Random Thoughts on Retirement ( David Y. Chung / 鍾彥龍 ) Introduction : o Life is a one-way journey - a journey that no one is anxious to reach the “final destination”.  The goal is to enjoy the “journey” along the way and have as many unique and memorable experiences as possible before reaching the “final destination”. o Retirement is part of normal life cycle – it is a new chapter with more freedom to do whatever you always wanted to do in life. o The Golden years (60-75) is the last window in life with good health for travel or other activities that require physical strength. o Satisfying Retirement Life Needs Good Planning in Advance o The good news - every retiree I know is happier after retired and no one misses his/her old job at work (no regret).

Common Questions About Retirement: o When to retire ? o Doing what in retirement ? o How much total “retirement funds” is needed ? o Where to invest the retirement funds ?  The biggest unknown in retirement planning (timing and financial preparation) : --- when each of us will reach our “ final destination ” ?  Life expectancy in U.S. : 76 for men, 81 for women (L.E. in Taiwan : 78 for men, 83 for women) => Life is fragile, so wish for the best, but don’t take “wishful thinking” for granted.

When to Retire ? o Why may be a desirable retirement age ?  A few more “golden years” with good health for travel & etc.  Lump-sum pension payout max out at  Due to life expectancy factor o At same NPV by design, the total annuity pension payout (pay monthly) also max out at 60-62, statistically.  Retiring at 70 & getting higher monthly payment doesn’t guarantee higher total life-time retirement benefit than retiring at 60, all depends on how long we will live (the biggest unknown). o Impact of losing monthly paycheck after retire is less than expected.  With good financial planning and prudent investments, it is possible to have steady income in retirement comparable to pre-retirement. o Another big unknown – how long our good health can hold ? => Time is the most precious commodity, especially after 55. => Wish for the best, but be conservative in retirement planning

A Few “Legitimate” Reasons to Retire Late o Just “love” what you do on your job everyday  Examples of the “lucky few”  Warren Buffet  Professors  Medical doctors  Private business owners o Need few more service years to qualify for pension o Need more savings to retire comfortably.  Make up saving shortfall by working a few more years o Just don’t know what to do everyday in retirement  This is NOT a good reason to give up part of precious Golden years.

Doing What in Retirement ? o Whatever you always wanted to do in life, one idea is to gain more unique and memorable experiences. o The key is to keep mentally and physically active  Consulting (p art-time advisory job, a good transition step to full retirement)  Religious work  Volunteer work (help others & expand social contacts)  Art, Music, Majiang, Golf, Gardening, Social clubs et. al.  Grand kids  Managing investments (good mental challenge, potentially profitable)  Travel - Too many places to see, not enough time in life. - Try to be a “traveler” instead of a “tourist”. - Good mental and physical activities  Others

Financial Preparation for Retirement (From the view point of typical employees, not private business owners or rich landlords) o Accumulate as much “capital” as you can during work years, and invest wisely. o Start early, the earlier the better (compounding effect). o Invest wisely, extra 2% return from in investment can make BIG difference over 20+ years. o “Market timing” does NOT work in the long-term. o After retire - instead of a 9-5 job, continue to make money with the retirement funds (capital) via prudent investments--like a “capitalist”. o Minimize “total cost” of investment (fees, commissions, spread & etc.)  2% fees on $1MM investment is $20,000 each and every year. o Cash Flow (spendable income) maybe more important than asset growth in retirement – especially during the Golden years.

How Much “Retirement Funds” Is Needed for Retirement ? (Retirement funds = 401K + lump-sum/pension + other liquid assets ) o It is a “life-style” related question. o Generally the more the better (money provides “freedom” and options ). o A good guideline is sufficient capital (401K+ pension + other savings ) to generate 80+% of pre-retirement income based on realistic investment return assumptions.  Assuming 7% LT average return, $70,000/yr income needs $1MM capital base. o Common “big-ticket” expenses in retirement  Travel & other hobbies in 1st-half of retirement (optional & controllable)  Medical expenses in 2 nd - half of retirement (less predictable) o Don’t forget market cycles, inflation and unexpected expenses in life, so be conservative in capital target and investment return assumptions. When to Take Social Security Benefit ? o A personal decision. o Take SS benefit ASAP and invest the SS checks to push the breakeven point from 78 to 82+ could be a preferred option.

Where to Invest The Retirement Funds ? o Equity (stocks and mutual funds) or Real Estate ?  Most retiree’s 401K & lump-sum are rolled over to IRA at retirement, which makes it difficult to invest in real estate. o Equity investments can be risky, but doesn’t have to be risky.  Depending on quality of the equity, time horizon and individual “risk tolerance” o Stock is fractional ownership of a business, not a gambling chip.  Invest in the stock/business, not playing the market.  The more you understand the business, the less panic you will be in down market. o Equity/Stock investment options:  Stock mutual funds (total annual costs can be >2%)  Index funds (total costs < 0.5%)  Self-managed diversified stock portfolio (home-made mutual fund) No annual fees, Can achieve 3-4 % steady dividend income (+ growth potential) Dividend usually has build-in inflation protection. Can sell “put” or “covered-call” options for extra income (for experienced investors only)

Where to Invest Retirement Funds ? (Continued)  Focus on blue-chip, dividend-paying stocks, accept moderate long-term average return (5-7%), let compounding and time do the magic.  S&P 500 in 12/2000 & 12/2010 are basically the same (~0% gain in 10 years) => Steady dividend income is important in retirement  4% dividend =$40,000/yr from $1MM investment (even in down market). o The biggest risk in equity investment is emotional (Greed & Fear)  Typically cash flow into stock mutual funds is the highest near market top, cash flow out of stock mutual funds is the highest near market bottom (Buy High, Sell Low). o Never buy stocks on margin, it is high-risk gambling. o Don’t buy at market high and don’t panic sell during market crash => “ Buy Low, Sell High” instead of “Buy High, Sell Low” o Low cost index fund probably is a better option for people not interested in managing their own investments.

Summary Satisfying retirement life needs good planning in advance. Keep mentally and physically active in retirement, do whatever you always wanted to do in life. The “Golden years” is extremely precious, take advantage of it to travel or enjoy other activities that require physical strength, before it is too late. To prepare for a long retirement, prudent investment in retirement is just as important as during work years, especially in current low-interest environment. Wish you all a happy and healthy retirement…sooner or later. Disclaimer : I am NOT a certified financial planner or retirement consultant, all statements here are my personal opinions.