Monday, 7 August 2017

Financial planning: New graduate? Never too early to think of retirement

Experts say millennials have time on their side, and an early start in financial planning will benefit them
By Lorna Tan, Invest Editor/Senior Correspondent, The Sunday Times, 6 Aug 2017

Last month, more than 15,000 university students graduated here. Now that they are entering the workforce, these millennials should set up a financial plan, whip their money management habits into shape and adopt financial discipline.

Experts say it is never too early to start. In fact, surveys have shown that the main reason most people cannot retire comfortably is that they started saving only around their 40s.

Ms Shirley Tan, head of marketing and customer experience at Etiqa Insurance, said the big advantage millennials have is time.

"Millennials are in the best possible position to get started, with about 40 years to save for retirement, and whatever they contribute will grow and accrue interest greatly over time," she noted.

Manulife Singapore said that its latest Manulife Investor Sentiment Index - carried out in March this year - shows a gap between millennials' expectations of their retired life and the steps they are taking to achieve those financial goals. For instance, eight out of 10 millennial investors expect their lifestyles to remain the same, but only five out of 10 say they are on track to achieve that.

Retirement might seem far away, when in reality you are in the best position to plan for your future during the prime of your life, said Manulife.

Recognising that graduates should embark on their investment journey as early as possible, DBS Bank recently launched NAV Hub in Tanjong Pagar, which is targeted at young adults. They can enjoy free personalised financial planning sessions conducted independent of sales, and with no products sold.

The Sunday Times highlights what millennials should be thinking about when it comes to savings, insurance and investments.



Mr Brandon Lam, Singapore head of financial planning group, DBS Bank, advises millennials to set aside savings of at least 10 per cent of their income on a recurring basis.

They should also set aside at least three to six months of their monthly expenses as liquid cash savings for contingencies.


Ms Shirley Tan, head of marketing and customer experience at Etiqa Insurance, said it is important to start cultivating the habit of saving as soon as you get your first pay cheque, whether it is saving for retirement or for big milestones to come.

"The value of compounding means you will have to set aside less later, whereas the amount you have to contribute per month goes up as you put it off for later. The key is to start small, but save regularly," she said.


Graduates who have taken study loans should have a plan to pay off the outstanding amount by allocating a part of their income towards this, said Mr Lam.

Interest that is charged on the borrowed amount will be compounded over time, so it is financially prudent to redeem the loan as early as possible.



Ms Pauline Lim, executive director of the Life Insurance Association, Singapore, said millennials should understand how insurance plans can address short- and long-term goals.

They must also consider the sustainability of meeting premium payments throughout the plan's tenure and the penalties should they opt for early redemption.


Compare and find insurance products most suited to your financial objectives.

One website that aggregates life insurance plans is compareFirst, an industry-led initiative.

A purely informational online portal, it does not promote or distribute life insurance products. You will have to buy the product directly from the life insurer or a financial adviser.

Another aggregator to check out is DIYInsurance.


If you have dependants, getting a term insurance plan which provides a payout upon death is something to consider.


Equally important is hospitalisation insurance cover such as an Integrated Shield Plan and a critical illness plan to manage any sudden influx of unforeseen expenses, said Ms Lim.

Mr Daniel Lum, director of products and marketing at Aviva Singapore, noted that 37 people in Singapore are diagnosed with cancer every day.

He said: "Critical illness could happen to anyone, and easily racks up hefty medical expenses for those affected. It is best to make sure you have a strong financial safety net to serve both your and your family's regular needs should the worst really occur."

Mr Ryan Sim, deputy vice-president of savings, investment and fund solutions at Prudential Singapore, said that critical illness plans are structured to pay out a lump sum should one be diagnosed with a serious illness such as cancer, and help provide much-needed financial security in times of a health crisis.



Once savings and insurance needs are met, any excess funds that may not be required in the short term should ideally be invested for a higher rate of return, said Mr Lam.

