FAQ: Financial Planning for Seniors

1. Introduction

If you are approaching your retirement age, you have to plan for the next phase of your life. You have to address the following issues:

* How much income do you need for your retirement?
* How should you invest your accumulated savings?
* Should you continue to work?
* How should you manage your finances?

I wish to give some tips that are suitable for a person retiring in Singapore.

2. Retirement Income

The income that you need during retirement depends on the following factors:

• How many people depend on the income?
• Do you have a home that is fully paid for?
• What is your target lifestyle?

The basic minimum, for a couple living in a home that is fully paid for, is $800 a month. This will cover food, utilities, medical expenses, transport, entertainment and social expenses. It assumes that the children are on financially independent.

The capital sum that is needed to provide this monthly income (with some adjustment for future inflation) is about 200 times of the monthly income, ie $160,000. This is based on a retirement age at around 65 years old.

Most people prefer to have a comfortable lifestyle. This requires a monthly income of 50% to 100% more. They will need about $240,000 or $320,000 to be able to retire comfortably.
These target savings at retirement is for the value of money today. If you are planning for a retirement in 5, 10 or 15 years time, you have to adjust the target sum to allow for inflation.

I suggest that this should be increased by about 10% to 15% for every five years.

If you do not have a home that is fully paid for, you have to add another 50% to cover the rental of a home.

3. Sources of Funds

You have to identify the sources of funds available to you on your retirement:

• CPF minimum sum
• Your personal savings, including the CPF savings that you withdraw at age 55
• Existing life insurance policies
• Pension (if applicable)

You should make an estimate of the capital value of these sources of your savings at the time that you plan to retire from work.

I wish to give some tips on how you can invest your retirement savings.

4. Invest your CPF minimum sum

Under this scheme, you are required to retain a minimum sum in the Central Provident Fund at age 55, to be withdrawn in monthly instalments from age 62.

You have the following options to invest this minimum sum:

• Keep in the CPF to earn interest at 4% per annum (plus an additional 1% bonus for the first $40,000)
• Transfer it to a bank to earn the prevailing interest rate (currently, not exceeding 2.5% per annum)
• Use it to buy a life annuity

The minimum sum is currently set at $99,600 for a person reaching age 55 in 2007. The minimum sum will increase each year for people reaching age 65 in that year.

Most people find the interest rate of 4% per annum (plus 1% bonus) to be quite attractive. The majority decide to keep the money in the CPF.

You are given an option to pledge your property for up to 50% of the minimum sum. This will allow you to withdraw a larger sum at age 55 from the CPF.

However, as the interest rate paid by CPF on the minimum sum is quite attractive (i.e. 4% to 5% per annum), it is better to retain the full minimum sum in the CPF to enjoy this return. It is difficult to find a return on risk free investment that can give you a better return.

5. Invest your Personal Savings

If you add up the personal savings that you have accumulated during the past years and the CPF savings that you are withdraw at age 55, you may have a large sum of money to invest.
You have the following options to invest this accumulated savings:

• Fixed deposit
• Structured products
• Single premium endowment
• Life annuity
• Investment fund

Based on the investment climate today (in 2007), the return that you can get is estimated to be:

• Fixed deposit - about 1.5 % to 2% per annum
• Structured products - depending on level of risk and expenses
• Single premium endowment - about 3% to 4% per annum
• Life annuity - from 2.5% to 5% per annum
• Investment fund - from 2% to 7% per annum, depending on risk and type of fund

6. Fixed deposit

You will earn an interest rate, depending on the duration of the deposit and the bank. You can check the interest rate offered by several banks to find out which offer the most attractive terms.

On maturity of the fixed deposit, you have the choice of renewing it or withdrawing the deposit. You should check the interest rate available at that time. Some banks offer a lower rate on renewal, compared to a new deposit.

The interest rate on fixed deposit is currently quite low, i.e. less than 2.5% per annum. Some banks offer a higher interest rate for customers who are above 55 years old.

7. Structured products

The structured products are specially designed by the issuer. They may offer capital protection or the chance to earn a higher rate of return depending on certain events in the future.

Most customers find the structured products to be quite complicated. Their past experience has generally been unsatisfactory. They received a lower return, compared to other types of investments of similar level of risk.

The structured products generally give a poor return, due to the high expenses in designing, marketing and managing the products.

8. Single premium endowment

You can invest some of your savings in a single premium endowment. It offers the following:

• Capital guarantee
• Return of 3% to 4% per annum, by investing for 10 to 20 years
• A modest amount of life insurance cover

Part of the return (about 2%) is guaranteed. The remainder comes from bonus, which is not guaranteed and depends on the investment performance of the fund.

In the event of death or permanent disability during the term, the full sum assured plus bonus is payable immediately. It gives a higher return, compared to the return on the maturity date.

