When a woman reaches her 50s, the years of relative leisure are finally close at hand. The children are financially independent and the house is fully paid for. There’s still one thing to worry about, though – ensuring that the next 25-30 years can glide by on sufficient income. Here’s how women in their 50s can make some nifty investments to get a head start.
By Kenice Tay
 
PROFILE ONE
Our first candidate is a 55-year-old mother with three adult children. She has one son in national service who will enrol in the local university in a year’s time and two 20-something daughters who just started their careers. Our candidate is separated from her husband and is likely to get a divorce in one to two years’ time. She worked for about 25 years before quitting at 50, so she has $300,000 in her Central Provident Fund ordinary account. She has just returned to work and her current monthly income is about $2,000. She would like to retire soon. Her other source of income is from her two daughters, who give her $500 every month. As she is separated from her husband, she does not depend financially on him but her husband still contributes to their son’s education fund.
 
As she spent most of her savings on her children’s upbringing and education, she has saved very little – only about $8,000, which she keeps in a savings account. And she has about $3,000 in unit trusts but no other investments. She also has no insurance plan.
 
She does not own a car and uses public transport. She co-owns the five-room HDB flat with her husband and may sell the place after the divorce.
 
Her priority is to fund her youngest son’s tertiary education, and she reckons that she can retire after he graduates. She wants a comfortable retirement and does not wish to work during her leisure years. If she gets a divorce next year, she will need a new home and that is one of her most pressing concerns. During her resting years, she believes that she will need about $2,000 a month for daily expenses.
The plan
From IPP Capital Planning’s Director of Financial Planning, Dr James Chia.
  • She wants to retire soon but due to the lack of early planning, she would have to work another five years and cannot retire until she is 60. However, her prudent lifestyle is her saving grace for she has no car, lives in an HDB flat and only requires a modest monthly budget of $2,000 after retirement. However, as she is about to get a divorce, she has to fund her retirement on her own. 
  • After her divorce, the HDB flat will be sold and the sale proceeds will be spilt with her ex-husband. We assume that the value of the apartment would be $400,000 at the time of sale and she would likely receive $200,000 from the proceeds. Because she has insufficient funds for retirement, she will not be able buy her own home after her divorce. She may have to consider living with her children.
  • We recommend a strategy consisting of managing her cash in addition to investing in low-risk and growth assets.
  • She is currently working and has a monthly salary of $2,000. She should keep her job until she reaches age 60. Her current annual income is $40,000 ($1,000 from her two daughters, her monthly salary of $2,000 plus her thirteenth month bonus and her employer’s CPF contribution of 6% of her salary). 
  • Assuming that she spends $2,000 every month, she has surplus cash of $16,000 a year after deducting her annual expenses of $24,000 from her annual income of $40,000. From the surplus, we recommend that she spend $6,000 a year on a $100,000 whole-life critical-illness insurance policy. 

    The policy will pay $100,000 upon the diagnosis of a critical illness or $100,000 if she meets with untimely death. By investing in such a policy, she would not have to worry about her medical bills if she were diagnosed with a critical illness during her vesting years. The treatment of a critical illness requires a large sum of money and without this insurance policy, she would have to put aside a large amount of cash for such an emergency. If she were diagnosed with a critical condition during her retirement years, she may even need to liquidate her growth assets, for example her investments in unit trusts with potentially good returns, at low prices to pay for the medical bills. This is not encouraged as it will diminish the size of her retirement fund.

  • She should save the remaining $10,000 in savings or fixed deposits annually to create an emergency cash buffer. Together with the $8,000 she already has, she would have about $60,000 at the age of 60.
  • Her situation does not allow her to fund her son’s tertiary education alone, so she should ask her ex-husband to help support their son through university. In the worst-case scenario, she still has her cash savings for emergencies. This can be used to finance her son’s education if her ex-husband cannot help out.

