Living on your accumulated savings

In my book, Practical Guide on Financial Planning, I educate consumer on the option to keep their accumulated savings in a low cost investment fund and withdraw the money regularly to meet their living expenses. Although the market value of the fund may be volatile, it does not matter to a long term investor, as long as the underlying shares are in good quality companies.

The investor can just earn the dividend on the shares (which is about 3% per annum). If the dividend is not sufficient, the investor can sell some units every few months to supplement the dividends. If this is managed well, the fund should be able to last the lifetime and leave a balance to be beneficiaries.

Assume that the accumulated saving at retirement is $500,000 and the retiree needs to $2,000 a month to spend. Here is the balance of the accumulated savings at the end of 25 years (by which time, the retiree will be 90 years old), assuming that the fund earns a net yield of 4%, 5% and 6% (inclusive of dividend):

Balance after 25 years
Yield
4%      $293,436
5%      $490,455
6%      $750,182
You can do the same calculation with an Excel spreadsheet.

There is no need to invest in a life annuity, if you have sufficient savings to last for your lifetime. The advantage of a low cost investment fund are:

• Avoid the high deduction taken away by the insurance company (a lot of money!!)
• Earn a higher yield (better than a life annuity)
• Greater flexibility - to meet unexpected needs

The disadvantage is the perceived investment risk. You can manage it by diversification (e.g. in an indexed fund), investing for the long term (to average out the good and bad years) and by being educated (e.g.  buy my book and attend the educational talks by FISCA). 

Tan Kin Lian