S is a senior executive in a large corporation. She is in her 50s and looking to retire in the next couple of years. She has no dependent. She only started to look at financial products to help her in her retirement planning this year.

She is not in a bad financial position. She owns two properties. She stays in one, which is a government housing and near her parents. She rents out the more expensive private property for close to $10,000 per month. Both the properties are fully paid up so she has been enjoying good passive income from the rent alone.

As she is still working, she is accumulating cash and wants to look at financial products to help her maximize her return. In our conversation, she has been looking mostly at short term instruments

a. 6 months T bills which are paying about 3.5% to 4% interest

b. Short term (1- 3 months) currency pairing instruments that is giving her 4% pa

c. Leverage (borrowing in Japanese Yen and Swiss francs with lower interest rates) and buying Singapore REITs and Bond Funds in Singapore dollars offering better yields.

She also dabbles in some stocks but she mentioned that she doesn’t keep any of them for more than 1 month. Essentially, she is a trader.

She aspires to travel to different countries once she retires. She intends to stay in each country for 1 to 3 months and move on to the next country.

While she can fund her retirement and travels, our conversation revolves around how we can make her financial instruments provide more predictable and stable returns for her over the longer term. She needs instruments that can give her stable income over the next 20-30 years and be a hedge as well to the rental income that she is receiving.

In Trio-Retirement Plan, we discussed about the three “O”s. We did not go into specifics on her desired expenses and how much the rental and investment income can cover her cost during her retirement. However, we discussed about suitable investments for her RESERVES “O” and INVESTMENT “O”.

So far, she has only been looking at short term investment instruments like T-bills and currency pairing structured deposits. Those instruments are suitable for her RESERVES “O”. She has to spend more effort to look at instruments in the INVESTMENT “O” to provide her with sustainable and long term retirement income.

For her income portfolio in INVESTMENT “O”, we discussed the following instruments

a. Blue chip REITS – giving about 5.5% to 6.5% pa now. She was looking at some smaller players and since she is new to financial products, I was encouraging her to look at more stable companies with stronger sponsors.

b. Bond funds hedged to Singapore dollars – providing about 6% pa. She was looking at PIMCO bond fund which I think that it is an excellent product for her.

c. Equity funds – she was looking at some larger Blackrock funds which I think she is in the right direction.

For her growth portfolio in INVESTMENT “O”, I was encouraging her to look at holding stocks for a longer period instead of trading them frequently. She is technology savvy and I thought she should be keeping stocks in the space of Artificial Intelligence (AI), Blockchain and Electric Vehicles (EV) for the longer term. I was also encouraging her to look at various ETFs that can help diversify her risk from one particular company.

As she gets more into the financial space, I am sure she can explore more products that can fit her financial plan. Trio-Retirement Plan helps her frame different products with different characteristics and timeframes into different “O”s or buckets.

TRI-O RETIREMENT PLAN is a simple way to help you get started on your retirement planning. Learn the FUNDAMENTALS and HOW TO GET STARTED. There is also a spreadsheet to help you CALCULATE your monthly savings and your project monthly income at retirement. You can check out our BLOGS on topics pertaining to retirement planning. Feel free to CONTACT US if you have any questions or comments.

I read Investment Moat’s article “9 Strong Points to Why I say, the Dividend Income Retirement Mindset is Not a Good Retirement Risk Management Model” with a lot of interest.

Investment Moat is right that having sufficient monthly income over many years (20 to 40 years) during retirement is a topic that bothers retirees like me a lot. The prospect of running out of money during retirement is a scary thought. He mentioned the use of Safe Withdrawal Rate method which is empirically proven. I will share some of my thoughts on the Safe Withdrawal Rate method.

Tri-O Retirement Plan is built on the premise of dividend income. In our Investment “O”, there is an income portfolio and growth portfolio. The income portfolio (which should make up 80% – 90% of the total Investment “O”) is supposed to provide dividend income to cover our monthly expenses. The growth portfolio (which is about 10% to 20% of the total Investment “O”) can help mitigate inflation by focusing on more risky and higher growth instruments.

