during this period.
– Initial capital of retirement fund may not be depleted if capital gain + dividend > expenses. If not, plan for an initial capital (which could be lower amount), including selling of partial stocks yearly (as if fixed deposit in stock market, selling stocks for cash), gradually towards max lifespan, eg, very conservative planning of 100 or 110 years old (a good problem to have if so long life).
– Planning for retirement fund depends on many factors, including lifestyle after retirement (monthly expense with consideration of inflation), safety of investment, etc. Assuming a conservative return of capital gain + dividend yield, total of 10%/year, assuming someone who retires at 60 years old, required fund = $5000 / month (average expense with consideration of future inflation) x 12 months = $60000/year, then one would need at least $600,000 capital to generate 10% income yearly to pay for this expense (assume initial capital of retirement fund can be kept till end of life, then pass to next generation).
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In short, start retirement fund planning now, it is never too late (yourself in future will thank yourself now for taking action). Even one has already retired, still can modify the plan (eg instead of live with past cash saving, also considering saving through a portfolio of defensive growing dividend stocks), aligning with own personality and individual needs. This way, one could lessen the burden on country or next generation. One could enjoy happy and fruitful retirement life when financial need is taken care at early stage.
Even after one has stopped working after retirement, the money (capital) accumulated over the past decades of hardwork could continue to work for us but need to learn the right ways of investing. Readers may learn from free 4hr stock investment course by Dr Tee to plan for own retirement fund with defensive growing dividend stocks globally in diversified growing sectors.
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