Believe it or not, portfolio diversification has worked

It looks great on paper. Diversification is the hailed financial theory that says investors can reduce the ups and downs of their portfolio by sprinkling money all over the place in different types of investments, rather than plunking down everything on just household-name U.S. stocks.

Investors who take a closer look, though, can see that diversification has done what it’s supposed to do. And for investors looking for a prudent way to gear up for the stretch goal of saving for retirement, diversification can still be a big key to success.

“Diversification is like a free lunch, or at least a free hors d’oeuvre,” says Ian Ayres, professor of law at Yale University who has studied diversification. “You want to take advantage of it.”

“Diversification is a great tool to protect against risks of problems at a particular company or industry, but not if the entire financial system comes under strain.” Read how diversification can get more powerful over time and what the key ingredients to make your diversified portfolio work at USA Today.

IM$avvy – Why I worry about retirement

Many close friends who read my blog often label me as a salty man. This has a negative connotation because in Hokkien context, it is “kiam” or scrooge in western terms. However, when I explained my rationale to them, suddenly they realise they either be prepared to work past 55 or be better off being more salty.

In today’s competitive workplace, there are not many people who are willing to work past 55 years old, even if they are ABLE to. Perhaps it is due to the increased pace of life and work pressure, many people just find it too stressful to cope mentally and physically beyond 55 years old.

The problem is exacerbated when the same group has ailing parents, growing kids and mortgages to repay monthly.

Life becomes much more stressful, simply because they need to work or they die (from debts and poverty).

In a nutshell, most people don’t retire at 55 simply because they cannot afford to do so, not because they choose not to.

25 Shocking but True Statistics About Retirement

MorningStar has compiled 25 shocking but true statistics about the state of retirement in the United States. Wonder how many of them reflects the state in Singapore. Here are the 25 statistics, with some comments:

• 19: Percentage of U.S. workers participating in a defined-contribution plan, such as a 401(k), in 1980. (401(k) is an opt-in type of retirement savings account, akin to SRS in Singapore)

• 52: Percentage of workers participating in a defined-contribution plan in 2004.

• $71,500: Average balance of Fidelity 401(k) account holders at the end of 2010, based on 11 million accounts.

• $740,000: The amount of assets needed to deliver an annual income of $50,000 per year for 25 years, assuming a 5% rate of return and no inflation.

• $1 million: The amount of assets needed to deliver an annual income of $50,000 per year for 25 years, assuming a 5% rate of return and a 3% inflation rate.
• 
  
• $1.25 million: The amount of assets needed to deliver an annual income of $50,000 per year for 25 years, assuming a 5% rate of return and a 5% inflation rate. (These numbers are the same for Singaporeans, just that they are in SGD)

• 45: Percentage of retirees who don’t factor inflation into their retirement planning. (Many tend to ignore the cost of inflation in their retirement plans when they reach their retirement)

• 13: Percentage of retirees who look at least 20 or more years into the future when planning for retirement. (Singaporeans do not look so far ahead when planning for their retirement too!)

• 21 and 17: Average number of years, respectively, that women and men in the U.S. will be retired. (Note that Singaporeans have a longer life expectancy then Americans)

• 25: Percentage of 401(k) participants ages 56-65 who had more than 90% of their accounts in equities at year-end 2007.

• 42: Percentage of the target equity weighting for those retiring in 2010 according to Morningstar’s Lifetime Allocation Indexes.

• $1,000: Monthly Social Security benefit a retiree would receive if he begins collecting benefits this year, at age 62, assuming an annual income of $50,000. (Singapore has no Social Security benefit, the closest is our CPF and CPF Life)

• $1,951: Monthly Social Security benefit if same retiree delays receipt of Social Security benefits until age 70.

• 72: Percentage of Social Security recipients who begin collecting benefits at age 62.

• 34: Percentage of retirees who rely on Social Security for 90% or more of their income needs during retirement.

• 40: Percentage of average wage earners’ income that Social Security replaces.

• 80: Percentage rule of thumb for how much of one’s pre-retirement income will be needed during retirement. (The typical range is 70% to 80% of your last drawn pre-retirement income)

• $230,000: Amount that a 65-year-old couple retiring in 2011 will need to pay for medical care throughout retirement. (Alot of people do not consider the potential cost of medical care in their retirement plans!)

• 40: Estimate of the average percentage increase in 2011 premiums on long-term care insurance policies issued by John Hancock.

• 45: Percentage of Americans ages 40-64 who believe the government will pick up the tab for their long-term-care needs. (Singapore has Basic ElderShield in place, but is it enough?)

• $2,000: Amount of countable assets to be eligible for Medicaid to cover long-term-care costs in most states.

• 70: Percentage of Americans over age 65 who will need some form of long-term-care services during their lifetimes.

• $162,000: Average annual costs for private-room nursing home care in Manhattan in 2011.

• $60,000: Average annual costs for private-room nursing home care in St. Louis in 2011. (The monthly cost of private nursing home in Singapore ranges from $1,400 to $4,000)

• 2.4 years: Average length of stay in a long-term care facility.

So You Want To Retire

Have you wondered how your retirement years will be spent? What are the things that will occupy you when you take your well-deserved break to enjoy your golden years?

Attached is a letter published recently in TODAY – So You Want to Retire – TODAYonline. The writer, who is retired, writes about the pre-conditions for retirement,

a. Your children do not have to depend on you financially,

b. You have zero liabilities,

c. You have enough savings to support your lifestyle,

d. You know what you will be doing during retirement.

He shares an interesting perspective on how one can one can stay active and have a fulfilling retirement.

“If you can afford to retire and want to do so, start preparing now to live your sunset years to their fullest.”

I hope you enjoy the read and have a great F1 weekend!