This is because starting investing early would enable compounding to work to your advantage.

"If returns and dividends from investments are re-invested regularly, over time, the total investment portfolio value will grow substantially," he said.

Investing would also help to mitigate the effects of inflation. As purchasing power is eroded over time due to inflation, one should always aim to invest at a rate of return above the inflation rate.


Options include equities, exchange traded funds (ETFs) and unit trusts. Investors who prefer to delegate the task to experts can consider investing in unit trusts or ETFs, and track market indexes.

Single equities may be more suitable for investors who are interested in assuming more control over their investment choices, added Mr Lam.


Ms Ho Lee Yen, chief marketing officer at AIA Singapore, said that while investing helps you to set aside money for tomorrow, it is important to ensure that current needs are not compromised.

"It is essential to plan how much you can afford to comfortably allocate for investing," she said.

For example, it would not be financially prudent to invest all of your savings over the next 10 years if you plan to buy a home in the near future, she said.

Mr Lam said that your risk profile is another factor to consider before you start investing - how much volatility you can withstand and how much you can afford to risk or lose.

Another common but equally important question is whether you prefer investing a lump sum or investing smaller sums periodically.

Finally, ask yourself: What is your investment horizon and how long do you plan to stay invested?

Common insurance policies
The Sunday Times, 6 Aug 2017

Here's a summary of the common categories of life insurance:

• Term insurance covers you for a specified sum assured for a fixed term, for death, total and permanent disability, critical illness or other types of coverage. There is usually no cash value at expiry date.

• Whole life insurance covers a specified sum assured until you die or when another specified coverage condition is met (such as critical illness) or when it matures. The main plan usually has cash value.

• Endowment insurance - more for savings - covers a specified sum assured for a fixed term, with a lump sum payout upon maturity.

• Investment-linked insurance invests in sub-funds with insurance protection options. Cash values are based on investment values less charges.

• Critical illness insurance covers you for a specified sum assured for a specified term, against a list of critical illnesses. A variant of this is early critical illness insurance.

• Long-term care insurance covers you for a specified payout for a specified term, against being able to perform a specific number of activities of daily living such as dressing yourself.

• Medical expense insurance covers the likes of certain types of inpatient services, such as surgery, and out-patient treatments like chemotherapy. An age limit may apply or may offer lifetime cover.

• Disability income insurance covers you up to a specified sum assured to an age limit, when you are not able to work or are disabled.

• Annuity insurance provides a lump sum and/or regular payouts for a fixed term or for your lifetime. It helps supplement your income sources and cushions against outliving your resources.


A letter to my daughter who just graduated
What kind of financial destiny awaits fresh graduates? As a mum of two young adults, I hope they will be financially savvy and lead meaningful lives. Here's a letter that I wrote to my daughter who has just graduated.
By Lorna Tan, Invest Editor/Senior Correspondent, The Sunday Times, 6 Aug 2017

Dear Jacelyn, As I watched you receive your Fashion Contour degree from London College of Fashion at the Royal Festival Hall, London, last month, I rejoiced at your latest milestone.

You have successfully taken on the challenges of a creative education, and sharpened your skills through school projects, design competitions and interning in London as well as New York.

As you embark on your career, I want to talk to you about the financial steps you can take. These money management tips can be put to good use as you take charge of your own financial destiny.


Thanks to a mom-and-pop scholarship, needless to say (but I still want to), you are starting out with zero financial debt.

To illustrate how much debt you have avoided, I decided to work out the cost of your overseas education during your awards ceremony. A back-of-the-envelope calculation showed that the family coffers were lighter by about $240,000. The bulk of the cost was your tuition fees with the balance being accommodation and your monthly allowance.

Tuition fees for the four years amounted to about $92,000.

This is a far cry from the $2,000 that my three years at the National University of Singapore cost. Back in the mid-1980s, the tuition fee was a mere $1,000 per academic year. As a needy undergraduate student, my first year was funded by the Wee Kheng Chiang Memorial Bursary.

