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Principles for a successful retirement: Prioritise your goals and put more savings to work
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You are now reading:
Principles for a successful retirement: Prioritise your goals and put more savings to work
All goals are not created equal, so investing for them as one may not be the best plan.
Instead, decide how much of your savings will be put toward goals such as education, housing and retirement, based on your priorities. Next, create an investment strategy that allows you to take advantage of the longer investment horizon for goals with longer time frames.
Be sure to have a reserve fund of liquid short-term investments and cash so you can cover emergencies and upcoming large expenses without having to sell your investments during down markets.
While markets can always have a bad day, week, month or even year, history suggests that investors may expect a more consistent return over longer periods.
While one-year stock returns have varied widely since 1950 (+47% to –39%), a blend of stocks and bonds has not suffered a negative return over any five-year rolling period in the past 68 years. In other words, if you diversify and stay invested, you may expect a smoother ride with less volatility.
Important disclaimer: Investors should not necessarily expect the same rates of return in the future as we have seen in the past, particularly from bonds, which are starting with very low yields today.
An average Singapore household has about 35% of its assets in cash and deposits, the largest percentage of its wealth. Cash may feel safe in the near term, but it won’t work as hard for your retirement over the long term due to inflation. Prices of the goods that you buy tend to increase over time, and if your portfolio isn’t keeping pace, you are losing ground.
Average annualised return (above inflation)
Over a 15-year horizon, the annual real deposit rate is negative which means that you are effectively losing purchasing power by saving in cash. Equities and bonds exposure on the other hand may provide more protection against the eroding effects of inflation. Balance is needed — some cash to meet near term expenses and emergencies, coupled with a well-diversified long-term portfolio that can protect against today’s market uncertainties while growing your wealth for spending needs in the future.
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Eroding Effect of inflation
Holding cash over the long-term means having less for your retirement after accounting for inflation. Portfolio strategies that include some equity, or that are fully invested, may provide more protection against the eroding effects of inflation.
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