FAQ: Financial Planning for the Young

1. How much should I save for my retirement?

You should save 10% to 15% of your regular earnings to supplement your savings in the Central Provident Fund.

This personal savings can be used for the following:

* to meet an emergency, e.g. unemployment or an unexpected medical bill
* to make the down payment for your home or car
* to pay for your child's education expense
* for your retirement.

If you do not contribute to the Central Provident Fund, you should increase your regular savings to 30%.

2. How should I invest my personal savings?

You should choose an investment fund as follows:

* large, well diversified fund
* with low annual fee, e.g. less than 1% per annum
* with low upfront charge, not more than 3%
* invested mainly in equities (to earn a better long term return)
* offers flexibility to change the savings
* allows withdrawals (with low penalty)

3. Do I have to manage the investment risk?

You have the choice of investing in the following types of investments:

* equity
* bond
* money market

The average yearly return over the long term are:

* equity: 6 to 8%
* bond: 4 to 5%
* cash: 2 to 3%

For a young person (below 45), it is better to invest in equities, as it gives the best return over the long term.

Equities have a higher risk. But, you can minimise the risk as follows:

* invest for the long term, i.e. 10 years or longer, to average out the good and bad years
* invest in a large, well diversified fund, i.e. to reduce the risk of some bad investments

You should also choose a fund that have a low upfront fee and a low annual fee. This allows you to keep most of the market gain (instead of giving it to the fund manager)

4. What type of insurances should I buy?

You should buy low cost insurance to cover the following:

* death or permanent disability
* accidents
* hospital bills
* loss of income due to disability

The suitable products are:

* term insurance
* accident insurance
* hospital insurance
* disability income insurance

The low cost insurance will just cover the risk, and is not bundled with any investment (which increases the premium).

It is better for you to invest your money separately in an investment fund (see paragraph 2).

5. How much life insurance do I need?

If you have dependents, you should have life insurance for 5 to 10 years of your earnings. If you earn $30,000 a year, you should be insured for $150,000 to $300,000. This is the sum that should be paid in the event of premature death or permanent disability.

You can have this insurance through a combination of:

* term insurance (level)
* decreasing term insurance
* accident insurance.

Here are some examples of the premium payable for a low cost insurance:

Term assurance to cover $150,000 (level) for 30 years
Male at 30: $280 a year
Female at 30: $195 a year

Decreasing term assurance
to cover $150,000 (decreasing by $5,000 a year) for 30 years:
Male at 30: $165 a year
Female at 30: $115 a year

Accident insurance to cover $150,000 for 30 years
$100 to $300 a year (depending on occupation)

Term insurance covers death only.
Accident insurance covers death, permanent injury and temporary disability.

6. How much medical insurance do I need?

You only need to cover the large hospital bills.

If you have a Medishield or private Shield plan, it should be sufficient to cover the large bills. These plans require you to pay the initial portion of the bill (i.e the "deductible") and a small share of the excess. The rest of the bill is covered by the insurance plan.

The annual premium depends on your current age and the type of plan. Most people pay an annual premium of between $60 to $600.

7. Should I buy a life insurance policy?

A life insurance policy (i.e. endowment or whole life) has the following features:

* combines insurance protection with savings
* gives a modest net return of about 3% to 4% per annum.
* requires a fixed regular premium to be paid for the duration of the policy
* lacks flexibility
* has high costs that reduces the return to the policyholder

In the past, many people buy a life insurance policy through the marketing of the insurance agent. In today's environment, it is better to buy low cost insurance and invest separately.

8. What age should I retire?

You should plan to work for about 40 years, to accumulate sufficient savings to meet your financial needs during the next 15 to 20 years of your life (after retirement). Most people start work around age 25. They should aim to retire at age 65.

Apart from a fully paid home, you should have the following savings (including CPF savings) at the time of retirement:

* $200,000 for a basic lifestyle
* $400,000 for a comfortable lifestyle

If you have a pension, the amount that you need can be reduced.

If you have inadequate savings, you an work a few years longer, provided that your health is still good. If you have more savings, you can choose to retire earlier.

Note: You have to adjust the above figures by about 2% per year to keep up with inflation.

9. What was the actual return from various types of investments?

Annualised return in SGD, as at 31/12/2006,

Over the past 10 to 20 years, equities give a better return compared to bonds.

10. What is my projected amount for my savings?

11. What types of products should I avoid?

You should avoid the following products:

* difficult to understand (ie complicated)
* lacks transparency
* lock you for a long period
* imposes a heavy penalty on termination
* lacks flexibility

Always ask for a simple FAQ that explains the key features of the product. If the FAQ is too complicated or leaves many areas of doubt, you should avoid the product.

12. Who can I approach for advice?

You have the following options:

* approach a broker (who can offer products of different companies)

* approach an adviser (who can offer the products of a specific company)
* approach the company directly

IMPORTANT: Choose a broker or adviser who is honest and can look after your interest.

Get them to present a few options for you to choose for the following:
* low cost insurance plans
* low cost investment funds

Ask for their recommendation. Read the FAQ. Decide only after you have understood the options

BE CAREFUL: Some brokers or advisers may offer you a product where they can earn a higher commission. You may not get a good value product.

DO IT YOURSELF: You can approach a few companies directly. Ask them to give you a quote and a FAQ.
Make a comparison. Read the FAQ. Decide only after you have understood the options.