STI: Can you AFFORD to retire?

Dec 18, 2004
Can you AFFORD to retire?
by Leong Chan Teik and Maria Almenoar

A LONG time ago, Mrs Lucy Lim and her husband dreamt of retiring in a terrace house they bought in Johor in 1995.

They pictured a languid lifestyle, affordable health care, occasional regional vacations and frequent visits across the Causeway to see their grandchildren, funded by an instant doubling of their savings when converted into ringgit.

But no more.

Their expectations and circumstances are greatly diminished today. All they hope for is to get by.

A catering business Mr Lim ventured into eight years ago upon retiring from his civil service job drained their savings.

Because of his age, he could not secure another job.

Their finances were dealt another brutal blow when the terrace house in Changi which they upgraded to in Singapore from a Simei HDB flat in 1995 tumbled in value.

Mrs Lim's 55th, and then 60th, birthday came and went, with no retirement celebrations in sight.

Today, at 62, with fast dwindling energy, she still stoically works as a personal assistant in a financial services company and plans to continue 'till I can't or am no longer wanted'.

She is part of a growing group of Singaporeans who are literally greying at the grindstone. They tap away at their keyboards with arthritic fingers and squint at their computer screens through bi-focals because they can ill afford to stop working.

As of June last year, 35,727 Singaporeans aged 65 and over were still employed, up from 22,699 a decade ago (1993), according to Ministry of Manpower statistics.

Of this lot, the June 2003 survey also showed up three trends:

The majority, or 35.7 per cent, worked as cleaners and in other related menial jobs. This means that their incomes will fade with their strength.

About 21 per cent held jobs in the service and sales industry, which means jobs such as salesmen and waiters, that, sadly, place a premium on youthful vigour.

Another 15 per cent were proprietors, managers and senior officials. This came as a surprise because this higher-earning group was most likely to have the financial means to retire. The survey, however, did not canvass information on their motivations for working.

But a fair guess, say financial planners and analysts, is that many of them were caught off-guard by an unrelentingly vicious spate of financial storms over the past seven years.

First, the Asian financial crisis in 1997 sparked a rout of the stock market and plunged the region into recession. Then the Nasdaq tanked with the bursting of the dot.com bubble in 2000. Shortly after came the Sept 11 terrorist attacks in 2001, which sent shock waves through stock markets worldwide.

Before things had a chance to look up, the Sars outbreak in early 2003 caused another recessionary relapse. Throughout these troubled times, people lost long-held jobs, had their wages sliced, diced and frozen, and personal bankruptcies climbed to record levels.

More woes struck as the value of homes - Singaporeans' all-time favourite investment tool - fell relentlessly. Today, they are still down by about a third from their 1996 historical peak.

These dire straits explain the dismal findings of a survey by Ngee Ann Polytechnic's School of Business | Accountancy in March last year.

Its survey of 1,140 people aged 40 to 59 years showed that only one in three felt they had enough to retire on. Another one in three planned to downgrade to a smaller home to make up for their looming shortfall in retirement funds.

Frighteningly, almost four in 10 said they were counting on luck, in the form of a Toto or 4D windfall, to bankroll their retirement.

Basically, they had no idea what they will live on in old age, just like security guard David Chung, 56.

Ten years ago, his electronics trading business at Sim Lim Square was booming.

'When the money was pouring in, I didn't really think about saving for retirement. I thought things wouldn't change,' confesses the bachelor, who lives with his sister in a four-room HDB flat in Sims Drive.

Today, working 12-hour days guarding a condominium for less than $1,000 a month leaves him 'hardly anything' to put away.

'I have to see how to get by day by day. Retirement? Can't afford even to think about it,' he sighs.

CPF not enough

ANOTHER indication of the nation's preparedness - or lack of - for old age can be found by a peek at their Central Provident Fund (CPF) balances.

These days, turning 55 is no longer cause for celebration for most. Gone are the handsome pay-outs as, according to the CPF Board, most Singaporeans have difficulty even meeting the minimum sum requirement of $84,500 when they turn 55.

That is the base level of CPF savings that has to be set aside to provide them with a very basic monthly income from age 62 onwards. Only savings in excess of that sum can be withdrawn at 55.