9. Investment Fund

You can invest your personal savings in a large, well diversified, low cost fund. You should choose the following:

• Fund operated by a reputable financial institution.
• A large, well diversified fund, say more than $50 million
• Low upfront fee (less than 3%) and low annual fee (less than 1.5%)
• A global equity or balanced fund

Asset class

The average return on various asset classes during the past 10 to 20 years (up to end 2006) is:

The actual return in each year can be quite volatile, and vary signifiantly from year to year. If you invest for 10 years or longer, you will get an average return that averages out the good years and the bad years.

If you invest $100,000 to earn 6% per annum for 20 years, you will get $320,700. If you earn 4% p.a. (ie lower risk), you will get $219,100. The difference of 2% amount to $101,600 (i.e 46% more).

Low Fees

If you invest $100,000 to earn 6% per annum over 20 years, you will get $320,700. If you have to pay a higher fee, and earn a net 5% per year, you will get $265,300. The difference of 1% amount to $55,400 (i.e 17% less).

Past Performance

Studies have shown that the past performance of the fund is not indicative of future performance. Some funds perform well in certain years, but poorly in other years. The performance tends to average out over the years. This applies to good managers. There is likely to be no difference in their results over many years.

How to Take Risk

You can invest in a global equity fund to earn a higher rate of return, but it has higher risk. You can reduce the risk as follows:

* Invest in a large, well diversified fund
* Invest in quality investments that comprise the market benchmark
* Invest for 10 years or longer
* Choose the right time to realise your investment

If you can exercise the right timing, you can turn risk to your advantage and earn a return that is higher than the average return.

10. Life Annuity

Under a life annuity, you can get an attractive monthly return on your invested sum. The monthly payment is guaranteed for a lifetime. You do not need to worry that your invested sum will be depleted prematurely during your lifetime.

If you invest $100,000 in a participating annuity plan (with capital protection), you will get the following monthly payment:

The monthly payments represent a return of between 5% to 6% on your invested sum.

Under the participating annuity plan, your annuity payment will be increased each year at the rate of bonus declared by the insurance company. This rate of bonus is not guaranteed and depends on the investment return of the annuity fund. It will usually be in the range of 1% to 3%, but it can be nil in some years.

Under the annuity plan, the invested sum is consumed during the lifetime of the annuitant. There is no refund of the capital sum on the termination of the annuity.

Under a capital protected annuity, if the total annuity payment at the time of death is less than the invested sum, the balance of the invested sum (without interest) is paid to the estate.

Many people find the annuity to be attractive because of the higher return (i.e., more than interest earned on fixed deposit), addition of annual bonus, and guarantee payment for a lifetime.

You should buy a life annuity to guarantee a monthly payment that is sufficient to meet your monthly expenses, say $500 to $2,000 a month.

11. General advice on your investments

Here is my general advice for most retirees:

• Keep your CPF minimum sum with the Central Provident Fund to earn interest at 4% plus 1% bonus on the first $40,000. You can review this decision if the interest rate paid on the minimum sum changes in the future. Quick likely, it will remain the most attractive option.

• Invest up to $200,000 of your personal savings in a life annuity. It provides a guaranteed income to you for the rest of your lifetime. Perhaps you can split this sum into two annuities, one on your life and the other on your spouse.

• Invest the remainder in an investment fund

• Avoid investing in structured financial product.

If you feel that this general advice does not suit your personal circumstances, you can approach a financial adviser to help you to find a better solution.

Before you talk to the financial adviser, make sure that you understand my general advice, and your personal needs. This allows you to evaluate the options given provided by the adviser.

12. Existing Life Insurance Policies

If you have bought life insurance policies that require premiums to be paid beyond your retirement age, what can you do with these policies?

You have the following options:

* Continue to pay the premium using your accumulated savings
* Stop paying premium, and enjoy a lower coverage under the paid-up policy
* Terminate the policy and receive its cash value

You can ask the insurance company to give you the following figures:

• Cash value of the policy, if it is terminated now
• Projected cash value of the policy if it is continued for another 5, 10 or 15 years
• The future yield on your policy for the next 5, 10 or 15 years

If the future yield is more than 3% per annum, it is better to continue the existing policy. You will enjoy the life insurance coverage and a fairly satisfactory return. However, you have to consider that part of the future yield may be based on non-guaranteed bonus.

If the yield is lower than 3% per annum, you may find it better to terminate the policy now, or to keep it as a paid-up policy. You have to take this option, if you are not able to continue paying the future premiums (after you retire from work).

13. Pension

If you work for the government or an employer that provide a monthly pension to you after your retirement, you have a steady source of income for your lifetime.

You may be given the option to convert part or all of the pension into a lump sum payment. You should get the details of this conversion option and get expert advice to decide if it is better to accept this conversion option.

I believe that, in the past, the conversion term have been quite generous, and most people find it attractive to accept the lump sum payment by giving up a part of their pension.

14. Provide a Monthly Income

You should add up your regular income from the following sources:

* CPF minimum sum scheme
* Pension (if any)
* Dividend or interest from your personal savings
* Your occupation (if you continue to work on a full or part time basis)

You should try to live within your means.

