The Income Route to Retirement

07 Dec 2013 
SOURCE: Yong Hui

​Recently I have been asked about income creation during retirement – not the active income from working but passive income from investments, retirement solutions or other means that will provide a regular stream of income when they stop work.

It used to be that retirement planning was about saving and investing to accumulate a large enough pool of money a.k.a nest egg to live off for the next 20-30 years. That’s the golden number that we often hear people discuss about, the answer to the burning question of how much you need to retire.

But nowadays as we live longer and things get more expensive every year – the question at the back of many people’s mind is“What if my money runs out before I do?”

Plus it is psychologically stressful to solely live off our savings. Imagine seeing your account balance drop month after month, year after year without any new inflow of money. People who have experienced periods without income or taken no pay leave before would testify to this.

One way to reduce this stress is by having one or more retirement income sources that can pay for the core living expenses e.g food, utilities, transport etc so you don’t have to worry about the basic expenses. The savings in your nest egg can complement this income and be utilised for flexible one- off or larger expenses like holidays and gifts.

Some common retirement income sources include:

  • Stock dividends
  • Coupons or payouts from bonds
  • Rental from property
  • Annuities e.g CPF LIFE or private retirement plans
Each of these income sources has its pros and cons and appeal to different people. A lot depends on your current stage of life, budget, preference and risk appetite.
Let’s take a case study of Jenny - a 40 years old executive who plans to retire at age 60. She is a low risk taker and prefers something that will provide a secure and guaranteed stream of income for her when she retires.

Jenny thought of buying a second investment property for rental income but find the cash outlay daunting with the high property prices and recent cooling measures. She figured that it didn’t quite make sense to empty all her savings and tie herself to another 30 years of debt. Besides, majority of the rental income would go to paying the mortgage with little income remaining, especially during the first 10 years of her prime golden days.

Good thing for Jenny is that she still has 20 years to her retirement and she is prepared to put aside consistent savings to build a retirement income source.

Since Jenny is more risk adverse and prefers having stable consistent income, she can consider saving regularly towards a private retirement solution plan that will provide her with a guaranteed income from age 60 or start building up a portfolio of bonds that pay out regular coupons. By the time she reaches 65, she will also receive some monthly payout from CPF LIFE to supplement her income.

What about you?

We all have different financial situations and some income sources may suit you better than others. Maybe you have already built up some savings or retirement plans along the way, but wonder – is it enough? Which income sources can you use to bridge the gap?

Ultimately, THE question is – How can you secure an adequate and steady stream of income so you can retire with confidence?

Everyone‘s situation is different and these questions can only be answered meaningfully through a holistic retirement analysis.

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