As of last year, only about 40 per cent of active CPF members who turned 55 met the minimum sum. Of these, slightly more than half had set aside no more than $40,000 and had to pledge their properties to make up the shortfall.

All in, it's a pretty grim picture.

Faced with mounting evidence that Singaporeans are setting themselves up for gloomy rather than golden years, the Government has decided to raise the $84,500 minimum sum bar in several steps.

By 2013, this will be raised to the tune of $120,000 (in 2003 dollars, which means it will be further adjusted upwards for inflation).

The bottomline message it is sending to Singaporeans is stark: Save more, spend less or retire poor.

But besides starting to save earlier, financial planners say that Singaporeans desperately need to know how to invest their money so it grows at a faster clip than just parking it in a 1 per cent per annum savings account.

Most have no clue. Unfortunately, Singapore Management University Associate Professor Benedict Koh notes the concept of financial planning caught on here only in recent years when organisations such as the Central Provident Fund Board, Monetary Authority of Singapore and the media began launching educational campaigns.

The co-author of Personal Financial Planning (Prentice Hall, 2000), who started a course on the topic in National University of Singapore (NUS) in 1995 because he saw many floundering at managing their money, says much more should be done to teach financial literacy in schools, universities and polytechnics.

Indeed, a survey of 1,000 Singaporeans who earn more than $2,000 a month done five years ago by the NUS and commissioned by Citibank found that most Singaporeans do not plan for their future simply because they don't know how.

Prof Koh laments: 'Many people work extremely hard to create wealth for their employers but neglect their own personal finances. They tend to just leave their money in savings account and struggle to keep up with inflation.'

But with more enlightenment and a little luck, he says they could pack up their jobs earlier with comfortable nest eggs, beefed up by stocks, unit trusts and insurance policies.

Even then, most Singaporeans badly need to revise their typically unreal expectations of retirement living. Ms Anne Tay, vice-president of wealth management at OCBC Bank, notes that most professionals 'refuse to believe' they will need at least $1 million to keep up their current lifestyles.

'For most, it's a case of forget $1 million - I don't even have $100,000. They ask you: How many people would have $1 million to retire on?' she recounts.

But the sobering reality is that $1 million in the bank only works out to $4,000 a month, or $2,000 each if shared by a couple, over 20 years of retirement, without even factoring in inflation. That is by no means extravagant, especially with rising medical costs today.

Grinding halt

AS SUCH, working well beyond the mandatory retirement age of 62 looks set to become the new norm.

Minister Mentor Lee Kuan Yew, for one, champions this trend because he feels that with a life expectancy of 82 today, 62 is too early to grind to a halt.

He revealed that the Cabinet had discussed this issue during a meeting last month and is now working out a scheme to enable more to work past 62, possibly at lower pay, so their skills and experience remain in circulation.

What was left unsaid is that besides benefiting one's psychological health, delaying retirement is also good for the pocket, as it will hopefully help raise tens or hundreds of thousands of dollars more for retirement.

That is why Mr Liaw Beng Teck, a university professor in Brunei for eight years and National Institute of Education teacher trainer for 16 years, continues writing educational books at 63.

'It's boring to stay home everyday. I like keeping busy. The extra money is also a bonus,' says the father of two who enjoys gardening, cooking and cycling.

In most developed Asian countries, gerontologists say Mr Liaw would be typical.

In South Korea, 53 per cent of the people in the 60 to 64 age category still hold jobs. Among Koreans above 65, about 29 per cent are employed.

In Japan, the figures are 55 per cent and 20 per cent, respectively. But in Singapore, it is just 25 per cent and 18 per cent, respectively.

Having to beaver away in one's doddering years is still viewed here as a pitiable exercise, which hints at earlier financial negligence. Many Singaporeans yelp with pain, rather than delight, at the prospect of working past 62, preferring to devote their dotage to doing something else, or nothing.

But that mindset has to change because staying at work is one positive way of ensuring active ageing.

At the least, it buys Singaporeans badly needed time to get their finances in order. Because, as Mr Chung knows, there is nothing worse than being near broke as retirement dawns, when it is too late to start life over again and save all those spent dollars.