Tri-O Retirement Plan mitigates the dividend income risks mentioned by Investment Moat’s articles with the following strategies.

a. Diversification

The income portfolio of Investment “O” should consists of multiple instruments. For eg, in my income portfolio, I have

i. Dividend Stocks, Equity Income funds and ETFs

ii. Individual Bonds, Bond Funds and Bond ETFs

iii. Individual REITS, REITS Funds and REITS ETFs

iv. Multi asset income funds

The above instruments are also diversified across geographies (Global, US, Europe and Asia) and during the accumulation phase, some of them are also bought across time (using Regular Saving Plans).

The above list may look like too many instruments and may become hard to manage. Fortunately, with today’s technology and online platforms, they can be pretty much on “auto pilot” mode.

Diversification helps in soothing out the ups and downs of different instruments. For eg, a bond fund which I have held for more than 15 years is showing decline in the monthly dividend in the last few years. Some of the REITs that I have held for more than 15 years have been steadily increasing their DPUs (distribution per unit). Some of the REITs suspended their dividend payment during the Covid period. The multi-asset income funds have been constant in their payout for the last 5 years that I have held them.

In our article Picking our own stocks, we covered that diversification could mute our potential returns versus picking our own stocks. Higher risk means higher returns. Diversification may be a necessary risk mitigation strategy for the normal investors like us who may not have the Midas touch of Warren Buffett or skills of a professional investor.

b. Headroom or additional coverage

Yes, dividend income does fluctuate and it may be important to provide some headroom in our planning. For eg, I designed the headroom for the dividend income versus my expenses to be 10%. In months that I have excess dividend income, the excess is either transferred to RESERVES “O” or plough back into investing into the income portfolio.

In the Investment Moat’s article and related comments, it was mentioned that there are retirees with 2x to 3x coverage. That is indeed admirable if it is achievable. These retirees can definitely enjoy a risk free retirement.

c. RESERVES “O” and/or cutting down Expenses

In Tri-O Retirement Plan, RESERVES “O” continue to play a role in the decumulation phase. When there is a financial crisis, the dividend income may go below the monthly expenses required and dipping into the RESERVES “O” may be required. Of course, before going there, we may need to trim off the good to haves in our expenses. For eg, we may have to forgo the annual or bi annual vacations that were part of the expenses during these period. During better times, excess dividend income from the headroom can be ploughed back to help replenish RESERVES “O”.

d. Growth Portfolio to take care of inflation

The decumulation phase of Retirement can take place over many years and over time, even if the dividend income remains constant, the purchasing power will be eroded by inflation. Therefore Tri-O Retirement Plan advocates that we should still have a growth portfolio comprising of growth instruments in our INVESTMENT “O”. Some of these growth instruments can be sold over time to purchase more instruments in the income portfolio to help increase dividend income to counter inflation.

Tri-O Retirement Plan is built with middle income employees in mind who may not be investment professionals. The Safe Withdrawal Rate Method, which is empirically proven to work as mentioned by Investment Moat, involves building a portfolio of stocks and selling 3% to 4% every year to fund the retirement expenses. For this method to work, we need to make sure that we build a good portfolio of stocks, manage and refresh the portfolio when necessary and have the emotional fortitude to choose what and when to sell every year to fund the retirement. This may or may not be a simple undertaking for most of us. The portfolio is supposed to perform well over many years.

No one can look too far down the crystal ball when we retire and we can only plan as much as we can. The bottom line is we need to embark on retirement planning whilst we are still economically active. In the event that the retirement income is still insufficient after we retire, we can continue to do some gig work to keep ourselves economically and socially active. This can help boost our retirement income.

TRI-O RETIREMENT PLAN is a simple way to help you get started on your retirement planning. Learn the FUNDAMENTALS and HOW TO GET STARTED. There is also a spreadsheet to help you CALCULATE your monthly savings and your project monthly income at retirement. You can check out our BLOGS on topics pertaining to retirement planning. Feel free to CONTACT US if you have any questions or comments.

Academically, there is a simple way to determine good vs bad debt.

If we borrow $1,000 at 3% interest and invest it with a return of 6%, this is a good debt.

If we borrow $1,000 at 24% interest and have it sitting in the bank account making 2% interest or worse, spend it all on non essential items, this is bad debt.