However, if you find the regular income to be inadequate, you can draw down on your accumulated savings.

You have to work out a financial plan (with the help of a financial adviser) to make sure that the accumulated savings can last you for a lifetime. You may use part of the accumulated savings to buy a life annuity that guarantees a payment for as long as you life.

If you do not need to spend all of your regular income, you can save and invest the difference. It will add to your accumulated savings.

15. Continue to Work

You should continue to work, if you are still healthy, for the following reasons:

* Earn a supplementary income
* A good way to spend your time
* And be socially engaged

You can choose an occupation that is less stressful and more enjoyable. As you have sufficient savings and your family commitments have reduced (in most cases), you do not need to work too hard to earn a full income.

You can work in a place that is closer to your home, so that you spend less time and expenses on travelling, and avoid the traffic congestion.

16. Insuring your Risks

You can use part of your regular income to buy the following types of insurance:

* Medical insurance
* Personal accident accident
* Property insurance (ie home or car)

The cost of these insurances is relatively small, and can be paid out of your regular income. You should not commit to any insurance covers that is too costly and be a financial burden.

There is less need for you to have a large amount of life insurance, as you have already stopped full time work, and your family does not depend on your full time income.

If you have bought life insurance earlier, you can continue the insurance policy to provide a modest amount of life insurance coverage.

17. Medical plan (Shield)

A Shield plan allows you to have medical insurance coverage for a lifetime. You can choose from the following options:

• Medishield (provided by the Central Provident Fund)
• Private Shield (offered by various insurance companies)

The private Shield plans offer you a wide range of options (to cover the expenses incurred in various classes of wards in public or private hospitals).

The Shield plans require you to pay the first part of the hospital bill (also called the "deductible") and a percentage of the remaining bill. Some insurance companies offer you a rider to cover these items.

The premiums for the Shield plans are based on your current age, and are adjustable according to the claim experience. You have to pay a higher premium rate when you grow older. You may have to pay a higher premium rate, when more people make claims.

In choosing the Shield plans, you should consider the following:

• Choose a plan that meets your budget
• Look at the future cost at the older ages
• Do not over-insure (to avoid paying excessive premium)

The Shield plans cover critical illness as well, including the cost of outpatient care. Generally, you do not need to buy separate insurance to cover the cost of critical illness.

If you already have bought these critical illenss cover, you can continue the policy to provide an additonal payment to meet your expense. If you do not have the cover, you can meet the additional expenses from your accumulated savings.

Here are some annual premium rates for the Shield plans

The premium rate for a private Shield plan varies among the insurance company.

18. Will

In the event of your death, your assets (i.e your estate) will be distributed as follows:

* According to your will (if there is a will)
* By mutual agreement among the family (if there is no will)
* According to the intestate law (if there is no will and the family members prefer this option)

If you have substantial assets, worth more than $100,000, it is better to write a will. The lawyer fee can be quite modest, if you follow a standard will.

Here is another option:

* Buy a life annuity to meet an adequate income for your needs during your lifetime
* Have a discretionary sum of (say) $100,000 to meet emergency needs
* Distribute the remaining assets to your family members earlier, during your lifetime

19. Pay off your existing loans

If you have existing loans on your home or car, you should consider the following options:

* Pay off the loans earlier with your accumulated savings
* Keep the loans, if the interest rate is low, and you can earn a higher return from your investments

Most people will find it better to pay off the loans, and be free of the burden of paying interest. Generally, this option is best, if the interest rate on your loan is 4% or higher. You should get the facts and seek an expert advice on the best choice.

20. Investing in Property

If most of your assets is tied up in a property and you have insufficient savings to meet you living needs, you can consider the following options:

* Sell the property and buy or rent a smaller property
* Rent out part or all of the property to earn a rental income
* Use the property for a reverse mortgage

Under a reverse mortage, you can take a monthly income to be charged against the property. The monthly drawdown and interest will be charged against the property and will be repaid at a future date, when you sell the property.

The reverse mortage is suitable for a owner who wish to have a monthly drawdown for a few years, while waiting for the right time to sell the property or to move to another property.

In some cases, the owner may wish to continue this arrangement for a lifetime. The lender will be willing to continue the reverse mortgage, so long as the accumulated borrowings is less than (say) 70 percent of the value of the property.

21. Talk to an Financial Adviser

You may need an expert adviser to help you on some of these key decisions. The adviser can provide the following value:

* Access to the current market conditions
* Help you to make the best choice to serve your needs
* Help you to implement the decision

You should choose an adviser who acts honestly and in your best interest. Look for an adviser

* whom you know personally
* recommended by a friend

The adviser needs to make a living and should be adequately remunerated for the time and effort.

You should be prepared to pay a fee to the adviser. If the adviser earns a commission or fee from the financial institution that offer the financial product to you, the adviser should disclose this remuneration, so that you know that the remuneration. This allows you to be sure that the advice is given in your best interest and is not based on the remuneration.