 

What you need to do to avoid greying at the grind

START EARLY, LIKE NOW

The earlier you start, preferably as early as you join the workforce, the less you need to set aside every month.

For example, if the plan is to accumulate $1 million by age 65, you need only invest $846 a month from age 25. If you wait till 45, you need to put aside $2,726 a month.

In both cases, the investments are assumed to grow at 4 per cent a year - a rate of return which can be achieved by investing in, say, bonds and Real Estate Investment Trusts (Reits), according to financial planners.

LIFE IN PLASTIC IS NOT FANTASTIC

As American personal finance guru and debt hawk Suze Orman always says, every money-spending decision you make today has a huge impact on your future finances.

Yet, many people are 'flirting with financial suicide' by chalking up huge debts on their credit cards.

Credit card debt here has shot up from $662 million in August 1994 to $2.6 billion a decade later. Ditto the number of credit cards in the average Singaporean's wallet. The number of cards issued over that period has more than doubled from 1.4 million to 3.8 million.

LIVE LIKE THERE IS A TOMORROW

Settle for a modest home and car and fight the urge to upgrade incessantly.

Let's say you buy a three-room HDB flat at the age of 28. Seven years later, you upgrade to a five-roomer, about 40 sq m bigger.

The total mortgage you will pay - first for the three-room flat and then for the five-roomer - works out to about $399,000, including interest.

That means the cost of upgrading - the extra you forked out for more space - is, gasp, about $226,000, thanks to the higher purchase price of a bigger home and the interest costs on a bigger loan.

CHILDREN ARE NOT YOUR ATMs

Those counting on their offspring to maintain them financially in their retirement are headed for disappointment.

Singapore has one of the fastest ageing populations in Asia. Increased life expectancy is expected to impose undue financial strain on even the most filial and capable of children.

Children may find their resources stretched under the strain of supporting two generations of elders - their parents and grandparents.

The Central Provident Fund Board estimates that 10 economically active persons are supporting one elderly person.

By 2030, only 3.5 persons will be supporting one elderly person.

STI: Mastering the basics of financial planning

Oct 26, 2004

Mastering the basics of financial planning

IN CONJUNCTION with Family Festival 2004, MoneySENSE and various financial industry associations will bring you a series of educational messages about money management and personal finance to families.

In the first of a four-part series here, we share some practical tips on how you can embark on financial planning.

But first, is financial planning only for the rich?

Many people have the misconception that financial planning is solely about buying insurance policies and investments.

To put it simply, financial planning is about each of us making an effort to meet our life goals, through the proper management of our personal finances.

It is about solving financial problems and achieving financial goals by carefully developing and implementing a plan that takes into account a person or family's current situation and future goals.

Financial planning consists of six areas:

Cash flow management: This deals with how you allocate your income to meet daily expenses, and how you set aside money and other assets to meet future financial goals.

Risk management: It means making sure that you have enough family income to handle unforeseen circumstances such as premature death, disability or illness.

Investment planning: This involves putting your assets in a combination of different financial instruments that help you to meet your investment goals and allow you to grow your wealth.

Retirement planning: This focuses on building up wealth during your working years to achieve financial independence when you retire.

Tax planning: This deals with minimising your taxes through the use of various tax benefits and incentives.

Estate planning: This allows you to plan for the transfer of your assets to your beneficiaries with minimal hassle and estate taxes.

The first step in financial planning involves identifying your financial objectives and goals.

At different stages of your life, you will have different needs and face different challenges.

It is important to identify your priorities so as to set realistic goals and use your financial resources efficiently.

Make sure you review your priorities regularly, especially at key stages of your life, and every time your family circumstances change.

These include starting work, getting married, buying a home, making an investment, having children or reaching retirement.

In our next article in a fortnight's time, we will zoom in on a specific area: how to calculate the insurance coverage you would need to protect your family income.

To find out more, visit www.mas.gov.sg

This article is provided by the Monetary Authority of Singapore as part of the MoneySENSE national financial education programme.