In real life, it is more complex. Some get into debt because they get into cash flow issues and cannot afford essential items. Others do not want to get into debt because of their upbringing and attitude towards debt. And there are folks who just love being in debt.

For example, I was brought up with the notion that debt is bad. The only time I took a loan is for buying my homes. I also took the fastest possible time to pay it off despite enjoying very low rates. The day that I paid off my mortgage and became debt free was a happy day. I could sleep well. Instead of using the money to pay off the mortgage, I could have used it for investment, which pays off higher return. However, I wasn’t interested. I didn’t like the risk or the notion of being in debt.

Conversely, I had another friend who believed in debt. He made full use of every opportunity to go into debt and used the money to buy non essential items. He had this attitude that if he were to die tomorrow, he will die net positive. He wanted to enjoy things that he could otherwise not afford. Fortunately, he wised up later in life and did not get into financial ruins.

In the blog REIT vs Physical Rental Property, we gave the example on how cheap mortgage loans can amplify returns in physical rental properties. We know of many successful friends who have a knack for buying undervalued properties, have a great rental network and are able to retire with a sizeable amount of retirement fund making full use of good debt. In reality, it is of course more complex and there are risks involved. With the FEDS increasing rates recently and mortgage loans based on floating rates, some of them have to manage their cash flow tightly and have to continue to make sure that the rentals can cover the mortgage payments.

What is the right balance or an optimal debt model for retirement planning purposes?

Tri-O Retirement Plan proposes that the property that you stay in should be paid off as quickly as possible. In the decumulation phase, one should not continue to pay mortgage in the property that you live in. This is to keep expenses in check especially during retirement. To achieve it, one can choose to downgrade to a smaller property or move to a lower cost city or country. If a person uses physical rental properties for retirement income in INVESTMENT “O” , he/she will need to manage the cashflows and preferably have some cash buffer. Hence, it will be ok to continue to have good debt even after retirement.

TRI-O RETIREMENT PLAN is a simple way to help you get started on your retirement planning. Learn the FUNDAMENTALS and HOW TO GET STARTED. There is also a spreadsheet to help you CALCULATE your monthly savings and your project monthly income at retirement. You can check out our BLOGS on topics pertaining to retirement planning. Feel free to CONTACT US if you have any questions or comments.

I didn’t realize that not having a retirement plan can have an impact to our physical and mental health until my meeting with X.

Had dinner with X recently. We are all in our early 50s and we were discussing about health issues. X told me that he had a recent episode of high blood pressure. Although he went for all the health checks, the doctor did not find anything wrong with him. The doctor concluded that it could be due to stress and his lifestyle.

X is an executive in one of the large local enterprise. It was his first job, he rose through the ranks and have been in the same firm for close to 30 years. He was in charge of an important project for the firm and unfortunately the project did not go well. The project over ran both in terms of budget and timeline. It got the attention of the CEO of the firm and the CEO personally reviewed the project on a weekly basis. X was under tremendous stress. He said he woke up at about 5 am every night breaking out in cold sweat. He personally believed that it contributed to his high blood pressure.

X and his wife discussed about quitting the job. X is the sole breadwinner of the family. Both his kids are still in tertiary institutions. They calculated the sums and realized that if they downgrade their house to a smaller apartment, X can have an earlier retirement. X just bought a new expensive set of wheels too.

Being assured that financially the family is alright even if he quits, X could began sleeping fitfully again. He could also manage the project in a calm and objective manner and finally the project went back on track (although it still did not meet the initial timeline and budget). The CEO felt more assured about the project and X was off the hook.

The above episode illustrates that having a good retirement plan like Tri-O Retirement Plan can benefit the mental and physical health of a person. If X has started on a retirement planning earlier in his career, he will have a good handle on his retirement income at any point of time if he chooses to retire earlier. He can also watch his expenses so that additional savings can be ploughed into Investment to further boost his retirement income.

TRI-O RETIREMENT PLAN is a simple way to help you get started on your retirement planning. Learn the FUNDAMENTALS and HOW TO GET STARTED. There is also a spreadsheet to help you CALCULATE your monthly savings and your project monthly income at retirement. You can check out our BLOGS on topics pertaining to retirement planning. Feel free to CONTACT US if you have any questions or comments.