Asked by Anonymous
Asked on 16 Jun 2019
Hi, wanted to plan a retirement plan for my single mum at the age of 48 who don't have any prior investment/savings plans. What is a good way for her to delegate her savings, which have been sitting in a normal savings bank with the least interest rate? Are the retirement savings plan from DBS, OCBC, and UOB any good? Just entered tertiary studies and do not know any good plans for her hence will like some help in this area.
Firstly, ensure that she has a basic level of guaranteed income when she retires by ensuring that she has CPF contributions. CPF Life is one of the best annuities around and it gives a lifetime of income. As we do not know how long we live, a lifetime annuity forms the basis of 'survival income' to ensure that she will has money for essentials. You can also contribute to her SA (up to the prevailing FRS) when you start working so as to enjoy tax relief and help her retire better. Once she turns 55, you can contribute to her RA.
Do note that this is a one way traffic however, money put into SA/RA will largely not be able to be withdrawn.
Next, ensure she has medical and Long Term Care coverage. Medical and nursing bills cab be quite hefty and we want to ensure that such bills do not drain us of money for retirement. Beyond Medishield life and Eldershield, look at getting an integrated shield plan as well as Eldershield enhancement.
Once those are taken care of, we can look beyond the basics. Creating lasting income from both guaranteed and variable sources will ensure diversification across various asset classes (retirement plan, equities, fixed income, etc) and a stable, low volatility portfolio. The exact composition of such a portfolio is dependent on your mom's risk appetite and preferences, so discuss with a consultant who can help you to plan and allocate her limited resources accordingly. Retirement saving plans from the banks would be an option but it is important to compare with other insurer plans as the banks only distribute products from a single insurer, so as to ensure that she gets the most for her money.
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There is a sequence to financial planning.
Before even looking at interest rates, retirement savings plans, insurance, investments, perhaps one should take a step back and look at their financial health.
A few simple ratios to consider if one is financially healthy. Savings Ratio, Total Debt Servicing Ratio, Emergency Fund. All the ratios should be looked at in totality just like how you read a blood test report. Are you serving too much debt based on your income? Have you set aside an emergency fund of about 3 to 6 months of your expenses?
Once all that is taken care of, you should look at a systematic and organised way to save and then invest by means of a budget. Identify your fixed and variable expenses, look at how you can reduce some of these expenses in order to have a surplus.
From this surplus, you can now look at protecting this human capital. The role of insurance in your financial plan is for protection against the loss of income. Loss of income would mean you are unable to work towards your financial goals (Retirement).
What could cause your financial plan to fail? When your income stops permanently or a very long time, you have no choice but to draw from your current assets to fund your current lifestyle and that will affect your ability to reach your goals. Death, disability, and major illnesses could cause your plan to fail. Insufficient returns could also cause your plan to fail. That is where the right types of insurances and investments come into your financial plan.
As Luke rightly pointed out. Retirement is a vague word, what does it mean to you?
Perhaps a better term to use would be Financial Independence, or having a fully paid roof over your head, and a sum of money sufficient to pay for your expenses until you die. (CPF LIFE would form a good foundation for you to build upon, depending on the standard of living you desire)
Insurance is an expensive way to save/invest. There are many low cost investment options in the market today. You are not just limited to the banks when it comes to financial planning. Seedly is a fantastic platform with a wealth of information on personal financial planning to help you make better decisions :)
I'm kind of surprised that no one has pointed out that retirement is tremendously subjective. If your mum is a pretty simple person who doesn't need a particularly high standard of living, CPF could literally be enough by 65.
If she wants to retire before that, it changes the whole game. Or if she wants to retire at 70 instead. You get the general idea. So whether or not she has less than a 2k salary is not as important as how much she's saved already and how much she's willing to save, depending on the kind of guaranteed income she wants in retirement. The instruments and risk required to meet those goals also vary depending on some of the stuff I mentioned above. You may want to edit this post to include some of these points so that people can give you more detailed advice.
Congrats on making the effort to know more about finance and helping to plan for your mum.
Below is an analogy in terms of soccer team.
Firstly you will want to build your goalkeeper first which is insurance
Secondly to build on your defences which is emergency money.
Thirdly your midfielders are your savings account, get those that give high interest rates.
Fourthly your strikers are investments, low risk first before high risk investments.
Fifthly is the manager which is you on planning what to do next at every quarter
Lastly is the fans which are people that you can count on for support and guidance like the seedly community.
19 Jun 2019
I think you can consider in this order first:
Find out what insurance policies she has. Especially hospitalization. Reason being cancer is more and more common. Don't go uncovered. My mum got diagnosed recently, and I had started buying them the policy only three years ago. If I didn't have this policy, I think I would really really be broke now. When I have spare time, I will start summarizing the total cost so far for her treatments.
Get the cdp account? For older folks, some really like low risk. Bank account with low interest rates can be mitigated by either slowly purchasing some SSBs, and/or opening an acct with better interest rate. I suggested the bank account behind because some are apprehensive about being sold high risk products when they go open bank accounts. If she agrees to open the bank account, I think it would be a good idea for you to go with her. Considering my mum was askd to buy more endowment policies instead of just renewing the fixed deposit, its a good idea. My mum lost out heavily on the endowment policy with the insurance cost eating into the returns. It still has positive return, but the returns are really really bad. I hate these unscrupulous folks doing anything to sell insurance.
Check with your mum on her preferences, goals and intentions. Share your concerns. This discussion should help you in the planning as her preferences and goals should be respected. I won't be surprised if she opts for low risk now. Go for education and do some comparisons. To be honest I haven't heavily infringed on my mum's retirement investments ( I dont want her to think I am after her money). Having said this, at the moment, the cpf suggestions are great. With 2k salary, I dont think she will have a lot in SA. Her OA might be reserved for hdb and your tuition fees, if so dont touch. If she has really low risk preference l, going after the sa topup is a good place. If she is 48 now, there's still 17 years before the payouts start happening. So $1 put in there now will I think earn extra 95 cents or so?
Just giving a slightly different perspective of planning here.
1) ensure she has hospitalization bills covered, either with integrated shield plan with rider or if she has diabetes or health issues, an accident plan to supplement her Medishield Life coverage 2) knowing her salary is less than $2k, not sure if she has much in her cpf, especially if she's also paying for house, and if she has paid your education fees with her cpf. Where possible, she should have basic retirement sum which can give her about $600 to $800 monthly when she retires. Fully agree with Elijah that CPF annuity is a good plan. 3) bank savings in normal bank is ok. But there's CIMB Fastsaver around and the like, which offers better than 0.05%p.a. interest rates. Fixed deposits are good options where capital is secure. For retirement planning I don't suggest putting money in places where capital can be at risk. But if she's comfortable, please do so by all means!
Lastly, she has about 17 years left to retirement age, and probably by 55yo she'd like not to do much work already. Ask her how she'd like to spend her retirement, and then do an estimation on how much she needs. From there, you'll know the shortfall and also the strategies she is comfortable to use. Then see how to plan things from there.
Feel free to contact me for an in depth discussion! :)
7 yrs to 55 year old. If the flat is already paid-up, after putting aside about $50,000 cash as emergency fund, move the rest of the cash to SA. Also move the OA to SA. Take it as a 7-yr fixed deposit at 4% interest. At 55, if there are more than the CPFLife amount in both the OA and SA, balance can be withdrawn or leave in cpf to earn interest.