STI: Investing your CPF: How it can go wrong

Sep 6, 2004 
Investing your CPF: How it can go wrong
by Leong Chan Teik

IF YOU are like most Singaporeans, you probably think that $1 in your Central Provident Fund (CPF) account is not the same as $1 in your pocket.

You view the CPF money as being locked away, only to be consumed during some far-off period, while cash in hand can let you do things right here and now.

That sort of mindset can do big-time damage to your retirement nest-egg.

It contributes towards a less rigorous approach to investments in many cases, say financial experts.

The managing editor of Asia Financial Planning Journal, Mr Andy Ong, says: 'Someone I know, who would be very careful about not spending too much on lunch, invested nearly $200,000 of his CPF savings in unit trusts without much thought.

'He didn't know what he was doing, and I think he was just being nice to the female financial adviser. Within a few months, his investments had lost 10 per cent.'

According to Mr Ong, this investor was none too sorry about his paper loss. 'He said: 'I don't see the money, so I don't feel the pain.' '

Experts and readers cite various ways you can do wrong by your CPF savings, or run into difficulties:

RISKING SPECIAL ACCOUNT

YOUR CPF Special Account is truly special in these days of ultra-low interest rates when, for example, savings accounts earn 0.1 per cent a year.

The Special Account pays 4 per cent a year, a return that few investment products approved for investment using money from your Special Account can beat comfortably and with any certainty.

Recognising that, Mr Ong, who is also a certified financial planner, declares: 'I'll never ever touch my Special Account.' He treats it as part of his bond portfolio, which is the safe part of his overall investment portfolio.

Mr Jeffrey Silva, chief executive of Optimus Financial, an independent financial adviser, cautions against using your Special Account to invest in balanced funds with a 60-40 mix of bonds and equities.

To start with, many of such funds can hardly achieve 8 per cent a year, he says.

When the expected annual return is, say, 5 per cent, this gain is equal to or less than a compounded return of 4 per cent when the investment period is long - such as over 15 years.

'What this means is that the opportunity cost of using the Special Account is higher than most people think,' says Mr Silva.

The only products that Optimus currently recommends for Special Account money are deferred annuities, for which compounded returns can be much higher than 4 per cent even after deducting charges, he adds.

BIG WITHDRAWALS

IN THEIR desire to have a home that is mortgage-free, schoolteacher Tham Siang Wah, 31, and her husband have withdrawn a total of $48,000 from their CPF savings since 2000 to pay off chunks of their loan.

But that led to a shock for them when they received a letter from the CPF Board. It said they would soon reach the allowed limit on CPF withdrawals for their three-room flat on Mei Ling Street.

As a result, in three months' time, Ms Tham will no longer be able to use her CPF savings to pay her monthly mortgage instalment of $280. She will have to pay cash.

'If we had not made the lump-sum payments, we would not have reached the withdrawal limit so fast. I now figure that I would have 14 more years before reaching the limit,' she says.

After speaking with HDB officers, she believes hers is not an uncommon case.

Chartered financial consultant Leong Sze Hian warns that most people will have a hard time calculating the so-called Available Housing Withdrawal Limit (AHWL), which is a recent introduction.

'When I do seminars where the audience includes experts like real-estate agents, I can see they don't know how to calculate the AHWL, and they don't know the implications of it,' he says.

OVER-COMMITMENT

AS WITH cash, you can inadvertently over-commit yourself to long-term payments for an asset bought with CPF savings.

A reader tells of how he signed up in 1997 for an endowment insurance policy that matures in 10 years' time. The annual premium of $12,000 would be paid out of his CPF savings.

Last year, he lost his job and his CPF savings were running low, after he had paid seven years' worth of premiums.

He subsequently stopped paying his premiums, resulting in the policy becoming a 'paid-up' policy - that is, his insurance cover remains in place, but the sum insured is lower than if he could pay his premiums in full.

Worse, when the policy matures in three years' time, his CPF account will receive a smaller sum than he had planned on, reflecting the hefty cut in the rate of return on the policy.

LOW RETURNS FROM PRODUCTS

CONSIDERING that the CPF Ordinary Account pays you 2.5 per cent a year, it makes little sense to take out the money and buy into a product that actually yields less, or just a little more.