Low-risk assets

  • While working towards a financial plan that will enable her to have $2,000 a month (in today’s dollars) for about 30 years into retirement, we recommend that during her first five years of retirement (at the age of 60-64), she should invest $100,000 of her CPF savings into a single-premium bond-type investment with maturity periods of about five to eight years. Assuming
    that the expected return on such investment is approximately 4.8% annually, she would have accumulated $126,000 when she reaches 60. In order to avoid additional foreign exchange risk, these single-premium bond-type investments should be exposed to Singapore-dollar bonds.
  • A single-premium bond-type investment is sold mainly by life insurance companies and is typically invested in high-quality bonds and a small amount of the premium is invested in blue-chip equities. For investors with low investment capital, bonds are preferred because the bond’s coupon rate, or yield, is re-invested automatically thus resulting in a more certain compounded sum of money when the policy expires.
  • At age 60, she would have a total of $186,000 from her single-premium bond-based investment plus her emergency cash buffer of $60,000. This would give her about $3,000 every month to spend during her first five years of retirement.

Growth assets 

  • The short period of five years to retirement makes it difficult to invest in high-growth assets, which require a longer time horizon to minimise the risks that are inherent in such investments. Furthermore, her current investment portfolio suggests that she is conservative by nature. In order to accumulate enough for her retirement, which is five years from today, she should consider taking on more risks.
  • We recommend that she invest the remaining $200,000 of her CPF funds plus the $200,000 proceeds she might gain from the sale of her property in two years’ time into unit trusts. These would likely yield some 8% annually. In 10 years’ time, at age 65, her $200,000 investment capital from her CPF will grow to be $430,000. At that age, her other investment of $200,000 (which she is likely to gain from the sale of her property) will be $370,000. In total, she would have $800,000 from her investments in unit trusts. This sum of money will be able to produce an annual income of about $40,000 annually for 30 years into her retirement. This sum will be sufficient for her expenses from age 65-95. 
  • In order to minimise risk, we recommend that she invest in unit trusts, where the risk is broadly diversified among a portfolio of assets and countries. Moreover, the investment will be handled by professionals. However, the performance of unit trusts is not guaranteed and she has to cautiously select them and also has to avoid the herd instinct of “buying high and selling low”.
  • When she reaches age 65, she would have a portfolio that consists of cash, low-risk assets and growth unit trusts. If she spends the cash and low-risk portion of her portfolio on living expenses during her vesting years, she would need to convert some of the growth investments and low-risk assets into cash after 65. The remaining growth assets are required to keep pace with inflation. This portfolio will be adjusted constantly during her vesting years.
Profile Two
Our second candidate is a 50-year-old mother with two grown-up children in their late 20s. She is currently working part-time and has a monthly income of $1,500. In addition, she gets a monthly allowance of $500 from her husband and $300 from each of her children. As her job is part-time, it is not a stable source of income. Indeed, she tends to be unemployed during festive seasons like Christmas or Chinese New Year.
 
At the moment, she has about $20,000 invested in equities, $30,000 in savings and another $10,000 in Australian-dollar investments. She has a life-insurance policy, which insures her for $50,000, and one endowment policy of $20,000. She figures there is no need for an annuity as she is very disciplined in saving for her retirement, which she hopes can be in two to three years’ time.
 
