23 June 2014

Retiring single and on $2,000 per month

The Case

One of my sister is only a fistful of years away from retirement. Her lifestyle is generally a frugal (if not miserly!) one. She has no mobile phone, no cable TV, no aircon, no car (in fact, no license!). Single and hence no kids either. Zilch. Simple lifestyle, doesn't cost much. A Mustachio lifestyle!

She lives in a HDB flat that has been fully paid for. My mother has in fact set aside a sum of money that will pay for all the utilities (water and electricity) for at least another 20 years. Maybe less if the price of utilities inflate.

She has some 'vice' though. She likes to travel. Occasionally, she also seems to splurge quite a bit on geomancy ornaments and temple offerings. Hobby and beliefs.

Retirement Income - The Current Situation

She said she expects to receive about $800 per month from CPF Life. I figured she would probably survive on under $2,000 a month. With $800 already coming from CPF Life, that's a shortfall of only $1,200. That doesn't seem difficult. I figured if she could invest a sum of $360,000 at a 4% yield, she would have a perpetual income to meet that gap. Didn't seem difficult at all since she had not touched her CPF for anything her entire life.

Out of curiousity, I asked her how she planned to make the difference. Turns out she had invested in some insurance scheme that would also generate a sum at the end of 10 years to grow her retirement pot. I don't know what she specifically bought, but I'm sure there must be an insurance component within. So I asked her, what the coverage was for since she didn't need to protect anyone else upon her death? There was a bit of awful silence as the realisation sank in.

Never mind. At least, the money wasn't sitting in a bank account rotting away. Hopefully it's not a Lehman Brothers sob story all over again. On the other hand, she did make a reasonable decision to leave the bulk of her money in CPF as she didn't know what to do with it otherwise. At least that would still compound at 2.5 to 5%.

Interestingly, she does buy stocks. But she's the kind that dabble in trading by buying on rumours, analyst buy calls, and get a hearth-thumping fillip from 3 cents changes in stock prices. You can pretty much guess that she's really into those penny stocks. Risky. Guess that counts as another vice?

Retirement Income - Alternative Options

I thought about this over the rest of the weekend and wondered how that 4% yield could be achieved.  I came up with a couple of possibilities, constrained by the desire to keep a lower risk profile:

Dividend-Yielding Stocks.

Buy a number of dividend yielding stocks and live off their dividends. I suggested she examine several stocks like Vicom, SATS, SPH, HourGlass, Boustead, and complement these with a bunch of REITs. I figured the stocks would generate 3-5% while the REITS would generate 4.5-7%. The upside is that some of these stocks could appreciate in value. Of course, that also come with the downside that the reverse could also happen.

Perpetuals and Bonds.

Presently, there are a few publicly traded perpetuals and high-yield bonds on the SGX - e.g. Hyflux6%CPS10, GentingSP5.125%Perp and Olam6.75%b180129US$. At 5.125% to 6.75%, seems like a combination of these could be a viable option. The yield-to-maturity (YTM) would be a little lower given that these are currently trading at above par (e.g. Hyflux's perpetual is trading at $106.8 for $100 par value on 23 Jun 14). Can't see the downside other than the underlying company folding or becoming unprofitable and hence unable to pay the coupon. The payout is otherwise fixed and would not fluctuate.

Bonds ETF.

What about buying a whole market of bonds instead? Was checking out iShares J.P. Morgan Asia Credit Bond Index ETF ("IS ASIA BND 10S$D") and noted that it holds bonds weighted towards Corporate bonds, with some sprinkling of Government bonds of Asia Pacific countries. Looks like at least 70% are investment grade. The yield seems to be about 4-5%. I believe its Expense Ratio is 0.5%. Seems doable.

Bonds Unit Trust

I also explored Bonds Unit Trust that provide regular dividend payout. But none seems suitable for the desired profile. Either dividend payouts would be too low (<4%), or risks seem high. Did I miss something?

A Matter of Choice

What would you choose?  Are there alternatives?  I greatly welcome any views and insights.

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