One of the most important components of personal financial planning is planning for retirement. Due to an aging population, it is predicted that there will be a continuously rising demand for financial planners that specialise in retirement planning, or in other words, wealth/retirement planners. Though, you might be wondering, what do retirement planners do exactly? Is it worth considering as a career path?
To answer these questions, you will first need to understand what is financial planning.
What is Financial Planning?
Financial planning is the process of creating an implementable financial plan, according to Investopedia, a financial plan is “A document containing a person’s current money situation and long-term monetary goals, as well as strategies to achieve those goals.”
The entire process involves a few planning modules:
Foundations in Financial Planning
Risk Management and Insurance Planning
Tax Planning and Estate Planning
Financial Plan Construction and Professional Responsibilities
While the term financial planning is relatively broad, as anything that involves money can be considered a financial planning activity, there are specified areas of planning that require professional knowledge. These are the areas where financial planning assistance is necessary.
Simply put, financial planning is being coordinated for life’s major events. Therefore, a retirement planner is a person who specialises in the major life event that is retirement.
Estate Planning in Singapore
An area that is often overlooked is estate planning. The focus for most people during their lives is usually on making more money, however, we don’t give much thought to where that money will end up after we pass on. It’s easy to forget when you’re so busy worrying about making your current life better, but what will happen to your loved ones after you’re gone? If you fail to get the basics of estate planning, all your hard-earned money might not get inherited by the people you want it to.
The Importance of F-E-A
There are three areas that interact with each other at any stage of life, these areas are F-E-A, Financial Planning, Estate Planning, and Advance Care Planning. Financial Planning is for when a person is alive, Estate Planning takes effect after a person dies, and Advance Care Planning comes in when a person is neither alive nor dead, e.g. mentally disabled.
All three areas are required, otherwise, there is a risk of gaps.
Take for example, without proper financial planning, a person will have nothing to leave to loved ones. If they have nothing, there will be no reason for estate planning as they will have nothing to pass down.
Another possible situation could be that a person has done proper financial planning and estate planning, but neglected advance care planning. If in the event that they are suddenly mentally incapacitated, their family will not be automatically entitled to their assets to take care of bills and such. This is because the assets are still under the person’s name, but they will be unable to give consent for the assets to be used.
This is why all three areas have an important role to play.
What is Estate Planning?
Estate planning allows a person to make the decision of who will receive how much of their assets after they die.
These are some benefits a person can enjoy when estate planning tools are utilised:
Ability to decide who receives what
Faster distribution of assets upon death
Overall lower costs to unlock assets
Prevention of any unnecessary arguments and fights between family members
The main point of estate planning is to ensure that assets are inherited by the beneficiaries of choice, instead of having the law make that decision. Even so, a great number of people neglect this area of planning.
These are some statistics on unclaimed and un-nominated assets:
$132 million in CPF savings are left unclaimed
Only 120,000 CPF nominations are made in a year
More than 8,000 insurance policy payouts are unclaimed
Only 2% of life insurance policyholders make nominations
Your assets may go unaccounted for if a Will isn’t made
Not more than 10-15% of Singaporeans have made Wills
As you can see, there is a need for proper financial planning in these areas as there is a lack of appropriate financial planning when it comes to the later years of a person’s life. This is why retirement planners are so important.
Your Role as a Certified Retirement Planner
As a retirement planner, your job is to help clients be appropriately prepared for their retirement, this includes planning for essential needs like income, medical, and long-term care and wants like charitable contributions and estate planning.
Therefore, in order to be a good retirement planner, you will first need to acquire the qualifications and licensing of a certified retirement planner. Additionally, you will also need to be very familiar with schemes and financial solutions that are specific to retirements, such as CPF, private annuities, and different types of insurance that clients may require.
But first and foremost, the role of a retirement planner is to help others and ensure their livelihoods are properly taken care of. This job requires you to service, have empathy and patience to help clients set up, implement and maintain a successful retirement plan. Having a passion for finance is important in this job, but having a passion for taking care of the well-being of your clients is absolute.
