Sunday, April 18, 2010

Safer ways of building retirement nest egg

Whenever the topic of building a comfortable retirement nest egg turns up, investing is almost always mentioned. Personally, I would not put investing at the top of the list of recommendations to build retirement fund to the general public. It will be a disaster if your investment gets wiped out just when you are about to retire. In fact, this did happen and the person got so aggrieved that he suggested that CPF funds be banned for investment.

There are less risky ways which I highly recommend to achieve financial independence. They are slower but surer. However, they will not make you very rich but will allow you to retire with dignity and avoid becoming a burden to society. The methods are as follows;

1. Saving money
Unlike investing where luck plays a role (at least in the short-term), saving money is within anyone's control. A middle-income person with financial discipline should be able to set aside at least 10% of their salary per month. Assuming there is no extended period of unemployment, the person should be able to accumulate a respectable nest-egg by the time he retires. My next series of posts will be on saving.

2. Using insurance for protection
Saving money alone is not enough as an unexpected disaster can take them away. You can lead a frugal lifestyle and save lots of money. However, without insurance protection, you can still be bankrupted by unexpected disasters like medical illnesses or accidents that hits you with a huge bill and disables you from earning an income for an extended period of time.

3. Work hard at your job and be good at it
For the majority of us, our major source of income comes from our job. Not many of us can have investment income that exceed our salary. Hence, it makes sense to concentrate your efforts on doing a good job in your career rather than dream of the day when you can shake leg and solely depend on your passive investment income.

Many people have said that one cannot get rich being a salary worker. That depends on who you are talking to. Fund managers, bankers, proprietary traders will disagree. People who work in the highly competitive consumer electronics sector (like me) whose profit margins get squeezed and major companies moving out to China every year will agree. The lesson learnt is to join the right industry. The right industry is the one with the highest median salary.

Speaking from experience, I have seen mediocre people working in the right industry getting paid more than smart people working in a bad industry. If someone is in the right place at the right time, he can work less hard and be less smart and yet earn much more than someone who works very hard and is very smart.

Choosing the right industry is a matter of luck. My advice to fresh graduates is not to choose a job simply because it pays well and end up becoming miserable. I believe it is more important to choose a job suited to your personality and natural abilities so that you can perform well and even come to love it.

4. Arm yourself with financial knowledge to protect against the financial sharks

In a modern economy in which financial services have become dominant, it is important to be financially literate to protect yourselves against the financial sharks who work in this industry. The compensation of Wall-Street kind of jobs is so out of whack with reality that I have to wonder about the source of their income. One income source is the financially illiterate suckers that they prey upon. You can do the right things financially all your life - saving hard and working hard. Without adequate financial knowledge, one commission-minded financial adviser intent on sucking you dry will succeed in persuading you to part with your hard-earned nest-egg. Remember the Lehman Brothers Minibonds?


  1. Hi HYOM,

    Chanced upon your blog via your HWZ post. A good read indeed, hope you'll keep sharing...

    I've bookmarked your blog in my RSS feed.

  2. Thank you very much for your encouraging comments. Hopefully, this blog gets more readers along the way, especially the financially illiterate ones. Otherwise, my efforts will be wasted.

  3. The problem is not that investing is inherently risky and therefore should be totally avoided.

    Risk and returns go hand-in-hand. The crux of investing is to MANAGE risk, not shy away from it. Risk management is what differentiates speculators from investors.

    A good example is the aggrieved investor you cited. He obviously failed to rebalance his portfolio to suit his personal risk profile. With such a short timeframe before retirement, he had no business putting such a large proportion of his funds in risky investments.

    The issue is more that in Singapore, there are very few viable investment options accessible to the average Joe.

  4. Staying employed may give us a false sense of financial security and we do not realise that being employable is uncertain as we age.

    We are likely to be the one to be retrenched and will start getting concerned whether we could then support our kids through university and have enough food and shelter over their heads. Some of us (senior employees) may already have witnessed some senior colleagues being sent off.

    We need to have other source of passive income while currently being employed and working towards the goal of staying employed as an option and we are ready to be sent off when it comes.

    Investing is one way to achieve this goal but it requires us to put in fair amount of effort and time to acquire knowledge, skill and discipline to accumulate wealth. We could start with any amount of capital and slowly add more capital as year passes by and through prudent investing to reach our goal.

  5. Hello,

    In a world of 5 Mins Millionaires, your post is a realistic dose of reality. Keep it coming!

  6. Hi Hyom,

    Came across your blog thru tan kin lian's blog. Must say that I have enjoyed reading your comments - level headed and with common sense advice. It will be good advice for those starting out in planning their financial life.
    Just a note to say thanks and look forward to reading more of your blog.

  7. Thank you for all the encouraging comments. At first, I thought I was talking to myself. Now, I will continue writing.

  8. May I suggest to add another way of building retirement nest egg ie to remain healthy? The medical bills can drain a nice retirement nest egg. Insurance is one way (as you have mentioned) to transfer this risk but the most important is still to remain healthy.


  9. Hi starlight,

    Certainly keeping healthy is very important. Keeping expensive doctors away as you have said is one good reason. Another one is to protect our most important asset - the ability to earn a living. Without health, that ability is lost. If you view your body health as an asset on the balance sheet, a healthy person depreciates this vital asset more slowly than a sickly person.

    Ironically, good health can become a liability after you retire. The healthier you are, the higher the risk that you will outlive your savings. I am not sure if postponing retirement is a good solution although it certainly solves the financial aspect of the problem. The old Sage of Singapore suggests that there should be no retirement age. He is lucky because he loves his job. But, to the man who drags his feet to work and absolutely hates his job, it is tragic to work to death without enjoying his last days. Besides, how many of us really love our job?

    There are no easy answers to this problem. However, I think a more serious problem is not the inability to retire early but forced early retirement. Forced early retirement is the inability to seek meaningful employment after retrenchment at an awkward age (old enough to suffer age discrimination but not old enough to collect money from pension, CPF etc)

  10. Thinking about the retirement is a good and important way of making it easier. I can agree with the author and I think that each person should learn how to deal with money and save it. However life is very unpredictable and you might need quick extra money. In such cases I use instant cash loans in the on-line service. It helps you to get money really easy, and also you'll be sure to pay it back. Because you can't take much money than you will be able to return.