“We want to have a dream retirement. But we don’t want it at the expense of not being able to live life today.” That was Valerie’s response when asked what sort of lifestyle she would like to enjoy in retirement.
The reality is that Valerie, 30, and Gary, 33, have been busy doing what young couples traditionally tend to do - get married, buy a house and raise a family, in their case two beautiful young girls, aged 1 and 3 years.
Somewhere along the line, retirement, a goal that they had initially started planning for, took a back seat.
With two young children, Valerie and Gary need a holistic financial plan to meet their retirement goals.
Dream retirements are expensive, but a strong foundation is in place
Valerie and Gary met with Adrian, an OCBC Personal Financial Consultant, for advice on how they could meet their dream retirement goal.
After going through a Financial Needs Analysis with them, Adrian estimated that the young couple had a short fall of close to S$2.5 million to make up. Valerie and Gary were shocked and surprised at how large the number was. "We're very disturbed by the amount we would need for our retirement."
It’s true that S$2.5 million is a big number, and sounds formidable, but Valerie and Gary are actually well placed to meet their retirement goal given their young age, as long as they continue to seek diversification in their investments.
They have a positive cash flow from their dual incomes, an emergency fund catered for and sufficient savings set aside that can be used for investment. They have various insurance plans to protect themselves, their children and property from unforeseen circumstances.
According to Adrian, many parents with young children often have conflicting goals, that of planning for their retirement as well as saving for their children’s education, which can add up to be a fairly large sum.
However, Valerie and Gary have already planned ahead and have invested in an endowment plan that will see their children through university in Singapore.
The foundation they have established is a strong one, and one which they have 30 odd years to continue building their wealth on.
Compound your wealth
“Is there a way that I can speed up the process to build my wealth? For example, invest for 10 years and then stop?” was a question they posed to Adrian.
Both hope to retire early, especially Valerie who is looking to retire in her mid-40s and spend more time with her children and parents.
While investing for a shorter time frame is possible, it would be much more beneficial for the couple to look at longer investments and the effect of compounding interest. This way, the lump sum or monthly investment would not impact their monthly savings to the extent that it affects their lifestyle, while still allowing them to meet their retirement goals.
Adrian also advised the couple against exposing themselves to too high a risk in an attempt to speed up the wealth building process, especially since they have young children.
In their unique situation, Valerie and Gary should look towards investing for the long-term.
Ideally, they should aim for a mixed portfolio of long-term (20- or 30-year plan) endowment plans or stable unit trusts that pay consistent dividends. They should opt to re-invest the dividends into the fund, so that they can make full use of compounding interest.
Peace of Mind for Valerie and Gary
Back on track, OCBC Life Goals helped Valerie and Gary to pay closer attention to their financial planning progress, enabling them to enjoy life today, while being confident that they will have a comfortable retirement.
Valerie added, “Having kids is a life-changing event. We need to take care of ourselves, as well as our kids, and our parents. There’s so much at stake. The session really helped us focus on our priorities, find the gaps in our planning and create a plan for how we can make up the short fall in our retirement goal. We were scared that we would have to compromise our lifestyle today, and still not have enough for retirement. It gave us peace of mind and also made us more aware of how changes to our lifestyle, such as upgrading to a bigger house or having a third child, would affect our retirement planning.”
A comprehensive plan for Valerie & Gary to act on
Manage your cash flow
- Maintain your emergency fund of at least six times your monthly expenditure
- Maintain your savings pool at current amount
- Channel additional savings into investments
- Maintain your current net positive cash flow
Safeguard yourself and your family
- Continue your life, critical illness and hospitalisation insurance policies
- Continue your children’s life, critical illness, and hospitalisation insurance policies
- Continue mortgage insurance policies
Build your wealth
- Maintain your children’s University education fund
- Channel at least S$1,200 from monthly savings into investments
- Invest for the long term aiming at 20 - 30 years
- Create a balanced portfolio of endowment plans and unit trusts
- Invest in 20 - 30 year endowment plans to capitalise on compounding interest
- Invest in a portfolio of unit trusts that pay regular dividends and reinvest the dividends to capitalise on compounding interest
Things to look out for
- Increase the amount invested as your salary increases
- Monitor changes in monthly cash flow as children get older
(E.g. tuition centres, extra-curricular classes)
- Review your plan if you intend to upgrade to a bigger house