Wealth Management Pyramid
At the end of it all, there will come a time when you finally take a long break from work or business. Retirement is a little scary for anyone who is used to the daily grind at work. That is a destination we all must share, unless you aim to work for the rest of your life. And there is the other kind of retirement that we all must face: retirement from life. Rich or poor, famous or not, that is our common ground.
Assuming that you have already reached the peak, what would you do with the money that you have accumulated this far? It doesn’t take a philosopher to realise that sooner or later you will be forced to think about the question, “What now?”
Should you spend the excess money for donation to the causes you support? Would you like to leave a legacy to your children and the next generation? Or should you just spend it all by travelling the world?
This is the stage where you begin to answer such questions and you address through:
Retirement planning refers to the financial strategies of saving, investment, and ultimately distribution of money meant to sustain oneself during retirement.
Planning for your retirement is incredibly important, seeing as how planning ahead allows for the individual to better enjoy your retirement. Starting early also helps to give you more time to reap the benefits of compounding interest.
Retirement is also about being able to choose whether to work, and that you would be in a better place to make that decision if you start planning retirement early.
Some indicators that state that you are ready for retirement is when you:
- Have a roof over your head (that is fully paid for and not mortgaged)
- Are free of debt obligations
- Have adequate health insurance cover for medical expenses
- Have enough savings or passive income to pay for your retirement lifestyle.
In order to build a retirement plan, you would have to:
Define your retirement goals
- When you plan to retire?
- How much do you estimate you will need, to retire with the lifestyle that you hope to have?
Assess your current situation
- Review your finances to see if you are on track to reaching your retirement goals
Close your savings gap
- How can you accumulate funds for your retirement
- Cut spending and save more
- What should you invest in
- How can CPF help?
Calculating Your Income Needs
Income Replacement Ratio Method
The income replacement ratio method recognises that most people will be spending less on certain expenses during retirement
As a guide, it will be good to aim for 2 thirds to 3 quarters of income to live comfortably
Adjusted expense Method
With this method, the individual will be able to examine their spending habits. Certain habits may increase, some will decrease, while others will vary as the individual grows older. Therefore, it is important to review the person’s expenses before as well as during retirement
CAPITAL PRESERVATION PROCESS
The capital preservation process basically uses the same two methods, Income Replacement Ratio Method and Adjusted expense Method to calculate as well. However, the difference is that you will only be spending the interest return that you get from your investment. While, you will hold and reserve a capital which you would not touch.
So, instead of the drawdown process where you keep spending with the funds decreasing every time, the capital preservation process allows you to keep a lump sum of money aside, while you spend interest returns you get from the investment.
Estate planning is the process of making preparations and leaving behind legally-recognized instructions on how you want your assets and possessions to be handled once you pass on.
Not doing estate planning can be costly for your other family members, including not being aware of your existing bank accounts, life insurance policies, and not knowing how to manage a sophisticated investment portfolio or appointing the right person to inherit your business.
Also, if there is no Will or Estate Planning done, your assets will be distributed according to the intestacy laws, which may not be in line with what you want.
What are the consequences of not doing proper estate planning?
Your family can lose money through these ways
1. Forced liquidation of assets
Assets like houses and properties need to be sold before proceeds can be split up among the beneficiaries. They could be sold at unfavorable prices due to bad timing or a rushed timeframe.
2. Heirs can’t manage your portfolio
Without a structured plan from you, your heirs may not know what to do with your investment portfolio or what you wish to achieve from it.
3. Family not knowing about assets
If you don’t do up a full inventory of the assets you hold, your family members might not be aware of all the existing assets you have.
4. Family has to pay your debts
If your family members are co-signers on your loans and credit cards, they will be responsible for the debts you leave behind.
Gifting is an estate planning technique, where many families routinely give their assets to heirs whereas some plan to leave their assets to heirs above the amount that the government allows to pass free of gift or real estate.
Some gifting ideas to consider would be
- Making Annual Exclusion Gifts
- Give the gift of compounding – for college
- Give the gift of compounding – for retirement
- Stuff their stocking
- Spread the wealth
- Paying Education And Medical Expenses For the Benefit Of Loved Ones
There are three different methods to reduce your taxable estate using gifting.
Gifting is one of the traditional and inexpensive strategies used for reducing estate taxes. Gifting your assets helps reduce your estate in the amount of the values of the assets and avoid estate tax on any following appreciation and income earned on the property.
Gifting to family
Gifting to family members can also help to reduce your estate while helping to provide personal satisfaction.
Gifting to charities
Gifts to recognised charity organisations are exempted from gift tax. Also, they may also qualify for current charitable income tax deductions. Similar to gifting to family, gifting to charities can reduce your estate tax by the value of the gift itself or by any following appreciation.