Being debt-free allows you to take better control of your financial destiny from day one. The clean financial slate - compared with others who have taken loans to fund their tertiary studies - means that you are not encumbered when you set up a budget and work out a financial plan.


I would not have been able to support your overseas education if I had not subscribed to the principle of paying myself first. Remember the trips we took together to the bank to set up a Giro account whenever I changed jobs?

This is an important habit related to budgeting, which is to adopt a disciplined approach to saving by paying into your own personal bank account first. Better still if this process is automated. For instance, I have a Giro arrangement where a portion of my income is channelled to another savings account which I do not touch. In addition, I increase this portion when my income goes up, such as when I have pay increments and I save almost all of my annual bonuses. I aim to save half or more of my pay. Create a spreadsheet and set up five- and 10-year savings plans.

With ample savings set aside for a rainy day and your future, this is a source of funds when suitable investment opportunities come by.


It is prudent when you are in a new working environment to track your expenses. Once you have a handle on things, you may not need to track every cent but should continue to have a general idea of your monthly expenses by keeping receipts and checking them against your debit/credit card bills and banking statements.

This habit keeps my budget regularly updated, and I know where the money goes and how much is left over. It also helps to guard against fraudulent online transactions. Rather than viewing your income as one lump sum, proactively allocate it for the different uses in your life.

Generally, I review my budget every six months. It is also prudent to do so when your circumstances change, such as when you receive a pay rise or a windfall.


I applaud your efforts to curb impulse buying, whether online or at physical stores, and picking up cooking so that you can eat at home, which is easier on the purse. Do keep it up!

To accumulate your wealth, you can do a few things and they include controlling your spending, getting higher income and reaping investment gains.

Learn to enjoy simple pleasures and avoid splurging on wants. The best things in life are free such as a beautiful sunset, a moving piece of art, well-written books that you can borrow from the library and time spent with family and friends.

When you have to spend in a big way, ensure that it would be for investments that contribute to your financial goals, or for family meals and holidays to grow the precious memory bank.


Years ago, your grandma advised me not to be financially reliant on any man. Today, I offer you the same advice.

Be responsible for your own money management and equip yourself with financial knowledge. It is better to bite the bullet now, get over any fear of financial jargon and pick up know-how like budgeting, credit management, getting a basic financial plan, sorting out your insurance needs and planning for your golden years.

Remember that women generally live longer and usually the family savings are already spent on the children's education and husband's medical bills, with nothing much left after his death.


When it comes to investment advice, trust no one. And avoid investing blindly.

Financial products can be very complex. It is worth your while to spend time understanding the product/scheme before any investment. Do not invest in anything that you do not understand.


While we have short-term obligations to fulfil, approach financial planning with a long-term perspective. It is never too early to plan for your long-term goals.

You are 24 now but the years will go by in a twinkle of an eye. Keep your retirement goals in sight at all times and look out for tools to achieve passive income flows during your golden years. These include blue-chip stocks, retail bonds, preference shares, investment properties, Singapore Savings Bonds, the Supplementary Retirement Scheme - this tool makes sense only if you are working here - and annuities.

Understand the Central Provident Fund (CPF) schemes. The CPF is an essential component of financial planning so it pays to get on top of the details in order to reap maximum benefits. When comparing long-term products, do include the CPF schemes as well.

As you are working overseas, your CPF balances will be close to nothing. Consider depositing spare cash into your Special Account - which has a 4 per cent interest rate - to build up your nest egg faster. Assuming you have nothing in your Ordinary Account, the first $60,000 in your Special Account earns an extra 1 per cent interest, so you earn 5 per cent to be compounded annually. This assumes that the rates remain unchanged.

Money is a means to an end. It may not bring happiness but it does provide more options. Embrace the adventures ahead and I wish you a purposeful and healthy life.

Your loving mum, Lorna

No comments:

Post a Comment