By Jarrad Brown
There's far more to retirement planning than simply making mandatory contributions to your superannuation fund or putting your surplus cash each month into a savings account. With an aging population and growing numbers of people over 60 living below the poverty level, far too many are either not saving for their retirement with a plan in place, or are simply not saving for their retirement at all.
Outlined below are the top 10 retirement mistakes that you need to avoid.
1) Keeping Your Savings in Your Bank Account
Deciding to save and making a commitment to do so is a commendable first step, however you must have a strategy for how it will be invested. Having your funds stashed in a regular savings account is in most cases not an ideal outcome, and won't generate the growth that you need to achieve your retirement goals.
You need to invest your savings into a diversified portfolio with an asset allocation that is suited to your risk profile and financial goals. This includes equities, fixed income, property and cash.
2) Relying on Your Spouse/Partner
Being completely reliant on your spouse or partner for your retirement can be a very risky decision. Firstly, you are assuming that your partner is making all of the right decisions to adequately plan for the retirement of both of you. Secondly, it assumes that you won't separate. While we certainly don't suggest that you plan for divorce, it is important that you have your own retirement goals in place and start saving to achieve your financial goals. This means that should the unforeseen occur and you do separate later in life, you won't be starting from scratch without a clear goal.
You may also have an entirely different idea of what your ideal retirement is to your partner so it's important that you discuss this. People commonly assume that they have the same retirement goals as their partner, however this is rarely the case and can create conflicts later in life if it's not discussed earlier. Ensure that both you and your partner are clear on your retirement goals.
3) Ignoring Your Company Retirement Plan
Many companies in Singapore over a matching retirement plan for contributions into a savings vehicle. For example, your company may match dollar-for-dollar for a contribution value up to 5% of your salary each year. This can be a very attractive offer and should not be ignored as it can be a simple strategy to significantly boost your retirement savings.
Some company retirement plans do also have vesting schedules in place so it's important to ensure that you're clear on exactly how they work. If your company doesn't currently offer a retirement plan, it could be worthwhile discussing such a strategy with your HR team.
4) Holding Too Much Company Stock
Many companies offer a share purchase plan for their staff, many of which are structured on a loyalty basis. For many companies, you'll have the opportunity to purchase your company's stock at a discounted price each year. In some cases, you might be gifted stock also as part of your annual remuneration.
It's important to include your company stock when you're reviewing your personal balance sheet. Your company stock must be added to your equities exposure and it's important that you consider the risk and diversification that you're truly taking on. It may be worthwhile to construct a strategy with your adviser to reduce your company stock on a regular basis to diversify your portfolio.
5) Ignoring Your Company's Vesting Program
Many companies, particularly in the finance and technology sectors, offer company stock with a vesting schedule. Put simply, this means that you'll be given company stock each year which might vest over a 3 year period. If you leave prior to the three-year period reaching its conclusion, then you will give up your right to the company stock. This is considered a 'cliff' style vesting program. The alternative would be 'phased, whereby you receive some of the stock each year over the three year period.
If your remuneration package includes such features it's important to consider the implications if you were to leave your current employer.
6) Not Having a Plan
As the saying goes, failing to plan is planning to fail. Without a clear retirement plan in place, you will not have a clear understanding of how much you need to be saving to achieve your retirement goals.
You should start by sitting down with your financial adviser to start formulating your strategy clearly. Explore what financial independence means to you and your family, what retirement income you would like to earn and how you would like to spend your golden years. Your adviser should then be able to clearly guide you on which retirement vehicles to utilise, how much to save, your asset allocation, wealth protection strategies and what role debt will play in achieving your goals.
7) Not Saving Enough to Achieve Your Goals
Far too many expats don't have a clear idea of how much they need to be saving to reach their retirement goals. There is no 'one-size-fits-all' approach when it comes to how much you need to save to achieve your retirement goals. Whether you need to save $5,000 per month or $25,000 per month to achieve your goals, it's important that you know your number.
Sit down with your partner and ensure you have a clear picture of how much you need to save to achieve your goals.
8) Start Saving Too Late
The eighth wonder of the world is compound interest. The time value of money highlights the importance of saving for your retirement today. This could mean the difference between needing to save $1,200 per month and $35,000 per month to achieve the same retirement outcome. Even if you think that you can't save much right now, start putting away a small amount into a diversified investment portfolio and start building your financial foundation.
9) Ignoring Tax-Efficient Retirement Vehicles
Whether it is an offshore investment portfolio, discretionary trust or superannuation fund, there are a wide range of tax-efficient retirement vehicles at your fingertips. It's important that you not only consider the short-term tax implications of such an investment vehicle, but also the long-term benefits when you are looking to draw your retirement income.
It's also important that you weigh up both the costs and the tax-benefits of the range of tax-efficient vehicles that you have available. Speak to a qualified fee-based adviser who can guide you through the pros and cons of the various vehicles, rather than a tied agent who has an incentive to sell you one or a small range of products.
10) You Underestimate Your Retirement Spending
There is no 'magic number' when it comes to your retirement spending. This will differ between most people so it's important that you review your current spending and start discussing the sort of retirement lifestyle that you would like to live. Far too often I meet people who vastly underestimate how much they end up spending in retirement. Sit down with your significant other and your adviser today and ensure that you have an accurate figure in mind for your retirement goals.
I hope you find these 10 top retirement mistakes to avoid helpful.