If you’re considering a career in retirement planning, you might be wondering where you can start. There are quite a few things you will need to familiarise yourself with before you make a definite decision on whether this is the right path for you.
Things you will need to know and handle as a wealth/retirement planner?
As a retirement planner, your job will include handling and advising your client on their finances and certain plans that they will need.
The Life Insurance Association (LIA) of Singapore recommends:
Setting aside 50 to 70 percent of the last drawn annual income for retirement
Setting aside additional savings for hobbies, travel & lifestyle plans
Starting as early as possible to save for retirement because the longer a person waits, the more they must save to achieve their retirement goals
Proper planning to be able to enjoy a more extended period of accumulation assisted by compounding interest
Supplementing CPF Life retirement income payouts as they may not be sufficient for your client’s lifestyle and the rising cost of living.
Some ways to supplement CPF Life payouts
Pay a monthly or single premium for a fixed period. Receive monthly payouts over a fixed number of years, depending on the chosen plan.
Insurance Savings Plans
Setting aside savings over a fixed period and growing money substantially more than the bank’s interest rate
Investment Dividends, Rental Income & Cash Savings
Enjoy additional streams of income from investment dividends, rental income, and cash savings
Medical coverage throughout retirement
Medical coverage is even more critical in the retirement years, and the rising cost of healthcare could affect a person’s retirement plans. The older a person gets the higher the risk for certain illnesses such as osteoporosis, a stroke, heart attack, diabetes, and cancer.
Having comprehensive medical insurance coverage is a must in the retirement years as the medical cost can be a heavy financial strain for many elderly people. With proper medical coverage, a person can live a comfortable, stress-free life in their later years without having to worry about medical costs and burdening loved ones.
Clients should consider enhancing their MediShield Life with an Integrated Shield Plan to ensure sufficient medical coverage in their retirement years.
Long Term Care arrangements
Even with all the planning in the world, you still cannot prevent unexpected events. Acquiring Long Term Care minimizes the financial risks of becoming a burden to loved ones in the event a person becomes severely disabled.
Long Term Care Insurance provides financial support in the event that a person should lose their physical capabilities to perform stipulated activities of daily living (ADLs). These activities include washing, toileting, feeding, dressing, moving around, and moving from a bed to a wheelchair.
Enhancing Long Term Care provides greater financial assurance in the unfortunate event that a person becomes severely disabled. All Singaporeans and PRs born in 1980 or later are automatically enrolled in CareShield Life as their long-term care insurance scheme. However, enhancing the basic CareShield Life is advised to get additional benefits.
Understanding the Complexity of Retirement Spending
Generally, most financial planners assume that the annual expenses of their clients will remain constant throughout their retirement years. That is why most retirement solutions and products are created to meet these kinds of needs, coupled with the fact that it’s a lot simpler to create a retirement plan or product with a flat annual pay-out compared to one that can adapt to fluctuating expenses throughout a person’s retirement years. These kinds of plans do not account for a person’s expenses actually changing at different phases of their retirement life. The CPF Advisory Panel rarely discusses this topic as it is not part of the terms of reference that are given to them. They do, however, recommend the CPF LIFE escalating pay-out option which has been implemented since 2016.
J.P Morgan Asset Management (JPMAM) released a research paper titled “Three Retirement Spending Surprises” in January 2019. Through its process of understanding the real-world spending patterns of over 5 million J.P. Morgan Chase households to evaluate retirement behaviors, it revealed three patterns: a lifetime spending curve, a retirement spending surge, and a high degree of retirement spending volatility.
A Lifetime Spending Curve
JPMAM’s research showed that on average, spending steadily climbed in households between the ages of 20 and 40 and peaked in households in their late 40s and early 50s, after which, JPMAM observed older households spending less. In addition, JPMAM also discovered that not only did the amount which people tended to spend change by age, but what they spent their money on also changed.
