How the Typical Retirement Plan works?

Many people have thought of retiring at the age of 65 and enjoying life after working for almost 20 years after they graduate and find their first job. But due to the high living standards of Singapore, is our dream retirement plan achievable?

I am always fascinated about finance from young and would always like to know about how the typical retirement plan works. Now that i am enrolled in SIM and have learnt to calculate some financial stuff using the calculator, i wish to present a classical example to show everyone.

Retirement Plan - Retire (stop working) at age 65 and life expectancy of 80 years old

Let's assume that you are now retired (65 yrs) and predict you will live to 80 yrs old. 
You only are living an average lifestyle with a car and house already paid for. 
And the expenses are all that you are paying for yourself w/o your spouse or sharing with him/her.
Utilities                $100
Mobile Phone      $50
Meals                  $500
Car Maintenance $800
Medication          $200
Daily Necessities $250
Others                 $200


Investing is like buying clothes?

Image via Wikipedia
Haha.. i just came across an article on the 'Invest' section of the Straits Times written by the all-famous senior correspondent - Lorna Tan where she compare Investing to buying clothes. I think this article will be quite interesting for girls in particular.

Now, let's check it out and see what it is all about...

When we buy clothes, they focus on buying clothes and accessories that match our lifestyle, age group and activities they engage in. 

An investment portfolio is not much different. We rely on lifestyle (risk appetite), age group (our time horizon) and activities they engage in (financial goals)

The rationale or idea behind this concept is that everyone should always take a look at what they are comfortable with given their current situation and future goals. 

Let's look at an scenario. It probably isn't wise to ask an elderly to dump all his cash into stocks and hope for the best. It has breached all the 3 principles of *buying clothes!

1) Lifestyle - an elderly risk appetite is the least minimal. Pardon me for saying... but they have only couple of years lifespan left and should take on as less risks as possible. Therefore, they should look for low-risk stuff such as bonds and term deposits.

2) Age group - An elderly has to invest things which reward them with the shortest time horizon as well for obvious reasons. Equities are risker assets but they generally give a positive returns if held long enough. However, this is not a good decision for the elderly. A good alternative may be short-term deposits or even forex trading! 

***(you may say forex trading is risky, but i feel that elderly can minimize the risks as they usually have more time and $$ (than working adults) to learn forex techniques from many workshop and read about the global news that affect the currencies. Thus,  in a way, they can take advantage of their free time and earn extra income from short-term trading or forex!

3) Activities - An elderly financial goals normally is not about capital gains or long-term appreciation of stocks because they might not live to see the day it happens. A more practical approach is the income approach. I have advised my father to load up on REITs during the U.S. housing crisis and it has paid off pretty well now. His dividend yield amounts up to 20% because he has bought the stocks at historic lows. If he can, so can any elderly!

Last but not least,
One can look at your personal age as a rule to allocation of your investments. Use 100 minus your age and invest the 'remainder' to equities.

E.g. if you are 45, invest 55% in equities or forex trading (it's my style =D) and the balance 45% in less risky investments like cash, bonds or income trusts!

When you have a well-planned investment portfolio, you can sleep soundly through any economic cycle. Well... that's all folks! Happy investing!


How Warren Buffett survives on a $1,923.09 a Week?

Warren Buffett speaking to a group of students...Image via Wikipedia
Everyone who is involved in investing may have heard of Warren Buffett, the self-made investor Billionaire and the third richest man in the world. However, what you may not know is that counting only his take-home pay, Warren Buffett (the Oracle of Omaha) is a pauper compared to his peers.

With a yearly salary of just $100K from Berkshire-Hathaway, the grandfatherly Buffett just barely finds himself among the top 30% of earners - a mere pittance for one of the world's richest individuals.

But as we all know, there is more to this story than meets the eye. After all, Warren is not exactly wondering where his next meal is coming from...
The difference, in this case, is in the dividends.

Dividend Stock Strategies

You see, aside from the paycheck he received from his "day job," Warren earned an estimated $42,583,971 in income last year from the dividends spun off from his own personal holdings.
Those dividend money machines accounted for 99.76% of his estimated 2009 income, keeping him flush with cheeseburgers and business jets.
And with the yields on the benchmark 10-year Treasury note hovering in the 3.8% range and the market struggling to rebound, Buffett's dividend portfolio will likely outperform in 2010, adding to his massive fortune.

True to form, he buys them, holds them, and watches them grow. Simple - but effective.
But that is not the only advantage to be had by building a portfolio like Warren's. The other benefits of a divided-based portfolio include:
  • Safety - If preserving your money is as important to you as it is to Buffett, dividend investments are preferable because of their low risk.
  • Diversification - If the balance of your portfolio tilts towards growth, dividend investments can help you diversify acting as buffer against unpredictable market swings.
  • Access - Dividend-paying stocks offer investors ready access to their income streams, unlike similar investments in 401(k)s and IRAs, which are retirement based and carry penalties for early withdraws.

Even in bear markets, dividend-paying stocks typically do well, especially if those companies have a strong history of increasing the dividend payout.
That's because investors win two ways when a company increases its dividend. First, the yield on your initial investment goes up with the dividend; second, and even better, the dividend increase often propels the share price higher.
That's an unbeatable combination in today's tough markets. And it's the reason that investors are so eager right now to gobble up companies with solid dividend yields.

Warren Buffett's Personal Portfolio
The latest filings from his personal portfolio showed that he had multi-million-dollar stakes in 10 companies as of the end of last year.
Per the SEC, they included investments in:

  • Wells Fargo (NYSE: WFC).............................. 14, 812,857 shares

  • Johnson & Johnson (NYSE: JNJ)......................4,973,200 shares

  • Procter & Gamble (NYSE: PG)..........................4,375,000 shares

  • Kraft Foods (NYSE: KFT)..................................8,000,000 shares

  • Wal-Mart (NYSE: WMT)....................................4,200,000 shares

  • US Bancorp (NYSE: USB)...................................8,365,000 shares

  • General Electric (NYSE: GE)..............................7,777,900 shares

  • United Parcel Service (NYSE: UPS).....................1,429,200 shares

  • Ingersoll-Rand (NYSE: IR) .....................................636,000 shares

  • Exxon Mobil (NYSE: XOM)...................................421,800 shares
Among them, they pay an average dividend yield of 2.3%, with Buffett concentrating 77% of his investments in the top five stocks. That plan allows Buffett to "get by" on the $1,923.08 found in his weekly paycheck.

Buffett is not concentrating entirely on dividend yields to make his investment as well. 
Firstly, He seeks for value - he scoops up companies shares when they are undervalued during bear markets.
Secondly, He makes sure these companies are there to stay and grow with their competitive strengths - companies like P&G and Kraft Foods are no-brainers.
Lastly, due to first and second steps by Warren Buffett, the companies which are doing good will keep compounding the dividend yield, churning out steadily increasing income periodically even as Warren Buffett is performing his favourite adage - 'buy n hold'.