Prudent retirement strategies

We want to ensure investors adopt retirement strategies that mitigate longevity risk. Between the ages 40 and 50, the simple solution is to convert lump sum capital into income streams by way of annuities. This simple strategy mitigates longevity risk but the decision is a difficult one because investors part with their long life savings to exchange for an income stream. The decision is emotional because investors know they will never be able to get the money back.

For this reason, while annuities are part of a simple strategy to exchange lump sum for income stream, many prefer to use strategies that preserve liquidity while meeting retirement needs. It is possible to use Treasury Inflation Protected Securities (TIPS) to create payouts during their lives. The key is working with your advisor to create an expected cash flow over a predetermined time frame. This is not a simple task. The set of future cash flows will have to meet retirement benchmarks shaped by inflation. It is intuitive for this custom set of cash flows to be benchmarked against the payout of a simple annuity instrument that is inflation protected. This will ensure the maintenance of real purchasing power.

Enhancing the retirement income

One other consideration is phased retirement. Besides creating a prudent retirement investment strategy, the investor should also consider postretirement positions, reduced workload and salary. The ability to create an alternative stream of salary, albeit reduced from previous scale, can enhance the retiree’s quality of retirement life. Gradual retirement allows the individual to reduce working hour and to acclimatize with a lifestyle of lower income. The individual can continue to receive predictable income and some health benefits.

Risks to consider

Retirement risks can be hard to incorporate into the investment strategy. How do we mitigate long tail market risks? You may own a sound dividend income plan, but a sudden crisis can create a volatile change in asset values and dividend payout plans. Fixed income investment strategies dependent on reinvesting coupon payments can fail to provide the required rate of return when rates turn for the worse systematically.

Relative to inflation and longevity risks, which can be often managed using a statistical framework, personal circumstances can also affect one’s retirement plans. To manage these risks, an individual must start considering insurance plans early. Use investment strategies to mitigate statistical risks such as longevity, inflation and market risks. Take on insurance plans earlier to mitigate future health risks and circumstance risks.

The entire retirement process may be complex. One way is to engage a prudent adviser to discuss your options early.

Gender Equality: 3 Major initiatives

Talent has become a decisive factor of production in the global business context. A business competes on innovative capabilities, no longer just on the accumulation of assets. In this context, businesses cannot treat gender parity as superfluous. Women are half of the potential talent available in any country. Gender parity and efficient use of women in all sectors will be a competitive advantage for countries and for any global firm.

The onus is on global firms to work with governments in creating gender equality benchmarks in order to measure gender gaps globally, regional and even down to sub-industry sectors level. Policy makers can use standard benchmarks that track gender gaps economically and socially to capture the magnitude of inequalities. This understanding is necessary for us to prescribe tools that close the gap in homes and in workplaces.

The lack of female representation in public offices is a barrier to gender equality. Women’s access to public office may in many cases be restricted by party bias for male politicians. We need women to be adequately represented in government and politics to ensure sound policies that close the gender gap. It is possible to install gender quotas for women. In Singapore, women Member of Parliament make for less than 30% of the parliament. We have racial quotas ensuring minimum representation for Malays and Indians.

Gender equality benchmarks and female representation in public offices are ingredients for gender equality. Equally important is the level of women education and women’s access to information and resources. Access to information and education is necessary to create equal opportunities for women to success in the future.

Can Singapore survive the knowledge and education revolution?

Higher education is no longer the privilege of the few. Middle class can now access higher education. The number of graduates is growing exponentially. With the introduction of quality Massive Open Online Courses, students from around the world have access to quality education.

Example

Udacity, has teamed up with AT&T and Georgia Tech to offer an online master’s degree in computing, at less than a third of the cost of the traditional version. Harvard Business School will soon offer an online “pre-MBA” for $1,500. Starbucks has offered to help pay for its staff to take online degrees with Arizona State University.