Given current interest rates, it's a definite no-no to take out your CPF savings and put them into fixed deposits, for example. The rate on fixed deposits ranges from 0.175 to 1.4 per cent, depending on the tenure and the sum involved.

Consider also the popular endowment policy called G22, which was distributed by DBS Bank and which had a eye-catching durian logo. Its return is guaranteed at 22 per cent over eight years. That works out to 2.52 per cent a year compounded.

It will be eroded after your CPF agent bank deducts $2 a quarter as a service fee over the next eight years.

And don't forget, during the next eight years, the CPF Ordinary Account interest rate could be raised in a rising interest-rate environment, note observers.

TRANSACTION COSTS

USING your CPF money to trade in shares can also be costly if the shares are penny stocks, points out veteran stock investor Kenneth Pang.

The cost of transaction and other fees will eat into your profits, if any.

The CPF agent bank charges between $2 and $2.50 for each lot of 1,000 shares, subject to a maximum of $20 or $25 per transaction.

So if you buy 10 lots of BreadTalk at 21 cents a share (for a total of $2,100), your CPF agent bank can charge you up to $25.

(Other costs incurred in similar transactions involving cash, such as stockbroker's commissions, also apply.)

'If you frequently go in and come out, the costs you are paying come up to a lot. How to make a profit then?' asks Mr Pang, 49.

That's not all: The agent bank levies a service charge of $2 per counter per quarter. This applies to unit trusts too.

If you have a tiny holding of SingTel shares or other shares or unit trusts, the bank charges would add up to quite a bit in the long run relative to the value of your investment, says Mr Pang.

OVER-INVESTING IN PROPERTY

SAYS Mr Pang, who is also a senior associate manager of a realty company: 'Many people have over-invested their future income - which includes their CPF money - in property.'

For those thinking of using their CPF money to buy an investment property, he points out that the gross rental yield in Singapore is reportedly 2 to 4 per cent a year. After costs and expenses, the net yield is barely equal to, or lower than, the CPF interest rate.

'If they are thinking of capital gains, they are being too optimistic,' says Mr Pang.

Agrees Mr Leong: 'You shouldn't over-invest in one sector - just in case it crashes. Nobody knows which is the best asset to invest in over the next 20, 30, 40 years, so you just have to diversify in terms of assets and geography.'

STI: Safe options for your savings

Aug 1, 2004

Safe options for your savings
by Leong Chan Teik

I'M A 30-year-old woman. After working for eight years, I have $25,000 in savings, all sitting idly in fixed and savings deposits.

I know the importance and benefits of financial planning, and would very much like to invest my money, but do not know where to start or what to do.

How can I grow my savings fruitfully, given my small appetite for risk?

The e-mail message above arrived recently at The Sunday Times, and is similar to others we get from time to time from other readers.

These people come from a wide range of ages and backgrounds, but they share at least one common trait: They want to be safe rather than sorry with their money.

They don't want wild vacillations in their investments.

What they do want is a better return than the 0.1 per cent a year they get from their savings accounts, or the 0.5 per cent, on average, from fixed deposit accounts.

Financial experts point out that low-risk investments almost invariably yield relatively low returns.

And what if the investors are young folk in, say, their 30s? Financial planners universally insist that they should opt for a less conservative portfolio of investments.

Young folk have a long time-horizon to ride out fluctuations in riskier instruments.

Over time, they could find that equities, for example, give a handsome return.

In any case, a new investor may start off with conservative investments and move on to higher-risk ones when he feels ready for them.

At the moment, there are five types of broadly conservative investments with varying risk-reward ratios that financial experts hold up for consideration:

REITs

What they are: The acronym stands for real estate investment trusts.

Reits own commercial or industrial properties, and pay out the rental income they collect to investors on a regular basis - usually half-yearly.

Returns: At current prices, Reits such as Ascendas Reit and CapitaMall Trust will give you a return of around 5 per cent, tax-free.

'I have about a third of my investments in Reits. They are quite a no-brainer,' says Mr Michael Loo, an investor consultant who is also a certified financial analyst.

