Friday, June 18, 2010

How to plug the savings gap for your dream retirement

Extracted from The Sunday Times on 19th Nov 2006

Gauge your risk appetite, diversify investments and stay invested for the long haul to enhance returns

By Finance Correspondent, Lorna Tan

MORE Singaporeans are waking up to the harsh reality that an early, comfortable retirement is becoming more elusive.

They recognise that the formula is simple but needs discipline: start saving and investing early.
Recent survey findings on financial planning and retirement highlight the problem that most Singaporeans are just not financially prepared for retirement. As a result, they face a grim choice: retiring later or lowering post-retirement lifestyle expectations.

With increasing awareness of the need to plug the savings gap, there is a heightened sense of urgency about accumulating wealth and protecting it. But to the uninitiated, the world of finance and investments is fraught with risk and uncertainty.

Of course, there is no one investment solution that fits all investors. And that means many confused consumers do not know where and how to start.

Financial checklist

AN INVESTOR should first do a financial review to identify his insurance protection needs, investment risk appetite, investment timeframe and expected returns.

On the insurance front, he should ensure that he is adequately covered for death, total and permanent disability as well as medical and health expenses.

His choice of investments will be governed by how much risk he is prepared to take. He may wish to consider having a mix of equity and bonds in his portfolio.

For example, an investor wanting to take some risks but with a fair dose of safety might consider a 50:50 split between equity and bonds.

A diversified portfolio

AS THE old saying goes, never put all your eggs in one basket. A diversified investment portfolio works on the same principle.

By spreading your investments across different asset classes and sectors, you are not fully dependent on any one asset or sector.

In that way, your overall investment risk and exposure to market volatility will be minimised.

This in turn brings stability to your investment portfolio and can enhance returns, said Mr Tom Tobin, HSBC Singapore's head of personal financial services.

Take, for instance, the performance of the three top stock market indexes over the past three years. HSBC said MSCI Korea, a single country index, was almost three times as volatile as MSCI World, which as its name suggests comprises global stocks.

Another index, MSCI World Info Tech, which comprises stocks in the IT sector, was also more volatile than MSCI World.

Volatility does not always mean higher returns of course - it might mean the reverse.

For investors who can stomach a higher level of risk, experts advise that while one's portfolio should be diversified, it could include a small percentage that is invested in riskier assets. They also suggest maintaining a globally diversified portfolio, but keeping things simple and investing only in things you understand.

For the long haul

INVEST for the long term, and try not to speculate by jumping in and out of the market. By doing so, some experts believe that your returns should be at least twice the rate of inflation.

Guard against succumbing to herd instinct and try to anticipate overall market direction.

After all, the latest investor behaviour report by United States-based research firm Dalbar revealed that most investors are unable to guess the direction of the market correctly after a bear market. These investors wrongly guessed that the market would not recover - an assumption based on fear. As a result, they stayed on the sidelines as the market recovered.

Insurance as investment

IN RECENT years, retail investment tools have expanded significantly from plain vanilla fixed deposits, insurance plans and unit trusts to hedge funds, real estate investment funds and commodity funds.

Of all the investment options, insurance is still the top choice of Singaporeans, largely due to the efforts of a 12,800-strong life insurance sales force.

As at June 30, $20.47 billion or 66.8 per cent of the $30.63 billion that is used for investments by CPF members was invested in insurance. By contrast, $5.49 billion and $3.92 billion were the sums invested in stocks and unit trusts, respectively.

HSBC Insurance chief executive Jason Sadler said those who are risk-averse or unfamiliar with investing may wish to take up an endowment plan which provides a 'reasonable return' and insurance protection.

The plan typically involves paying a fixed premium for a fixed period, after which a payout is made. Also, such a plan provides a forced savings mechanism.

He said investment linked plans - insurance policies where the funds are invested in the market - also offer the flexibility of adjusting the insurance coverage and investing in funds.

Still, consumers should ensure they have enough funds to pay the premiums of traditional plans such as whole life and endowment because an early surrender is not advantageous.

In some cases, if you surrender your policy after one year, you will lose the premiums you have paid. In fact, you are likely to face a loss if you surrender any time in the first 15 years which is before the plan 'breaks even".

Buy term, invest the rest

PEOPLE who practise the strategy of 'buy term, invest the rest' believe that by purchasing the cheaper alternative of term insurance, they can save money that can be channelled into investment tools such as unit trusts.

This is particularly so for those who believe they can get better returns than the bonuses that insurers pay every year to traditional whole life and endowment plans.

Term insurance offers pure protection with no investment element so the policyholder typically gets nothing when the policy expires or is surrendered. Such policies offer higher coverage at a lower cost compared to whole life and endowment policies.

Mr Gary Harvey, chief executive of ipac Wealth Management Asia, provided this example: For a life policy of $100,000, the 20-year term premium for a 35-year old male non-smoker is only $400 compared with $2,960 for a whole life plan.

At 55, the whole life plan's projected surrender cash value is $58,860 which is less than the total premiums paid of $59,200.

Let's say the customer purchased a term plan and invested the premium savings of $2,432 - after deducting annual fees - yearly in a conservative balanced portfolio with a target return of 3 per cent over inflation. After 20 years, his portfolio would be worth $81,469, giving him a neat profit of $32,829. In this instance, the portfolio comprised 27 per cent in global equities and property, 48 per cent in global bonds and 25 per cent in cash.

Lastly, investors should review their investments at least once a year to assess if their risk and return profile is still relevant for their investment needs.

Financial checklist

What do you have?

Set aside funds for your basic needs before investing. How much do you have to invest taking into account your daily, medical needs and outstanding financial commitments? The less spare cash you have, the less risk you should take when investing.

What do you want?

What is your investment objective and desired return? For example, is it for protection or to preserve your capital sum?

Or are you investing to grow your capital?

How long can you invest?

Know your investment time horizon. The shorter your time horizon, the less risk you should take with your investments. Do not invest in products that will put your capital at risk or impose penalty charges for early withdrawal.

If you have more time, you may wish to consider products with different investment periods so that you can have access to funds at different stages during your retirement years.

What can you lose?

How much are you prepared to lose?

Know your risk profile.

How much fluctuation and risk can you tolerate in your investments as market conditions change?

Source: National Council of Social Service

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