Wednesday, March 24, 2010

Will you money last as long as you do?

Every retiree wants to know that he will be financially secure for the rest of his life. Sources like CPF , annuities, dividends, rental income, investment accounts will be sufficient for you to live on if you spend less than you receive (Outflow does not exceed your inflow). As long as your inflow increases year after year to keep up with rising costs (inflation), you will have enough money to live on for the rest of your life. It’s that simple. No worries. Case closed.

In real life, a couple is going to retire with $100,000 in savings. After a review of their sources of income and expenses, the conclusion was that they will need to supplement it by $10,000 per year. That would mean taking 10% of their savings (10% of $100,000 = $10,000) in 1st year of retirement. (Do take note that this will only work if the nest egg does not dip below $100,000)

They shopped around for a financial planner and found one who was happy to help them reach their 10% goal. They chose him over the second planner because the second planner told the couple that they would have to spend less than they planned because he could only promise them 3% per annum instead of the 10% per annum which they requested.

This scenario is happening every day. Different planner will give you different answers.

Many people will go with planner who presents the more optimistic outlook as they chose the rosier view. In a bid to seal the deal, the planner may even provide references from happy clients who have withdrawn 10% or more from their savings for a number of years. However this does not mean he can deliver it for you.

Ask questions like
1) how did you manage to achieve the results? and
2) how does he plan to do the same for you?

Listen carefully to the types of investments used to achieve his prior performance and consider whether those investments are able to be as effective for today’s financial climate.

Be wary of going with planner who promises you big results based to prior performance. The strategies used for his past clients may not make sense for today’s financial climate.

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