Reits have an inherent risk - their prices dip and rise in day-to-day trading.

How to invest:  Open a trading account with a brokerage, and buy Reit units on the stock market, just like shares.

INSURANCE

What: NTUC Income Capital Plus policy; UOB Guaranteed Rewards Plan
Returns: NTUC's policy guarantees a return of 3.37 per cent a year while the UOB policy gives you 3.6 per cent a year if you stay invested for 10 years. You get lower returns if you cash out prematurely.

If you buy these policies through your Special Retirement Scheme account, the purchase amount will be deducted from your taxable income for the year, which means you enjoy tax savings.

Aside from that, both plans come with insurance coverage for death as well as total and permanent disability.

How to invest: Call NTUC or UOB Life Assurance.

BONDS and STOCKS

What: NTUC Income recommends its Combined Fund, which is invested equally in stocks and bonds.

Fundsupermart, an online distributor of unit trusts, recommends a portfolio with an equal mix of the following:

Fidelity US High Yield Bond Fund;
Fidelity European High Yield Bond Fund;
N502100H; coupon 2.625% (SGS Bond);
NY03100A; coupon 4% (SGS Bond); and
Schroder Asian Growth Fund.

Returns:  Bonds are issued by governments or firms as a way to borrow money. Bondholders are paid a fixed interest, and get back their capital at a predetermined maturity date.

Bonds get a little risky if they are issued by companies or governments that do not have strong balance sheets or political stability, respectively. But such risky bonds promise to pay out more to investors, hence their name: high-yield bonds.

For its fund, NTUC says you should expect a return of between 5 and 6 per cent a year over 10 years.

That means every $10,000 invested could grow to between $17,100 and $17,900.

As for the Fundsupermart recommendation, you can expect to receive a tax-free dividend return of 3.5 per cent a year from the bond portion.

The Schroder fund gives you exposure to shares of Asian growth companies.

How to invest:  Open an account with Fundsupermart, or any bank distributor.

You can ask for advice on a different mix of bond-equity investments.

SGS BONDS

What: These are Singapore Government Securities (SGS) issued and guaranteed by the Singapore Government.

Returns: SGS bonds have tenures of up to 15 years.

 

They pay interest every six months, and you get back the face value of the bond when it matures. For example, if an SGS bond has a coupon rate of 3.8 per cent, then for every $1,000 in face value, the investor will get two tax-free payments of $19 every six months until the bond matures. When the bond matures, the investor will receive the original $1,000 back.

The yields for SGS bonds vary with the maturity date. For an SGS bond that matures in three years, the yield currently is about 1.5 per cent a year.

Clearly, this is not sexy, but it outperforms savings and fixed deposit rates.

Says Mr Lim Chung Chun, chairman of Fundsupermart.com: 'Singaporeans are generally under-invested in bonds. There is an estimated $150 billion in savings and fixed deposits in the banks in Singapore. A good part of that should really find its way into the bond market.'

How to invest: Open an SGS trading account with a bank or Fundsupermart.

UNIT TRUSTS

What: OCBC Bank recommends the OCBC Map and The Accumulator unit trusts, which are globally invested and well-diversified.

Returns: With diversification, you put your eggs in several baskets, so your overall investment enjoys some stability.

One way to diversify is to spread your investments over assets that move in opposite directions, such as equities and bonds, says Ms Anne Tay, vice-president of wealth management at OCBC Bank.

How to invest: Diversified unit trusts can be bought from almost any bank.The list of investments is by no means exhaustive. Seek comprehensive advice before investing. 

STI: How to safeguard your home and investment

May 24, 2004

How to safeguard your home and investment

Keep your loan term short

AIM for the shortest possible repayment period, taking into account your ability to pay. The shorter the loan term, the better interest rates are likely to be. Choosing a shorter repayment period, therefore, could result in significant savings.

Ultimately though, you should tailor the repayment term to your housing plans. If you aim to be an owner-occupier, a longer mortgage period with fixed interest rates could still be an attractive option. However, if you plan to upgrade within a few years, or to sell the property in the near term, a shorter period would still be the way to go.

