Read? 4 Retirement Myths That Singaporeans Believe In
4. My investment will continue to do well till retirement
Here is why.
Most investment plans are successful in the long run due to the effect of compound interest. It is easy for any financial planners to excite potential customer on how much he can have if he starts investing today for the next 30 years and generate a 5% annual return.
For example, an annual investment of $5000 (about $400 monthly) into investment plan generating a 5% return would provide about $175,000 after 20 years. Give this 10 more years and the amount would double to about $350,000. Exciting stuff isn’t it?
What many people don’t realize is that compound interest gives a higher weight to returns in the tail end of an investment plan. That basically means that the returns generated in the last 5 years of your investment plan is far more important than the returns you get in the first 5 years. For example, if the first 5 years of your investment provides a negative return, it is okay and you can recover from it. If it happens in the last 5 years, your retirement plan is basically screwed; it is as simple as that.
Asset allocation is the solution to mitigate this risk. It basically says that as you grow older, you should be taking less risks, not more. Sadly, some Singaporeans do the exact opposite.
Uncle8888 did the opposite of (4) as he doesn't hope too much on his investment to produce continuous and steady cash flow year after year till his 80s.
No. Volatile stock market by nature doesn't work in this way. We cannot trust the stock market to produce continuous and steady investment income across future economics cycles and sector rotations.
After reading so many books on retirement preparation and Google for so many months; he finally settled down with his preferred Retirement Income for Life strategy - His Three Taps Solutions.
Uncle8888's Wealth Formula:
Wealth = Asset Value + Cash Flow
Asset Value by nature is volatile and we have no control over it.
But cash flow is different, we can still manage it to provide us with an adequate level to sustain our well being. Right?
Who Moves My Cheese?
4.3% off from Peak Net Worth!!!
See the sources of funding for Three Tap Solutions to mitigate or withstand the stock market volality.
Long-term pain cannot be eased by panadols but need morphine.
But, morphine is dangerous!