Tuesday, November 29, 2011

Retirement and Life Expectancy

When one thinks about retirement, one cannot escape from the somewhat morbid discussion about life expectancy.  If I can break it down into simple non-statistical terms, life expectancy basically means the number of years one can expect to live up till (usually calculated at a certain age).  And of course, most of us will be aware that based on statistics, most females in most countries have longer life expectancy than males.  And in most developed countries, the life expectancy for males and females probably is around or moving towards the age of 80.

When Do You Want to Die?

So when thinking about the retirement age or retirement planning in general, it is inevitable that the question about life expectancy will come up.  Meet any financial planner or insurance agent and they will most probably bring up the issue of the "age that one is expected to die" .  Well, it is a valid question as many of the assumptions that are made will be based on the assumption of when you think you are going to die (okay, that sounds so blunt but it is the truth).

The problem with putting a pinpoint estimate on when you think you are going to die based on the statistical life expectancy is that you might over or under estimate how long you might live.  Life expectancy is calculated based on a statistical average.  And we learn in school that average basically means that the average person is expected to be around there but at the same time, there can be large variances.

So these large variances means that you can either die way before the average life expectancy or you could actually live a whole lot longer than what you previously expected.  When it comes to retirement planning, I guess most people often make the assumption that the average life expectancy is the year that they will DEFINITELY DIE.  But that is wrong and it is perhaps wise to cater for a bit more extra just in case you are not the average person.  What happens if you retire at age 65 and die at age 95 or 105?  Will you have enough retirement savings to last you till then if your initial planning assumption used was that you are expected to live until only 80?  Yes, I know that might be going a bit overboard to cater in for such large variances in retirement planning but wouldn't you want to err on the safe side if your current income allows you to set aside a little more for your retirement?

Of course, if you die much earlier before the retirement age, then this is not a problem that you will have to worry about.  Sorry for being so morbid but that is the truth.

But the main idea is this:  Life expectancy is just a statistical average.  When using it as a planning assumption for retirement planning, do remember that it is just an assumption. Life might not turn out the way you assume it is going to be and you might die much earlier or live much longer compared to the average person.

Friday, November 25, 2011

The Mystery of REITs

I read with interest Mr Colin Tan's article in Today newspaper regarding REITs.  It is titled: "A decade on, REITs remain a mystery"

Indeed, after ten years since real estate investment trusts (REITs) were listed on the Singapore Stock Exchange, it seems that many people (including me) still do not really understand much about this asset class and the investment opportunity/risk involved.

I started taking note of REITs sometime back due to the potential dividends that I could receive.  It seemed like a choice investment instrument for me as I was really into income investing and was looking for ways to increase my passive income. My first investment was in First REITs. I subsequently divested it because it was too heavily focused on healthcare with its assets largely in Indonesia.  But while REITs are usually positioned as defensive play, I can agree with Mr Colin Tan that for Singapore REITs, many of them are still on the acquisition trail and are trying hard to expand their portfolios.

What does this mean for investors?  It simply means that once can expect money to be raised through rights issue. If one does not subscribe to the rights issue, your overall shareholdings as a % drop.  Whether this translates to a drop in distribution is probably a study to be taken up by somebody more experienced.  But I do agree that it seems that many of the REITs are linked to their parent companies and it might be questionable how the valuations are done (including of course the timing of the transaction).

The domestic market is also pretty small.  And I guess there are certain economies of scale required before REITs should start expanding overseas.  (Just think about the airfares that have to be paid for management to do the site visits, meetings, etc).  Of course, REITs are also tied closely to the property market and rental market and one needs to keep in mind all these factors when investing in them.  If one invests in REITs which has properties overseas, you are also exposed to other country risks that are involved.

Nevertheless, REITs still feature in my portfolio. I still intend to purchase more and diversify across the various REITs in order to diversify my risk accordingly.

Well, REITs is still a mystery to me in many ways and I am still slowly learning more about them day by day.  In a sense, they look simple.  But when one studies them further, you will come to realise that there are actually lots of complexities involved.

Wednesday, November 2, 2011

Financial Freedom, Being Debt Free and Quitting My Job

Today, I asked myself 3 questions:

How long more do I need to achieve financial freedom?
When will I become debt free?
How long more must I work at my job?

After so many years of working, it seems that I am no where closer to my goal and dream of financial freedom (where my passive income will surpass my monthly expenditure).  I did a quick calculation and estimate my passive income to be slightly around $2800 per year.  That is much less than what I thought I would have achieved 3-4 years ago when I first started out on this journey.  It seems that I will still be taking a long time to reach my true goal of financial freedom. Over the years, my monthly expenditure has also crept up slightly.  This can only mean one thing:  I NEED TO WORK HARDER AT MY GOAL!

Being debt free of course is one of the things that I look forward to.  It simply means having more disposable income to play around with.  Of course, if you manage to borrow cheaply, it does not make sense to pay back the loans if you can get a higher rate of return compared to the interest you are paying on your debts.  However, I don't know...perhaps it is just psychological.  But being debt free is something that I hope to achieve.  Well, at least I mean clearing my bad debts (e.g. car loan).  Good debt is still welcomed.

Well, the last question that I asked myself is really related to the first 2 questions.  When I can quit my job is probably the day I am certain that I have attained financial freedom.  It is not that I hate my work or anything.  It is just that I feel I can be doing so much more with my life and time then having only remnants of my time to give to my family and friends.  

 I want to work for the rest of my life.  But I don't want to have to work for a living (a.k.a having a job). 

Time to get down to business.  

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