By Leong Sze Hian
Going into involuntary retirement?
I have been a volunteer doing financial counselling for about a decade now. One of the most common cases that we come across, are people who have lost their jobs, their business has to be discontinued for reasons other than business financial failure that may typically consume most of their assets, or people who may feel that they are tired of working and need a long break.
A real life case study in Singapore
I shall share one typical case as a case study.
Ms Lee, age 50 was retrenched about 2 years ago. She has not been able to find a job that is acceptable to her, and is becoming rather anxious as to her future. Her 4-room HDB flat is fully paid for.
Her monthly expenses are about $1,500.
Her assets are as follows:
- CPF: $200,000
- Insurance cash values: $100,000
- Bank balance: $100,000
That is a total of $400,000.
Apart from her savings, she has a CPF approved medical insurance plan and a rider to cover the deductible and co-insurance, in the event of hospitalisation.
Assuming an average rate of return of 6 per cent on her total assets and 2 per cent inflation, she needs a capital of $355,403 to generate $1,500 monthly income for her expenses, increasing at 2 per cent per annum (indexed for inflation) for 38 years. from age 50 to 88.
While the life expectancy of females in Singapore is age 83. Most studies indicate that as one advances in age beyond the 70s, the monthly expenses tend to decline in real terms by about 15 per cent per every 10 years or so.
So, she has an excess capital or buffer of $44,597 ($400,000 assets minus $355,403 capital required to generate the monthly retirement income).
To plan for her retirement, she sets up a portfolio of approximately 30% equity, 30% bonds, 20% commodities and 20% property – comprising 7 funds for her CPF Ordinary Account (OA) balance and the balance of her cash. All this after keeping about 6 months of her expenses in the bank – $10,000.
(Note: the first $20,000 cannot be invested under the CPFIS (CPF Investment Scheme) and the first $40,000 under the CPFIS (Special Account))
The portfolio for her funds are as follows:
- Global Property fund – 20%
- Global Commodities fund – 20%
- Global Bond fund – 15%
- Asian Bond fund – 15%
- Global Technology fund – 10%
- Emerging Markets Equity fund – 10%
- Asian Equity fund – 10%
Monthly drawdown from portfolio
So within about 3 to 6 months – she will start to withdraw about $1,500 monthly from her portfolio for her monthly expenses by selling the fund (out of the 7 funds) that has increased the most. Why sell the fund that increased the most? Because historical trends will tell you what funds go up for a long period will come down and vice versa, therefore by selling the highest earning fund, the investor is able to cash out the “earnings” of the investment before it goes down.
Ms Lee has in effect, set up her own pension fund.
Some have highlighted on the management fees for the funds. The measure of the total costs associated with managing and operating an investment fund such as a mutual fund is referred to as the total expense ratio (TER). In Singapore, the cost comes to an average of 1% – 5 %.
It is recommended that one should choose the funds that has the expense ratio to be around 1 % so that TER in all for the portfolio is only 1%.
But how do you ensure that the funds are 1%, given that the funds are not that transparent in the management fees?
An easy way is to look out for funds that are approved by Central Provident Funds (CPF), as CPF conducts auto check of the TER for the funds and would take the funds out if they exceed a certain amount.
A fee that one could avoid paying is the advisory fees that is charged by the fund advisor if one is to be engaged. Normally the fees are about 1% to 1.5%.
[spacer style=”1″ icon=”none”] View Mr Leong’s seminar on investing in the video below.
Mr Leong Sze Hian was the past president of the Society of Financial Service Professionals, An alumnus of Harvard University, Member on the CIFA International Advisory Board, served as Honorary Consul of Jamaica and founding advisor to the Financial Planning Associations of Brunei and Indonesia.