Unopar University offers low-cost degree courses using online materials and weekly seminars, transmitted via satellite. In America, Minerva University has lower fees (around $10,000 a year, instead of up to $60,000). The first batch of 20 students has just been accepted for Minerva’s foundation year in San Francisco, and will spend the rest of their course doing online tutorials while living outside America, with an emphasis on spending time in emerging economies as a selling-point to future employers.

Singapore at risk

Singaporeans are at risk if the global MOOCs provider offer common standards for accreditation. Should common accreditations be accepted globally, Singaporeans will be competing with a huge pool of readily available talent from emerging markets.

Online learning will take the world by storm. The financial and technological disruption will render many universities useless. The cost to train a Singaporean costing $100,000 per student over 4 years will no longer be competitive if MOOCs can train the same quality student for a fraction of the price.

Trend of automation

Carl Benedikt Frey and Michael Osborne, of Oxford University, suggested 47% of occupations could be automated in the next few decades. White collar jobs are not safe from elimination. What can the Singapore government do by then?

Cheap online education will eventually replace faculty. Star professors will outshine their peers. The gap between the best faculty members and the average will widen. Starlets will deliver key lectures. Their online seminars can be distributed to an unlimited number of students. The learning can be automated and the Q/A guided by a cheap graduate student.

I believe the quality of education will sustain and may even increase as students can now hear from the best professors. The question is how will Singapore respond in a global environment filled with cheap talents?

Origination of complex investment management fee structure

Fee structures direct investment management behavior and influence the KPIs of funds.

Fund managers cannot guarantee returns. But they will need to receive salary even in losing months. This causes stress between the manager and investor.

The effort to reduce fee may lead to a reduction in quality of talent and regulations. This can reduce performance and increase risk management capabilities.

Performance related fee structure that pays managers only if the fund makes money is risky. This structure may lead to managers taking extra risk to avoid losses, even if the strategy does not fit the fund objectives.

A more complex fee structure can lead to better risk management outcomes. For example, we may want the manager to reduce volatility instead of pursuing alpha.

The yardstick to measure performance in investment management is complex. Do we pay managers for high returns and risk deviating from the investment objective? Or do we pay managers for mirroring a specific beta type?

In short, do we pay for better management quality or for higher earnings? It takes better managers to stick to management objectives than to seek opportunistic investments.

This is why managers are subject to complex fee structures such as risk adjusted returns and clawback schemes.

CPF payouts are not inflation hedged

Non salaried retirees face a greater risk than salaried employees in the face of inflation. At least, we assume salaries increase with inflation. Government need to help citizens mitigate the risk of 1. Inflation and 2. Longevity.

In Asia, most governments do not offer inflation protected benefits to their citizens. Given that revenues received by the state is linked to inflation, it could be the responsibility of the state to offer inflation protected schemes.

Such a scheme should have 3 core features:

1. Reasonable level of payout.

2. Payout that lasts for as long as the retiree lives

3. Payout level is inflation protected

At the moment, the CPF life meets only #2. For retirees with meagre CPF sum, payout sums can be minimal. Our payouts are also not pegged to inflation growth. To provide inflation pegged payouts, we need inflation linked annuities. To overcome the need for inflation pegged payouts, Singapore government can consider issuing bonds that are inflation indexed such as the US TIPS and Australia CAINS.

I understand that inflation indexed products can imply risks to the government. This is especially of concern when Singapore’s y-o-y inflation can range between 4 to 8%. I also note that Singapore is a small country and can be easily impacted by global demand. In the face of inflation, currency appreciation is a good way to manage risks.

Singapore should also consider financial innovation to create inflation indexed products. One way is to create a mixed basket of inflation linked products globally and hedge the currency exposure. I am not a financial expert and suspect that such intricate hedging techniques may be too costly to implement. But this could still be better than for Singapore to issue sovereign inflation indexed products. In the latter case, Singapore government would bear the entire inflation risks on behalf of citizens.