retire-in-pandemic

What’s It Like to Retire During a Pandemic

Alvin Chow
Alvin Chow

The following opinion is mine. This is a sponsored article.

Most investors dream of owning a stock portfolio that would allow them to retire comfortably.

In an ideal world, you’ll live off your portfolio via a combination of dividends and capital withdrawals during your retirement.

But in reality, relying solely on a stock portfolio exposes your retirement to market risks. You don’t get to choose when a bear market occurs. And the worst scenario is for you to experience retirement and a bear market at the same time.

A bear market can significantly reduce your portfolio value and a fixed 4% withdrawal rate on a smaller portfolio value means you will have less money to spend – a 50% reduction in portfolio value results in a direct 50% reduction in living expenses.

To sell or not to sell

Take the case of Covid-19 – it has definitely upended the economy.

Singapore experienced the worst GDP contraction in the second quarter of 2020 and is on track to finish the year with a contraction ranging between -5% and -7%.

It would be scary to be retiring during the worst economy in history. This is especially so for those who are invested heavily in the financial markets.

At the peak of the Covid-19, there was a lot of fear in the markets and stocks were sold down heavily.

I won’t be surprised that some retirees have sold a big proportion of their stocks – in case the market crashed and decimated their retirement funds.

However, the stock market rebounded quickly and strongly after bottoming in March 2020, and many stocks went on to set new record highs.

If you have remained level-headed and stayed invested, your retirement plan would have been back on track pretty quickly.

Of course, I’m saying this with the wisdom of hindsight and no one can predict the future.

Investing isn’t easy – we are constantly required to make decisions during uncertain times, using incomplete information. To make things worse, we are constantly battling greed and fear hijacking our thoughts.

So don’t be too hard on yourself.

Just learn from this experience and not bail from the markets the next time fear is back.

These tips may come in handy.

How to avoid making bad decisions during a market crash?

  1. Instil good investing habits

One solution is to create a system to shape your behaviour. I have little confidence in human discipline because it is so easy to give up if a good habit isn’t formed. Look at the majority who don’t complete their new year resolutions.

  1. Establish an investment system

Focusing on building and maintaining an investment system may distract you from acting on fear in the markets.

That said, #1 and #2 tend to work well only when the markets are bullish and your portfolio is looking good.

Most importantly, you should:

  1. Have a ready stash of Emergency Cash

Yes, this is textbook advice. But without a source of emergency cash, it’s human to succumb to fear no matter how ironclad your habits and systems are.

Having a sufficient stash of emergency cash would allow you to buffer for fluctuations during bear markets. Your portfolio value would rebound in the future as long as you stay invested.

Even retirees can make use of a high-interest savings account

All of us need a bank account to give us the liquidity we need to pay for expenses conveniently as well as a safe place to store our emergency funds.

A high interest savings account would do these jobs well.

A common problem retirees face is that they usually don’t qualify for the high interests because most banks require salaries to be credited into the account.

The good news is that DBS Multiplier recognises dividends credited by CDP into your bank account as an income and a transaction. Recently, their recognition has expanded to include dividends or interests from custodian accounts, SRS, CPF, Unit Trusts and Singapore Savings Bonds!

This can be substantial because retirees tend to have bigger investment portfolios. Assuming 3% dividend yield on a $1m portfolio, it would qualify for $30,000 worth of transactions alone.

How can retirees qualify for higher interest savings?

With DBS Multiplier, all you need to qualify for higher interest are:

  • keep your emergency funds in the account,
  • credit all your dividends there
  • fulfill one additional banking category

I would suggest applying for DBS/POSB credit cards since you will need to spend anyway. Just remember to apply for one before you quit your job and retire for good because you may not be able to apply without a salary.

With the credit card spend, you would qualify for a 1.2% p.a. compared to a miserable 0.05% p.a. interest. It makes a big difference given the low interest rate environment now.

How to hack the system for higher interest monthly, and enjoy monthly dividend payouts at the same time?

Criteria for additional interest are applied on a monthly basis while dividends are not distributed each month.

This means there will be months where you don’t get to enjoy the higher interests.

For example, you’ll enjoy 1.2% p.a. applied to your savings amount for months when the dividends plus expenses crossed $15,000. In other months, the interest rate would drop to 0.9% p.a. if you spend about $3,000 in that month and no dividends were credited.

Here’s a workaround:

Consider ETFs that distribute dividends on a monthly basis. There are a lot to choose from, but here are 3 examples. (This is a cursory selection of a stock, bond and REIT ETFs. Please do your due diligence and assess the suitability for your own portfolio.)

  • Global X SuperDividend ETF
  • Vanguard Total World Bond ETF
  • Invesco KBW Premium Yield Equity REIT ETF

This may even out your dividends payouts throughout the year. Coupled with your expenses, you could realise the 1.1% interest rate throughout the whole year, as compared to seeing your interest rate fluctuate closer to 0.9%. The difference isn’t large but there’s a psychological advantage.

Humans like certainty – seeing money credited to your savings account on a monthly basis via your investments evokes good feelings. You see the rewards and hence are more likely to keep doing it – i.e. staying invested.

This is what I mean by systemising your finances. It runs pretty automatically once you have set it up.

Most importantly, focusing on the system would distract you from selling in fear and jeopardising your retirement plan.

Alvin Chow
Alvin Chow
CEO of Dr Wealth. Built a business to empower DIY investors to make better investments. A believer of the Factor-based Investing approach and runs a Multi-Factor Portfolio that taps on the Value, Size, and Profitability Factors. Conducts the flagship Intelligent Investor Immersive program under Dr Wealth. An author of Secrets of Singapore Trading Gurus and Singapore Permanent Portfolio. Featured on various media such as MoneyFM 89.3, Kiss92, Straits Times and Lianhe Zaobao. Given talks at events organised by SGX, DBS, CPF and many others.
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