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Building a Passive Income Portfolio for your Retirement

Many people in Singapore are realizing that retiring can be very expensive. This is because the cost of living goes up over time, and it can be hard to afford everything you want to do when you stop working. One thing that many retirees want to do is travel, especially during the first few years of retirement when they are still healthy and active. They also want to spend time with loved ones and pursue hobbies, all of which can be costly.

When considering investment options, it’s crucial to weigh the potential returns against the associated risks and requirements. Low-risk options like savings accounts and fixed deposits typically offer stable but modest annual returns, ranging from 1-2%. Dividend-paying stocks can provide higher yields, averaging between 3-5% annually, although these returns are subject to market fluctuations.

Rental properties offer the potential for substantial rental income, typically ranging from 4-8%, but they require significant upfront investment and ongoing management costs. For those inclined towards entrepreneurship, online businesses present an opportunity for variable income, with some entrepreneurs reporting monthly earnings ranging from $1,000 to $5,000 or more after the initial setup phase.

However, success in this domain depends heavily on the chosen business model and the individual’s dedication and effort. Each option carries its own set of pros and cons, so careful consideration and research are essential before making any investment decisions. Let’s explore how we can build passive income through various means:

Building Passive Income through Rental Income

One easy way to make money without having to work actively is to rent out your home or some of its rooms. The amount of money you can make from this will depend on factors such as the type and location of the property, and the current demand in the property market. It’s important to remember that rental income is not immediate profit. You need to consider the costs involved such as your home loan payments, stamp duty, and home repairs or renovations. However, as time goes by, the rental income will eventually cover these expenses and you will start to see a profit.

If you don’t want to own a property, you can still generate passive income by investing in Real Estate Investment Trusts (REITs). REITs are companies that own and operate income-generating real estate. By investing in REITs, you can earn passive income from the rental income generated by the properties owned by the company. This allows you to generate passive income without having to worry about the day-to-day operations of the rental property.

Building Passive Income through Stock Dividends

Buying a million-dollar home isn’t something you can do the very next day. But what you can do is invest in stocks that give out dividends.

Companies pay their shareholders dividends each year. However, not all companies pay dividends, and nor are they obliged to do so.

So, what counts as a high dividend yield?

A good gauge would be 4% returns and above. To build a passive income portfolio, there are two main types of stocks to consider: Real Estate Investment Trusts (REITs) and blue chip stocks.

REITs are known to have high dividend yields of 4% to 8%, because it is compulsory for them to distribute at least 90% of their taxable income each year. When you invest in a REIT, you are investing in a company that is essentially a landlord, collecting rent and distributing the rental income back to shareholders as dividends.

Blue chip stocks refer to large and established companies that retail investors would easily recognise. Think along the lines of DBS, OCBC, CapitaLand, Sheng Siong, Dairy Farm, Singtel and more.

Over in the U.S., blue chip stocks include Apple, Coca-Cola, Procter & Gamble, McDonald’s, Berkshire Hathaway, and more. These blue chip stocks have a history of rewarding shareholders with handsome dividends.

These dividends are paid out periodically — this could be once a year, semi-annually, or even four times a year.

Some companies also offer scrip dividends, where you receive dividends in the form of shares. The payment date varies from stock to stock and you can find the dividend payout date based on the information found on their site.

Building Passive Income through Investing in ETFs

If you’re not comfortable picking individual stocks to create your dividend portfolio, there is another option – investing in ETFs. ETFs are a collection of securities that follow an index and are offered at an affordable price. They are also listed on the stock exchange and can reward their investors with dividends.

For instance, the Nikko AM STI ETF and SPDR STI ETF both follow the Straits Times Index (STI). The STI is made up of the top 30 companies in Singapore. By investing in such ETFs, you can gain exposure to the top 30 companies in Singapore and also receive dividend income every year.

In 2020, Nikko AM STI ETF paid out S$0.1268 per security. This means that if you have 10,000 units of Nikko AM STI ETF, you would receive a total of S$1,268 in dividends that year.

When you invest in dividend-yielding stocks or ETFs, it’s a good idea to start early in life. This allows you to take advantage of the power of compounding, which means reinvesting your dividends to grow your wealth. In your younger years, you may not rely on dividends for income, so reinvesting them can help you accumulate even more wealth over time.

Building Passive Income through Regular Coupon Payments by Purchasing Bonds

Bonds are one of the safer investment options because they are considered fixed-income products. When you buy a bond from a company, you are basically lending them money and in exchange, you get a fixed amount of coupon payouts.

With bonds, you have a better idea of when and how much you will receive as coupon payouts. For instance, Astrea VI bonds pay 3% of your principal amount twice a year, and your principal amount can be redeemed after five to ten years.

