I'm 50 and wish I could retire rich, but how can I do so?
_ PamANSWERED BY...Teera Phutrakul, CFP, Chairman, TFPA Define rich. What does it take to be rich these days? 10 million baht? 100 million? Ask a dozen people what it means to be rich and you will probably hear a dozen different answers. Money is a funny thing. It means different things to different people.
The term "financially independent" often comes to mind when we try to define the meaning of being rich. Most people rely primarily on their salary as their main source of income. However, many of us also have a second source in the form of investment income such as rentals, interest or dividends. If your investment income exceeds your monthly expenditures, it means you are financially independent.
When you retire, you will rely entirely on your investment income. Therefore, a good place to start is to figure out what we financial planners like to call the income gap. As you approach retirement, you will need to reconcile your budget with your portfolio. If you expect your monthly expenses to be, say, 50,000 baht, then you will need at least 20 million baht (assuming 3% inflation per year and 25 years of retirement) to be nearly certain you will not run out of money.
Depending on a host of variables including your lifespan and market performance, it is possible for retirees to enjoy short-term security and long-term growth. Let's suppose you have a 10-million-baht portfolio and need 50,000 baht a month to live on, which comes to 600,000 baht a year. One strategy to consider is to divide the portfolio into two portions _ 3 million baht and 7 million baht. Use the smaller portion to create a bond ladder by buying 600,000 baht worth of one-year government bonds, 600,000 baht worth of two-year bonds and so forth.
This strategy will ensure that you have five years' worth of income every year plus access to the principal as each bond or group of bonds matures. The remaining 7 million baht can then be invested entirely in stocks and commodities to generate capital appreciation.
When the five-year period is up, you could sell some stocks to purchase another year's worth of living expenses set to mature in five or so years. However, if your stock portfolio suffers a bad year or two, you can always hold off on selling stocks and shorten the ladder; if you have capital gains in any given year, it's wise to lengthen the ladder.
In conclusion, for those who are still in their working years, the message is clear _ save as much as possible when you are young and hope for the best when you are old.
I don't see any prospect of the deposit rate rising. I've been thinking about spending my savings to pay off my mortgage, but I'm not sure if I can make a better return from savings, because interest rates are low.
_ MongkolANSWERED BY...Teera Phutrakul, CFP, Chairman, TFPA When you take out a mortgage, it may seem logical to put down as much as possible on your down payment to minimise your interest payments, but this is not always best.
You need to consider other issues such as your need for cash reserves and what your investments are earning. Although mortgages tend to have lower interest rates than other debt and they are tax deductible, it is not wise to pour all your cash into a home if you have other debt. A 20% down payment is usually the norm in getting the best mortgage deals.
Ideally, your monthly long-term debt payments including your mortgage and credit cards should not exceed 36% of your gross monthly income. That's one factor bankers consider when assessing the creditworthiness of a potential borrower.
At the other end of the scale, avoiding debt at any cost is not smart either if it means depleting your cash reserves for emergencies. The challenge is learning how to judge which debt makes sense and which does not and then wisely managing the money you do borrow.
The Thai Financial Planners Association is the certified financial planner (CFP) trademark licensing authority in Thailand. It is a self-regulated, non-profit group of financial advisers and experts from various organisations set up to give advice to investors. Questions can be submitted to them through wealthcare@bangkokpost.co.th or posted on the TFPA webboard at www.tfpa.or.th