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Principles for a successful retirement: Prioritise your goals and put more savings to work

Published in November 2020

Article Summary

Achieving your retirement goals takes disciplined saving, spending and investing — all of which can feel overwhelming, especially as the retirement landscape in Singapore continues to change. This article by our partner J.P. Morgan Asset Management presents essential retirement planning principles that can help you take positive steps towards your desired retirement lifestyle.

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.

  • Short-term goals

    Includes emergency reserve fund of total spending needs for 3-6 months

    Short-term goals
  • Medium-term goals

    5-10 years, e.g. college, home

    Medium-term goals
  • Long-term goals

    15+ years, e.g. retirement

    Long-term goals
  • Legacy-term goals

    30+ years

    Legacy-term goals
  • Housing/real estate

    Ongoing

    • Correlated to the equity market
    • Greatest expense in retirement
    • Use of equity in home and real estate income is an important planning discussion
  • Cash & cash equivalents
  • Equities
  • Bonds
Housing/real estate

Ongoing

  • Correlated to the equity market
  • Greatest expense in retirement
  • Use of equity in home and real estate income is an important planning discussion

Source: J.P.MorganAsset Management. For illustrative purposes only.

Good things come to those who wait

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.

Put more of your savings to work

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.

Real returns over the past 15 years (2003-2017)

Average annualised return (above inflation)
Estimating Retirement Lifestyle Needs

For illustrative purposes only. Data represented as real total rate of return. Between 2003 and 2017, the best year for equities was 2003 and the worst year was 2008, for the 60/40 portfolio 2003 and 2008, for bonds 2003 and 2010, and for cash 2016 and 2008. Returns shown are December 31, 2002 to December 31, 2017. Source: J.P. Morgan Asset Management. Equities represents MSCI AC World Index Total Return, bonds represents Bloomberg Barclays Global Aggregate Total Return, cash represents Singapore 3-month bank deposit rate, inflation represents Singapore Consumer Price Index. Currency is SGD.

Eroding effects 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.

For illustrative purposes only. Data represented as real total rate of return. Between 2003 and 2017, the best year for equities was 2003 and the worst year was 2008, for the 60/40 portfolio 2003 and 2008, for bonds 2003 and 2010, and for cash 2016 and 2008. Returns shown are December 31, 2002 to December 31, 2017. Source: J.P. Morgan Asset Management. Equities represents MSCI AC World Index Total Return, bonds represents Bloomberg Barclays Global Aggregate Total Return, cash represents Singapore 3-month bank deposit rate, inflation represents Singapore Consumer Price Index. Currency is SGD.

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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