Scrutinising your building blocks of wealth
ARE you prepared for eventual retirement or does the prospect fill you with dread? It doesn’t need to be scary if you prepare for retirement decades in advance. We’re all growing older at the rate of 24 hours a day. As we age, the importance of trading active income we earn on the job for passive income, which flows into our lives without pesky exertion, grows.
With every monthly paycheque we collect we creep 8.33 per cent of a calendar year closer to the finish line of our career. That’s true regardless of whether we envisage having a short 25-year career or a long 50-year one, or something in between.
Statistically speaking, few of us die during our working years. Most of us will, instead, exhale our final breath when we’re ensconced in late retirement. So ask yourself, “What will my future retirement look like based on my current level of financial preparedness?”
Do you think it will be marked by affluent abundance, or is middling mediocrity or even deep desperation more likely? Regardless of your answer, take heart. If you’re at least a decade or two away from your eventual retirement, you have sufficient time left during your remaining active working years to make things better for your dependants and yourself.
What should you then do with your remaining years on the job?
SIMPLE, SMART STEPS TOWARD FINANCIAL FREEDOM
An easy power analogy might help you formulate your own D-I-Y plan (or even nudge you to work with a carefully vetted financial professional) to improve your targeted quality of life in retirement:
Just as turbine, diesel, coal or nuclear generators spit out electrical energy essential for our power hungry, interlinked civilisation, each of us would be wise to build a personal “generator of financial energy”.
We all need such economic generators to pump life-sustaining cash into our bank accounts, particularly when we’re no longer willing or able to work for a salary.
The way I describe such a generator to my clients and financial planning workshop audiences is as a Portfolio of Wealth, which abbreviates naturally to PoW.
I love that short form! It’s a convenient coincidence because in the Marvel or DC comics many of us read as kids — and which some of us still dip into as adults — when the hero’s prodigious fist slams into a villain, the relative power of the punch is indicated by the size of three letters and one ubiquitous punctuation mark: “POW!”
In advancing adulthood, as our hair turns grey and eventually white, the urgency of establishing our Portfolios of Wealth grows precipitously. Furthermore the responsibility for doing so lies on our shoulders, not the government’s. Many don’t know that.
Once such a construction plan for a well-structured PoW is implemented, our goal is to have it eventually pump out consistent streams of passive income in various forms; those I am most familiar with are interest, dividends, distributions and rental.
As the core focus of my Malaysia-based financial planning practice is constructing and shepherding customised PoWs for my retirement funding clients, you might like to learn a little bit about what I try to do for them.
POWER OUTPUT
I help my wealthier clients decide upon their targeted split between interest earned from cash; dividends earned from stocks and EPF; distributions earned from a diversified group of unit trust funds; and rental earned from brick-and-mortar investment real estate.
For my clients who want genuine handholding over many years and who also need me to construct their investment portfolios, I first ascertain how much they will require in passive income in the future, in their first full year of not working for money. While my stable of clients is relatively small, their desired passive income range is wide: from as low as RM2,000 to as high as RM50,000 a month. (Do you know what your target monthly passive income in retirement is?)
Whatever the specified target sum per month is, I then assess whether it’s practical and attainable or not. Once a client and I settle upon an achievable monthly income in retirement, the splits (based on personal preference, client sophistication and investment risk appetite) between cash in bank deposits and in money market funds for interest income; amounts in stocks and the residual sum, if any, left in EPF after official retirement for annual dividends; distributions from an array of funds diversified across various asset classes, geographic regions, and a long-term investment timeline; and net rental on real estate) are estimated. With those assumptions in place, a plan
invariably coalesces; it then should be implemented and monitored.
The earlier a client begins constructing his or her PoW, the less seed capital will be required to fully fund it because of the snowballing effect of compounding over long decades. Those who get serious about building their very own PoW in their late 20s to early 40s often tend to do exceptionally well in their ensuing decades, particularly if a proactive approach is regularly adopted to improve the “power output” of their respective generators.
Therefore, my planned focus for next week’s column is how we might manage our portfolio in the years ahead to gradually boost the passive income we “milk” from our robust “cash cow”, the one we affectionately named PoW!
Read his free articles at www. FreeCoolArticles.com; he may be connected with on LinkedIn at //www.linkedin.com/in/rajendevadason, or via rajen@RajenDevadason.com You may follow him on Twitter @RajenDevadason