Retirement Planning: Difference between Wealth Accumulation & Monetisation

Last Updated on 3, January 2016

This video explains the following

• Difference between wealth accumulation and monetisation.
• 3 classes of monetisation assets.
• Why retirement planning is a lifelong process.
• When it is too late to plan for retirement.

For those who prefer to read, the following is the transcript:

 I want to talk about Retirement Planning and specifically on Wealth Accumulation and Monetization.

Wealth Accumulation and Monetization are distinct phases in Retirement Planning.

During Wealth Accumulation period:

1. The individual is likely to be working and have many more years to work.
2. The priority is long-term capital growth.
3. Risk is your friend because when market is down, there is opportunity to buy as you have an income to do so.
4. Investment Income is totally irrelevant because you have a salary from your occupation.

On the other hand, Monetization refers:

1. To the period during your retirement years.
2. Capital preservation is the priority.
3. Risk is not your friend.  Volatility of your investments could depreciate your investments portfolio significantly if you are making regular withdrawals from your investments.
4. Investment income is very important. In fact, investment income is the only source of income to support your daily expenses.

In Monetization, I usually recommend 3 different asset classes.

1. One is rental income from properties;
2. Second would be annuities which give life-long guaranteed income regardless of market conditions;
3. The third monetization asset class would be high risk investments like dividend stocks and unit trusts.

Retirement planning is not a one-off exercise. It is not just about buying one product. It is actually a lifelong process. To give you some examples:

1. Property takes a long time to find because of the need to find a good location, satisfactory rental yield and the price has to be within your budget. The loan that you get, should be something you can afford. Even if those conditions are met, regulatory environment need to be in your favor. If regulatory environment penalizes individuals from investing in multiple properties (e.g. additional stamp duties), it means you have to wait for these regulations to be removed and that can take quite a long time.
2. Another example why retirement planning is a lifelong process is because many annuity products come and go. They often come in tranches. When the tranche’s capacity is met, the product offering will be removed. So you have to wait for another tranche. Another thing about annuity products is that some annuity products are limited premium paying products. This means that you have to pay for 10-20 years of a regular payments before the annuity starts. That means you need to have a retirement plan 20 years ahead of your retirement!
3. Annuity products are very influenced by interest rates. In a low interest rate in environment, annuity products tend to yield very low returns. So you have to wait for interest rates to rise.
4. Let’s talk about Unit Trust and dividend paying stocks. You need to learn how to manage these portfolios. If you have never learnt how to manage stocks and unit trusts in your life before, I don’t think it is wise to do so when you retire.  To learn how to manage these high risk investments, you need to go to through multiple business cycle and you have to lose money in the process in order to learn how to manage these investments. That’s why retirement planning is lifelong process.

Now, some people ask me how do I do financial planning for wealth accumulation and financial planning for monetization.

For those who are looking for wealth accumulation, these individuals tend to be young people, 20’s, 30’s or early 40’s. And they are looking to accumulate their wealth for retirement. Normally these individuals are those who have no idea on what is a financial plan. And that’s where I come in to develop a financial plan from scratch. Hence, they can follow this plan throughout their lifetime.

For those who are in their 50’s or late 50’s or early 60’s, they are looking for monetization plan. And I expect everyone to see me to already have some monetization ideas. You know, if you are in early 50’s or 60’s, you should have some monetization ideas, some ideas where your passive income is going to come from. My role is to give some advice on areas that are still lacking. For example, you may not be so sure whether the lease buyback is worth the trouble. I can help you to see whether the the increase in CPF life is actually financially benefitting to you or not.

I usually do not do retirement plan from scratch when you are in early 50’s or early 60’s. You should already have some ideas. In fact, if you are in 50’s or 60’s and you come to me and tell me that you have completely no idea on where your passive income is going to come from - that means I have to develop a retirement plan from scratch, right? But I have to say that it is too late. You cannot do a retirement plan from scratch when you are this age. In fact, my standard advice is: Just continue to work, you cannot retire. 

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