Conventional wisdom dictates that to plan for retirement here, you will need at least SGD 1 million in reserve funds. You then target to spend 4% of it per year and this will last you for another 25 years. Assuming that you retire at 55, then you will run out of money at 80. We all know that average lifespan is now longer and as we age, medical costs will go up and there will be emergencies that could drain one’s resources really fast.
Given that interest rates are so low now, even negative, savers are being punished. What do we do then?
If you attend retirement seminars and read related books, one often mentioned term is to make your funds work for you. There is the concept of passive income. As you grow older, one should try to build up a steady stream of income which does not require you to lift a finger.
The first most popular option for passive income is to have an investment property with monthly rental income. The gross yield should be at least 3 to 5% p.a. At the start, you may have also taken a housing loan against this investment. If yes, one should target to pay off the outstanding amount by the time you retire. For now, if you net off the monthly loan payments against the rental income, you should aim for at least a positive return on investment. Do also note that rental income is taxable and has to be included in your overall annual fiscal year tax assessment. There is also the monthly maintenance fee expense as an outflow that has to be taken into consideration too.
Another favoured option for passive income would be to invest in dividend-paying instruments. Classic examples would be to invest in government bonds, so call risk-free assets. Given the current nature of NIRP/ZIRP policies of central banks, this option now yields peanuts.
We could also look at good companies that pay regular dividends. These should be blue chips stocks with a sound track record of steady to increasing revenues. A big red flag will be those that continue to maintain or increase dividend payments even as their incomes are declining. Australian banks??
There is another alternative that is gaining much interest which combines all of the above. Real Estate Investment Trust (REIT) is a popular instrument. In S’pore, they are fairly well established and normally yield between 5 to 9% p.a. You can easily view a summary of them in websites like http://reitdata.com which also provides their asset type, NAV, gearing and current yields. Note that REITs do own real asset properties and are required to be managed by 3rd party trustees. By law, 90% of their net income (mainly rental income) has to be distributed to shareholders on a quarterly or semi-annual basis. REITs are also currently only allowed a maximum leverage/gearing ratio of 45% (Debt to Total Asset).
Main advantages for REIT investors : Affordability, liquidity/price transparency, tax-exempt, diversification and access to professional asset managers. Do note that like a stock, you could also suffer a capital loss on your investment. Also, the impact of online shopping on malls is still an evolving discussion that may hurt REITs in the long run.
Personally, I use technical charts of historical data to determine the levels which I would be comfortable to enter into any REITs before I place my buy orders. As there are now 40+ of them, you can easily diversify and target those you prefer (eg. retail, industrial, office, hospitality or residential, and by geographical locations). Anyone with a small amount of funds can participate as the unit prices are not high. Currently, I get a few thousand dollars every quarter from REITs, knowing that I have invested in some of the most popular malls in the country which are fully owned by these companies.
Currently, I get a few thousand dollars every quarter from REITs, knowing that I have invested in some of the most popular malls in the country which are fully owned by these companies. Over time, I intend to move more of my funds into REITs to provide a steady passive income for me in my twilight years.
Below are a few links which you may read more about REITs :
http://www.giraffevalue.com/reits-singapore/
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