Another low-risk bond option is the Singapore Savings Bonds (SSBs) which offers historical returns ranging between 1% to 2%, with minimal risk.

However, bonds have lower liquidity compared to other investments. They can be bought and sold, but it might be difficult to find buyers for the bonds you have. Additionally, you need to be prepared to hold the bond until it matures. For example, Astrea VI bondholders must keep the bond for at least five years.

Building Passive Income through a Fund or Robo-advisor

There are other options besides ETFs for generating passive income. Mutual funds or unit trusts are a popular choice and can be bought through an investment platform, robo-advisor or insurance company. Some robo-advisors also offer portfolios specifically designed to generate income, such as StashAway’s Income Portfolio. This portfolio invests in a mix of bonds, REITs, and dividend stocks, and requires a minimum investment of S$10,000. The dividends generated can either be reinvested or paid out to your bank account or SRS account. Another option is Fullerton MoneyOwl WiseIncome, a fund recently launched by MoneyOwl that aims to provide a steady stream of passive income to help secure your retirement.

Building Passive Income through Traditional Annuity

An annuity is a type of financial product that can provide you with regular payments every month or year for the rest of your life. You make a one-time payment or a series of payments to an insurer, and they invest the money to generate a guaranteed income for you.

Many retirees worry about running out of money in their later years, so the security of knowing they will receive a regular payment for the rest of their life can bring peace of mind. An annuity is often used as part of a retirement plan to generate income. If the person who bought the annuity passes away before they receive all their payments, their beneficiaries will receive the remaining balance.

In Singapore, the Central Provident Fund (CPF) LIFE is a national annuity scheme that provides a monthly payment for life to Singaporeans. You can start receiving CPF LIFE payouts at age 65, or you can defer them until age 70. The amount you receive each month depends on how much money you set aside in your CPF Retirement Account.

If you want to increase your retirement income, you can purchase an annuity from an insurer. If you need income sooner than age 65, you may consider an immediate annuity, which will start paying you income soon after you purchase it.

Building Passive Income through Whole Life Insurance

Whole life insurance is a type of insurance that provides coverage for an individual’s entire lifetime. As long as the required premiums are paid, the policy remains in force until the individual reaches a specified maturity date, such as age 100.

Whole life insurance policies offer both protection and savings. In the event of the policyholder’s death or total and permanent disability, a payout is made to the beneficiaries. Additionally, the policy has a savings element, which can be accessed in the form of a surrender value if needed during the policyholder’s old age. Some policies also include a rider that covers major illnesses.

Whole life insurance policies generally cost more than term insurance policies because part of the premium is invested to build up cash value. It is important to commit to the policy for the long term, as terminating the policy early may result in losses.

Whole life insurance is available in different forms, such as participating and non-participating policies. Participating policies share in the profits of the insurer’s participating fund, and policyholders receive bonuses or dividends based on the fund’s investment performance. Non-participating policies have guaranteed benefits, but policyholders are not entitled to bonuses.

Building Passive Income through Endowment Policy

An endowment policy is a type of insurance that combines protection, savings, and investment. It’s similar to whole-life plans, but the coverage periods are shorter and defined. The policy pays out in the event of death, total permanent disability, or when it reaches its maturity date.

The premiums paid by policyholders are used to purchase a protection plan and invest in financial markets. Endowment policies are often used for two main purposes: to save for a child’s education expenses or for retirement. The policy can be tailored to fit your specific needs.

If the objective is to save for a child’s education, a shorter-term plan of 10 to 20 years may be suitable. For example, SavvySpring is a 12-year endowment plan that is capital-guaranteed upon maturity and provides guaranteed and non-guaranteed bonuses. This plan can help you save for your child’s tertiary education and allows you to change the life-insured to your child.

Endowment plans are also popular for saving up for retirement. Depending on your preference, you may choose a longer-term policy to coincide with your retirement years. If you suddenly come into a lump sum of money, you can use it to purchase an endowment plan to help grow your funds.

Insurance companies invest premiums in a mix of low-risk and higher-risk assets, so endowment plans offer a guaranteed and non-guaranteed component in the form of bonuses, based on the investment performance of the insurer’s funds.

Building a passive income portfolio for retirement in Singapore requires careful planning, research, and investment. A combination of various passive income streams, including rental income, dividend income, and capital gains, can provide a stable and diversified source of income in retirement. It is important to assess one’s risk tolerance, set realistic goals, and stay disciplined in managing the portfolio. By starting early and consistently investing in a well-diversified portfolio, individuals can achieve financial freedom and enjoy a comfortable retirement. With the right mindset and approach, building a passive income portfolio can be a fulfilling and rewarding journey towards a secure financial future.

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