FINANCIAL PLANNING
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RETIREMENT PLANNING
WHERE WILL MY MONEY COME FROM?

Employment Income

Annual employment income will probably be the largest source of incoming funds you receive - and the largest component of your contributions to your retirement fund.

As there is no annual personal income tax in Negara Brunei Darussalam, it is best to do a simple budget to subtract your annual living expenses and recurring expenses from your annual income. The amount left over represents the discretionary saving you have at your disposal. This way you may be able to save a large portion of your employment income toward your retirement, or you may only be able to save a little.

Social Security (TAP and SCP)

Social security benefits can provide a small portion of your retirement income. You may visit TAP website (www.tap.com.bn) to estimate your retirement benefits (in today's dollars) by using the site's online calculator.

Although you won’t be able to use this funds to build your nest egg, however it will help to fund your living expenses when you're retired and reduce the size of nest egg you will need.

Current Savings, Investments and other sources of funds

With the current savings and investments that you have, if you have a sizable portfolio then it may sufficient to cover your retirement all by itself.

If you have yet to begin savings or coming to the retirement planning game late, you will need to compensate for your lack of current savings with greater ongoing contributions.

Other sources that will be available to fund for your retirement needs such as inheritance, gifts, pay raises and bonuses etc. Whatever additional sources of funds you may have do include them in your retirement projection only if it is certain to occur.

Building a Nest Egg

There are many types of investment account, savings plan and financial products that you can use to build your retirement nest egg. However, one may need to know the relationship between risk and return before investing into such products. Diversification may reduce the amount of risk in your portfolio, increasing the chances that you'll reach your retirement savings goals.

Hence, in order for you to choose a suitable financial instrument that suits your risk profile, you may want to consider consulting a professional financial planner.

Life Insurance

Whole Life and Endowment insurance plans are useful savings vehicles. Such policies acquire cash value over the years which the policy-owner can tap for various purposes such as  surrendered the bonus to meet some urgent needs.

Advantage of insurance over other investment vehicles is that it creates an immediate estate at the death of the insured to provide cash or income to the dependants when it is most needed.

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Unit Trusts

A unit trust is a pool of co-mingled funds contributed by many investors kept in trust by a trustee and managed by a professional fund manager.

Investing in unit trust may generate income in the form of dividends, payouts and capital gain in the long term.

As there is a wide variety of unit trusts with different investment objectives, it is important that the investment objectives are in line with yours. Investment objectives include aiming high income or a high capital growth, or a combination. Some unit trusts invest in specific countries or regions.

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Certificate of Deposit (CD)

CD is similar to savings account in that they are insured and thus virtually risk free.

However, they are different from savings account in that the CD has a specific, fixed term and usually a fixed interest rate. It is intended to be held until maturity, at which time the money may be withdrawn together with the accrued interest.

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Effect of Compounding Interest

One of the most important determinants impacting how large your nest egg can get is the length of time you let your savings grow. The reason for this is that the effects of compounding can become very powerful over long periods of time, potentially making the duration of your retirement savings plan a much more critical factor than even the size of your monthly contributions.

► Click here to load a sample case

Consider the hypothetical case of Mr.A and Mr.B, both 24 years old. Mr.A makes $2,000 annual savings contributions for 10 years and then never makes another contribution ever again. Mr.B makes no contributions during those 10 years, but then makes $3,000 annual contributions for the next 10 years. Assuming a 5% constant growth rate for both investors, the result will be as below.

Age Mr.A Mr.B
24 2000.00 0
25 $2,100.00 0
26 $4,205.00 0
27 $6,415.25 0
28 $8,736.01 0
29 $11,172.81 0
30 $13,731.45 0
31 $16,418.03 0
32 $19,238.93 0
33 $22,200.87 0
34 $25,310.92 $3,000.00
35 $26,576.46 $3,150.00
36 $27,905.29 $6,307.50
37 $29,300.55 $9,622.88
38 $30,765.58 $13,104.02
39 $32,303.86 $16,759.22
40 $33,919.05 $20,597.18
41 $35,615 $24,627.04
42 $37,395.75 $28,858.39
43 $39,265.54 $33,301.31
44 $41,228.82 $37,966.38
45 $43,290.26 $39,864.70
46 $45,454.77 $41,857.93
47 $47,727.51 $43,950.83
48 $50,113.89 $46,148.37
49 $52,619.58 $48,455.79
50 $55,250.56 $50,878.58
51 $58,013.09 $53,422.50
52 $60,913.74 $56,093.63
53 $63,959.43 $58,898.31
54 $67,157.40 $61,843.23

The table shows that even though Mr.B contributed $1,000 more than Mr.A, he ends up with the smaller nest egg because he started late!

The bottom line is if you don't start saving for retirement early on in your working life, it will be more costly trying to play catch-up later on. It's much easier to put aside a small amount of money each month starting from a young age than it is to put aside a large amount of money each month when you are older.

Questions you may have about Retirement Planning

  1. Why do we need to plan for Retirement?
  2. How much will I need for Retirement
  3. Where will my money come from?
  4. Troubleshooting and to Bridge the Retirement Gap
 
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