When it comes to retirement, slightly more than half of Singaporeans surveyed by Aviva in its 2014 Consumer Attitudes Survey say they worry that once they retire, they can’t afford an adequate standard of living. This could be because close to half also said they have not started to plan for retirement yet.
And as that saying often attributed to Benjamin Franklin goes, "If you fail to plan, you are planning to fail!"
If you're one of those who are also worried about your life after retirement, take a look at these five mistakes that you should not make when it comes to planning your finances.
1. Not starting early
According to the survey, 54 per cent say they are not saving for retirement yet because they are focusing on other priorities or concentrating on clearing off existing debts.
However, by not creating and saving money into a retirement fund early on, you are losing out on the benefits of compound interest. Compound interest is essentially the interest that your principal amount earns. However, what makes this magical is when you add in the time factor.
Take for example a 20-year-old girl, Adeline, who decides to save $1,000 in an account that will earn her 3.05 per cent interest per year. If she does not touch that account for 42 years, her $1,000 will grow to $3,531.96.
However, if Robert decides to start saving $1,000 in that same savings account only when he turns 40, he will have only $1,936.67 after 22 years.
So don't waste time. No matter how old you are, start socking away money – and take advantage of the magic of compound interest – now.
2. Not knowing how much is needed
Some people just guess at the amount they actually need in order to retire. This could work both ways: If your estimated amount is too little, you could be enjoying now and suffering later; or scrimping and saving too much now only to realise that you could actually live on much less when you've retired.
While the second scenario is better to imagine and could give you peace of mind now, there is also a way to strike a balance between the two. Instead of just guesstimating, you can make use of online financial calculators such as Aviva's Retirement Planner to help you gauge how much you may actually need.
For a more accurate calculation, sit down with a financial adviser representative who can help you do a proper analysis of your financial needs and help you determine a goal to work towards. This way, you will know better how much you need, how many years you would need that amount to last you, as well as how inflation will affect your nest egg.
3. Not diversifying
With the myriad of options out there, it is best to avoid putting all your eggs in one basket. This way, you can hedge your bets to avoid losing all your money in case something goes terribly wrong in one investment.
There are different ways to diversify: One of them is termed asset diversification, which means dividing your investments across different types of assets such as stocks, bonds, cash, and more. You can also diversify further within assets as well. For instance, you can spread your money out across different stocks within your stock holdings.
4. Not regularly reviewing your retirement plan
While you may have already planned for retirement earlier on, do not neglect to review this plan regularly. It is inevitable that your lifestyle and needs will change over the years so it is important to bear in mind that your financial plan will need adjustments as well.
Check that your asset allocation for your retirement savings is still meeting your financial objectives and risk appetite. Likewise, if there are any market changes, you may need to shift some assets around to rebalance your investment portfolio.
It is also important to update your insurance coverage to reflect any changes in income or lifestyle, or when you have people who are financially dependent on you.
5. Not factoring in cost of medical expenses or long-term care
Of the respondents to Aviva's 2014 Consumer Attitudes Survey, 58 per cent of Singaporeans say the top concern when it comes to their finances is 'serious illness'.
However, many still make the mistake of not factoring in this cost when they plan for retirement. Some also forget to factor in the cost of their health insurance premiums into their financial planning.
Long-term care will also be needed if one encounters an accident or illness that leaves one unable to take care of oneself. This could entail hiring a domestic helper or a professional nurse, or staying in a nursing home or a hospice. As this kind of care is costly and will be over a prolonged period of time, one must make provisions for this – just in case – when it comes to planning finances.
So if you want to ensure a rosy future ahead of you, avoid these mistakes and start planning now. With longer life spans, rising inflation, and low interest rates, it may seem daunting to reach your ideal retirement goal.
However, if you plan and act now, there is still hope. Sit down with a financial adviser representative to help map out a financial plan that suits your needs. While there's no guarantee to success, you may have a better chance at hitting your goal with some professional help.
This article was first published on AsiaOne on Sep 24, 2014
Source: AsiaOne © Singapore Press Holdings Limited. Reproduced with permission