To put it into numbers, a 60-year-old today spends $15,000 a month which included $3,000 for groceries and $1,000 for healthcare. A 70-year-old today might spend lesser, maybe $10,000 a month, including $1,500 for groceries but $1,500 for healthcare. Now, the question is, how much will the 60-year-old need in 10 years’ time when he turns 70? Conventional retirement planning simply uses the CPI as a proxy to maintain purchasing power (of $15,000 monthly) of the 60-year-old in 10 years’ time but does not consider the possible lower expenses of a 70-year-old and where his expenses will go to. This is important as inflation (or deflation) for different expenses can fluctuate. JPMAM’s research showed that this can lead to overestimating the actual spending needs by almost 26% by the age of 95.
A Retirement Spending Surge
JPMAM’s research also took a closer look at household spending during the critical five years around the retirement transition period, which is two years before and three years after retirement. They discovered that retirees’ spending experienced a significant increase that peaked in the month of retirement and then slowly decreased in the following three years as people move into this new life stage. JPMAM suggested that anecdotal observations indicated that this relatively short-term surge is usually because of increased travel, housing-related changes such as relocation or renovation and other types of changes as people enter their retirement. The key takeaway from the research is that people don’t reduce their spending in retirement immediately and usually spend more earlier than might be expected as they prepare for a new life stage.
Retirement Spending Volatility
Finally, JPMAM also noticed that while there is a general spending surge at retirement, based on median behaviors, there is also wide variation in spending at the individual household level, particularly early in retirement. They compared the average spending in the 12 months prior to retirement to annual spending in each of the three years after and found that almost 80% of the people experienced substantial changes in spending. About 24% spent considerably more or less (+/-20%) and 56% experienced increased or decreased spending temporarily. JPMAM concluded that the above showed that the majority of people do not start retirement and then immediately begin a new, static lower spending rate that continues throughout their non-working years. The key takeaway by the researchers at JPMAM is that volatile spending can continue to prevail early and throughout retirement and this can have important consequences for appropriate risk and liquidity levels.
This means that it is important to ensure that retirement and investment strategies created for retirees will have the ability to adapt to this spending volatility. Because having too many equities in a retiree’s retirement portfolio can be a problem in a down market when they need to spend. But having too much in cash or bonds may not yield enough returns to support the lifestyle expectations of retirees.
The Importance of Wealth/Retirement Planners
It’s been said for over a decade that the withdrawal phase of retirees is much more complex than the accumulation phase and the conventional retirement planning approach might not help prepare retirees adequately for their retirement. In the planning process for retiree clients, there is a need to help retirees reduce the risks of longevity, inflation, investment, overspending, and the worsening of health during the retirement years. Couple all that with the retirees’ spending curve, spending surge, and spending volatility, which adds another layer of complexity to the plan. And to top it all off, the need to integrate all the retirement assets that the retirees have, which can include properties, pension funds (such as CPF), insurance endowments, annuities, equities, bonds, and other investments such as managed funds and ETFs to meet their uneven income need in retirement. Not to mention balancing current spending needs with leaving behind a financial legacy.
Due to the complexity of it all, it is extremely crucial to listen to clients in order to fully understand their money values, important relationships, hobbies, interests, purposes, and life goals to develop their perfect spending plan that is also flexible to adjust when needed. This is due to the unpredictable nature of retirement spending over the course of two to three decades. Over the years, the world and how it functions will change, spouses and their health might change, and their situations and wants might change too. That is why it is extremely important to have lifelong conversations with clients as retirement planners to be able to service them appropriately and effectively.
Retirement planners are here to support people through life’s adventures and provide the right solutions every step of the way. Whatever the goal may be, it is the job of a retirement planner to listen carefully and show how well-advised planning can help achieve them. If you are considering a career as a specialised retirement planner, do feel free to reach out to us.
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