She lives in a 20-year-old four-room HDB flat and has no outstanding housing loan. She believes that she can sustain her retirement lifestyle with a modest $1,500-$2,000 every month. She does not drive and relies on public transport.
She hopes to start a small-scale food business in one to two years’ time and she believes that she may need a capital of about $50,000. As her flat is quite old, she also wishes to upgrade to a private apartment or a new five-room HDB flat in three to five years’ time. At her age, she does not think purchasing insurance will be beneficial but still wants her cash savings to generate more returns than the low-yielding interest rates.
The plan
From First Principal Financial Planning’s independent financial consultant, Robin Tan:
  • Considering that she wants to retire at age 55, she has only about five years left to accumulate enough funds to see her through at least 20 years into retirement. So she has to put some serious thought to what she wants to achieve in her golden years, given the limited time for wealth accumulation. 
  • It would be difficult for her to consider upgrading to a bigger five-room HDB flat or a private apartment for a few reasons. First, her children are already grown up and will probably move out once they get married and this means she and her husband will have the large flat to themselves. Second, getting a bigger and newly built five-room HDB flat or even a private apartment would definitely require additional financing.  Such a big-ticket purchase would put her retirement and financial goals in jeopardy. After all, one should be debt-free five years before retiring, if possible. Instead, she may consider buying a newer four-room flat or even downgrading to a three-room apartment. Assuming that the new four-room HDB flat is priced at $350,000 and the sale of their 20-year-old flat fetches about $230,000, the couple would require a loan of $120,000. Assuming that they take up a 15-year mortgage (till she is 65 years old) and the HDB interest rate is 4.25% (non-subsidised rate), then the monthly mortgage repayment will be $902.  Whether this is a viable option will depend on the cash-flow pattern and net-worth status of both herself as well as her husband.  As we do not know her husband’s financial situation, we cannot make any conclusions.
  • She has about $60,000 in assets ($20,000 in equities, $30,000 in savings and $10,000 in Australian-dollar investments). Assuming her endowment policy is maturing in five years’ time at $40,000, she should have about $121,132 in liquid assets when she retires at that point. The savings in her CPF account is indeterminable as we are not aware of her employment history. We assume that there is little or no CPF savings in this case.  Other assets that a retiree may have include regular savings in bank deposits, annual contribution to CPF accounts, pension and gratuities and investment property. 
  • If she desires to retire with an income of $1,500 per month for 20 years, she would need $180,240 in a lump sum at age 55 (after taking into account the $600 monthly contribution from her children and assuming an annual inflation rate of 2%). Given the short time available for accumulating assets, a higher investment yield ­– and therefore higher risk – from her stocks and unit trusts is assumed at 12%. We also assume that the monthly allowance of $500 from her husband will cease as he will probably stop earning an income and will also be in retirement.
  • Based on the projection above, she has a shortfall of $59,108 if she retires at age 55. She should try to accumulate this sum in the next five years. She should also consider starting a fixed savings plan in a guaranteed programme that will get her close to the target amount. Saving $865 per month for the next 60 months at 5% returns will give her the required $59,108.  This plan may be in the form of guaranteed unit trust funds or a specially designed guaranteed endowment plan. Although there is a need for generating high yields given the short time span, there is a greater need for securing her savings, as there is not much room for error. Savings for the next five  years can come from her part-time income and allowances from her children and spouse. Alternatively, she may want to continue working for another few years.
  • The question of starting a small business should be assessed solely on its merits – whether the investment is viable, given the constraints, risks and opportunities.  The results should then be compared with other types of investment vehicles available given the similar risks, efforts and capital needed.  All too often, business considerations are not given enough regard and starting a business is usually confused with a lifelong attachment to a certain interest or hobby.  As such, she should not consider starting a small business unless these questions are answered and the business proves to be commercially viable. Alternatively, she may want to find part-time work in a food-related business.
  • She should consider taking up an annuity plan, as there is a guaranteed minimum amount even if she lives past 75
  • Healthcare issues is another main concern. She may want to consider long-term-care insurance for herself and her spouse. This type of policy pays monthly proceeds of $500 to $2,000 when one cannot perform activities necessary for daily living, such as getting dressed, washing and feeding oneself due to age-related illness, injury or reduction of mental capacity. This monthly benefit can be used to hire a caregiver, maid or even act as replacement income for her children should they resign from their job to care for her needs.  Women in general outlive men, which simply means that besides taking care of their husbands, they will have to take care of themselves.  She should also enrol herself in the Medishield Plus scheme for hospital coverage and add on other hospitalisation plans if this coverage is insufficient.  The premiums can be deducted through her children’s CPF Medisave account. These would complement her existing $50,000 critical-illness policy, which is insufficient and should be increased.