There’s a lot to keep in mind when it comes to making a plan for your financial future; how might your income and spending change over time, for example? What are the likely fluctuations in interest rates, or in the inflation rate in Singapore or wherever you currently live? Andrew Talbot from Avrio Wealth runs through some details for us.
Making plans and assumptions
Planning your financial future has a lot to do with looking ahead and making assumptions. These assumptions forecast what might happen in the future and enable you to plan so you can ensure you make the most of your money and achieve your financial objectives. Modelling of this kind shows your current position relative to your preferred position and goals by assessing your current and forecasted wealth. It provides a detailed picture of your assets including investments, debts, income and expenditure; these are then projected forward, year by year, using calculated rates of growth, income, wage increases, interest rates and the inflation rate in Singapore and elsewhere.
It’s important to select the correct assumptions, as small variations in the figures can greatly impact future planning. Consider the following key assumptions:
- The rate of return or interest rates you use for the growth of your investments.
- The rate of inflation in Singapore or the country you’ll be living in.
Understanding how inflation works and knowing the rate of inflation where you live is essential. It will help you understand how much you need to return to keep up your future buying power. For example, if you get a 5% increase in portfolio return, but inflation is 7%, you’re at a net loss of 2% in terms of real value.
The Singapore inflation rate has been higher in the discretionary goods and services that wealthier and middle-aged households spend a greater proportion of their income on — items such as cars, furniture, hotel stays and recreation.
Watching your personal inflation rate
Your own personal inflation rate is something to watch and is a valuable metric. While inflation indexes use standard data for each country, they encompass a lot of price points you may not buy. Your own personal inflation index, on the other hand, may include items that have increased substantially and that may not be recorded in (or may have a more minor component of) the general index.
Looking at your index when it comes to planning is important. It lets you know the required rate of return a portfolio of assets needs to achieve. Your expenses will be different to a general consumer index such as the CPI (Consumer Price Index); if you have children located around the world, for instance, the cost of travel, flights, hotels and the like will have an impact on your assumptions. The current increases in school fees do generally outstrip the inflation index, for example. The cost of private health care also tends to be higher than standard indexes.
Without acknowledging inflation and the real buying power of your income, you may slowly fall behind on your financial goals. However, by building out a solid financial strategy, understanding your current index, and calculating how much money you actually need to pursue your long-term goals, you’ll be better positioned to achieve your life’s objectives.
Retirement spending also requires your personal index to be accurate – you don’t want to run out of money. Your expenses need to generate income from the assets to produce income for your expenses.
Thinking specifically and realistically
With every financial corner you turn, it’s important to run through the numbers; this will help you make the right financial decisions. It’s also important to be specific. For example, it’s not enough to say, “I want to have enough to retire comfortably.” It would be best if you thought realistically about how much you’ll need. The more specific you are, the easier it will be to come up with a plan to achieve your goals.
Avrio Wealth builds financial plans for their clients, and will discuss inflation rates that might affect you as part of your assumptions.
Set up an online consultation to work out your financial future, see where the gaps are and make a plan!
Found this interesting? Read on for tips on retirement planning.
Moving to Singapore or already living here, this neighbourhood guide is a good overview of where to live.
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