SLOG TILL YOU DROP

Retirement dream is likely to turn into a nightmare if you have not saved enough.

Ijust turned 52 this year, and if life was a game of golf, the next 50 years of my life, assuming I live that long, is equivalent to playing the last nine holes. Some say it gets easier from here because retirement is not an all-or-nothing game like golf, where losing by one shot is just as bad as losing by six shots.

With retirement, even if you don’t have enough money by the time you’re 60 years old, there are still many ways you can improvise. Retire at 70 instead of 60, cut daily living expenses, move to a smaller house or even to the countryside where the costs of living are lower than in Bangkok. Or you can tap into home equity — borrow by using your house as collateral and possibly use reverse mortgages when they are available in Thailand.

However, I think these suggestions are easier said than done. Not everyone can work until 70 due to a number of reasons, such as poor health and most companies having a mandatory retirement age of 60 or 65 at best. Cutting daily living expenses is also difficult to achieve with rising inflation, and moving house is not that easy.

I recently came across an interesting research paper by Boston College’s Center for Retirement Research that examines four variables — working longer, spending less, reverse mortgages and asset allocation — to determine the effect each has on an individual’s ability to maintain their consumption throughout retirement. The conclusion was that effects from asset allocation are overrated. The average 55-64-year-old American, according to the latest “Survey of Consumer Finances” (2010), has a median net worth of just over US$179,000 (6 million baht). Moreover, a sizeable percentage of that net worth is likely to be tied up in their homes, which leaves very little left over for any investment strategy to be truly meaningful.

I dread to think what the Thai numbers are like among the 55-65-year-olds. But judging from my aunt, who retired a couple of years ago from a lifelong civil servant career, all she received from the Government Pension Fund was a 1-million-baht lump sum plus a small pension. How she can stretch that retirement cheque to last 30 years is beyond me. It looks like working longer and belt tightening are the only default options.

Alternatively, we may have to retire the old fashion way — that is, work till you drop. Back in the bad old days in the 1920s during the industrial revolution, most people working in the coal mines and on the railroads did not retire, period. They worked until they dropped dead. The notion of retirement was seen as having “one foot already in the grave”. I’m not suggesting today’s situation is as dire as the 1920s, but the lack of financial preparation for retirement among the middle classes around the world is truly frightening.

If you do not sock away at least 20% of your take-home pay, you will not be able to retire in comfort, period. Even if you have been saving diligently throughout your working life, if your average annualised investment return is below 10%, then your retirement goals won’t be met either.

That said, the only asset class that has the highest chance of giving you that elusive 10% return a year is equities. One of my easy-to-remember guidelines that can help to take some of the complexities out of retirement planning is the old “100 minus your age” rule of thumb, where you should hold a percentage of stocks equal to 100 minus your age. So for a typical 30-year-old, 70% of the portfolio should be in stocks, while the rest would consist of bonds, although some have modified the rule to 110 minus your age — or even 120 minus your age for those with a higher tolerance for risk.

Once you are retired, you need to understand the 70% and 4% rules — they are considered to be the gold standards in addressing investors’ two biggest questions about retirement, namely how much money will people need to retire on and how to make it last.

In a nutshell, the 70% rule implies most people will need approximately 70% of their pre-retirement salaries or income to live on during the golden years, while the 4% rule estimates that if you withdraw 4% of your retirement savings each year, adjusted for inflation, it should last for 30 years. So the bottom line is stop procrastinating and get with the programme.