Retired at last. But relative leisure does not guarantee freedom from worry about failing health, loss of regular income and other uncertainties accompanying old age. Still, it is not too late to begin planning one’s finances at this stage.
By Kenice Tay
Our first candidate is a 62-year-old retired teacher. She lives in a terraced house with her husband and has two adult children who give her a monthly allowance totalling $1,000. She is also depending on her retirement fund of $300,000 and a modest Central Provident Fund balance of $150,000, part of which has been used to pay off her housing loan.
She has a life insurance policy, which insures her for $100,000.
Every month, she spends about $2,000. In addition, she needs frequent medical check-ups and her medical expenses, excluding surgery fees, is usually about $3,000 a year. She is concerned about her failing health and is considering setting aside about $100,000 just in case she needs long-term medical treatment.
Her primary goal is to have a comfortable retirement lifestyle and she figures that she will live until age 75. She hopes to expand her retirement funds to about $500,000 and therefore is seeking investment opportunities.
From Jeffrey Yuen, Branch Manager, Maybank Singapore:
- Her monthly allowance of $1,000 from her children is not enough to cover her monthly expenditure, which is estimated to be $2,250 (including her monthly medical expenses). Thus, she must dig into her savings of $300,000 to cover her living expenses. Still, her total monthly expenditure of $2,250 is reasonable, considering the current standard of living.
- The total amount she may require to live comfortably up to age 75 is expected to be $312,015. This amount is based on her monthly expenses of $2,000 compounded by an annual inflation rate of 3% for 13 years.
- As she intends to leave behind $500,000 for her loved ones, the total amount required to satisfy her financial objectives is $812,015.
- Her current portfolio consists of 66.67% ($300,000) cash and 33.33% ($150,000) savings in the CPF. These assets are sufficient to finance her retirement lifestyle for the next 13 years but will not help her achieve her dream of leaving $500,000 for her children. Her current portfolio can generate a future value of $522,709 in 13 yearsí time, assuming that both her cash and CPF assets yield 3% annually. Even so, she will be $289,290 short of her financial goals.
- To meet her financial objectives, the portfolio must yield an average 6.65% annually. Hence, we recommend that she adjust the portfolio in the following way: 33.33% ($150,000) in cash, 33.33% ($150,000) in unit trusts and 33.33% ($150,000) in CPF. The $150,000 in cash will be sufficient for the first 10 years of her retirement and for any major medical costs.
- The $150,000 that is invested into unit trusts is expected to yield about 10% per annum. This will enable her to accumulate further funds for her own use as well as the $500,000 inheritance that she desires to leave behind. As she is a retiree, she should concentrate on low-risk funds such as global bond funds, some global equity funds and global balanced funds. She would do well to avoid riskier unit trusts such as single-country, small-cap or sector-focused funds.
- At age 62, most of the risk management (such as insurance) options would no longer be available to her, with the exception of annuity plans for retirement. At this stage, she would have to rely on her existing liquid assets to meet any expenses for treating major or prolonged illnesses. Alternatively, her current insurance policy would pay the full amount that is insured plus any accrued bonuses if she dies or suffers any major illness.
We believe that no major estate planning is required but she might want to look into drawing up a will to stipulate the beneficiaries for the inheritance of $500,000. A will should expedite the distribution of her assets without disputes.
This candidate is a 65-year-old housewife with four financially independent children. They contribute a total of $2,000 per month to her income. She has CPF savings of only about $50,000, accumulated during her stint as a clerk before she retired. Her only other assets are the three-room Housing Development Board flat she shares with her husband and an insurance policy of $50,000.
She spends about $1,000 every month. Her ailing husband needs about $500 each month for medical care. To supplement the income from her children, she is seeking part-time work.
Her primary goal is to care for her frail husband and she figures that she may need to set aside at least $10,000 in cash just in case her spouse needs substantial medical treatment. She also wants a larger retirement fund.
From Kelvin Tan, Financial Consultant, Benchmark Consultancy:
- This woman may be in some financial hardship and has few assets to rely on for her retirement. The couple are dependent on their children for their livelihood and her CPF funds of $50,000 is too low an amount. The state of her husband’s health, which requires medical attention totalling $500 monthly, is a financial and emotional burden to her and the children. Still, with proper planning, their lives can be turned around and a comfortable retirement can come within reach.
- She should consider putting aside $20,000 for her husband instead of $10,000 in case her husband’s health deteriorates further. She may consider placing the $20,000 in a fixed-deposit account that yields about 3-3.1% annually.
- As she is financially dependent on her children, she might consider purchasing an insurance policy to protect the breadwinners. After all, the $2,000 monthly allowance from her children is the most crucial element in her plans; should anything happen to them, she will lose a substantial amount of her income. Each child could take up a policy of $50,000 with a monthly premium of about $125 and their mother could be the beneficiary. The cash value of an insurance policy of $50,000 can last the beneficiary at least eight to 10 years. The policies can be funded using her $500 monthly savings or she may want to seek an extra $100 per month from her children to pay for the policies.
- She should use her CPF savings (from the Medishield and Medisave accounts) to fund her future medical expenses. A basic Medishield plan costs only $96 per year for someone her age. There is another reason to use the Medisave funds – they cannot be used for investments or buying a house.
- Assuming that she does not want to work past age 70, she has five more years to earn a monthly income of, say, $500. As she intends to save $6,000, her current portfolio looks like this:
a) She will have a balance of $30,000 in the CPF, after setting aside $20,000 for her husband.
b) Assuming she bought life insurance at age 25, her policy value now will be about $130,000.
c) She would have saved about $6,000 per year for the next five years if she worked part-time.
- Based on her conservative risk profile, she should invest all the $30,000 (from her CPF account) and $6,000 (savings from her part-time job) for the next five years in low-risk unit trusts, such as global bonds and global equities. Such an investment portfolio will yield about 5-8% annually. She can opt to continue her policy till age 70. The accumulated cash value should be about $170,000 when she’s 70 years old. Her investment of $6,000 a year and a lump sum of $30,000 will yield a future value of $35,000 and $44,000 respectively in five years’ time. As such, she would have a total of $249,000, which includes the $170,000 in cash from her insurance policy, by the age of 70. If she withdraws this money annually for the next 15 years until she reaches age 85, she will be able to live on $29,000 a year or $2,400 per month.
- The policies she purchased for the children can be cashed out for any emergency. When she turns 75, she has the option to cash out an additional $40,000 on these policies.
She may also consider selling her flat if she needs cash urgently. But this should only be used as a last resort. The house should fetch about $150,000.
- I strongly recommend drawing up a plan for how she wishes her estate to be distributed after her death, considering that she has a piece of property and some liquid assets. She could draft a will and appoint one child as an executor to distribute and administer her assets. Otherwise, she could specify how her assets should be shared.