To gauge your 'ability to pay', financial advisers say your monthly repayments should not exceed 20 to 25 per cent of your income, inclusive of CPF.

Don't drain your CPF

IF YOU put the bulk of your CPF monthly contributions towards repaying your mortgage, you may find that you have little left over for retirement or to pay off that same loan when money is tight.

This problem is especially relevant as CPF contributions have fallen over the years.

Stay in the know

HOUSING regulations and legislation change. Be aware of the latest policies, to avoid nasty shocks.

Take, for example, the 'first charge' issue. Previously, the CPF Board had first claim on your property in the event that you defaulted on your home loan. Now, this first charge has shifted to the banks - unless they do not object to it remaining with the CPF Board.

If you cannot pay off your home loan - say, in the case of bankruptcy - and your property is sold, the bank has the first claim to the sale proceeds. The CPF Board is paid if there is money left over.

While this helps you get more competitive mortgage packages from banks, you could also lose all the CPF money you invested in that home if the bank forecloses on it.

With this in mind, you might consider requesting that the CPF Board retain first charge.

Fixed or floating rates?

WHETHER you choose a fixed or variable rate is a personal choice. For long-term mortgages, fixed rates tend to produce greater savings because rates usually go up in the long term.

If you think rates will fall, or if you don't plan to hold on to your property for long, variable or 'floating' rates could be better, as they tend to be easier on the pocket than fixed ones. Also, consider how vulnerable you are to interest rate fluctuations. If your cash flow is tight, you might not want to risk a rate hike under a floating system.

Theoretically, starting out with a low floating rate and then switching to a fixed-rate scheme if a hike takes place would maximise your savings, but this scenario, which looks pleasing on paper, doesn't take into account refinancing penalties, which could offset whatever interest rate gains you hope to receive.

Watch those extra charges

APART from the cost of the property itself, buying a home brings with it other charges. Make sure you've taken all of them into account.

First, check if your bank charges any processing or valuation fees. Most banks bear these costs for their customers.

Second, note the late charges. If you are tardy with your monthly instalments, the bank might slap on an additional fee, so find out how long the grace period is and how much you will be penalised.

Third, mortgages usually require that you take out a fire insurance policy on your property. Banks generally provide this for free.

Fourth, ask if the loan package includes subsidised legal fees.

Finally, remember, stamp duty is payable when you buy a house. It is 1 per cent for the first $180,000; 2 per cent for the second $180,000; and 3 per cent for the remainder.         

STI: They put 20% of wages in insurance

Apr 27, 2004

They put 20% of wages in insurance
by Rachel Lin

WHEN it comes to insurance, the Chia family has certainly got it covered.

About a fifth of the household's annual salary of $144,000 goes to paying insurance premiums.

Dr James Chia and his wife Jackie - who have three children - are not just enthusiastic holders of policies.

Dr Chia, 49, is involved in the financial planning industry, being the associate director of a financial planning firm, IPP Financial Advisers, and Mrs Chia, 47, has worked for insurance giant Prudential as an agent.

Yet when the Chias first ventured into the world of insurance, they made the classic mistakes that most newbies do.

This was back when they had both landed their first jobs, and knew little about insurance.

They bought a hotchpotch of policies recommended by friends who had become insurance agents and may not have reflected the Chias' real needs.

Dr Chia was a site engineer with MRT Corporation then. Mrs Chia was a credit administration officer with DBS Bank.

Of those early days, he said: 'We bought insurance from people who just happened to come along and talk to us. I got my whole-life plan from someone who bumped into me and convinced me to buy insurance from him. As for the Great Eastern policy, my friend had just become an insurance agent and asked me to be his first client. I thought, 'why not?' '

Acting on the advice of friends, the Chias bought a whole-life plan for about $60,000 with annual premiums of $1,200 and a Great Eastern endowment plan of $50,000 for their children at $1,800 a year.

'If you've got no insurance at all, buying plans like that can't hurt,' said Dr Chia.

The mistake they made was that the cover from these policies was insufficient: It amounted to about $100,000 in total which wouldn't have met the family's needs in the event the main breadwinner was incapacitated.

'Fortunately, we managed to review it early enough, in our late 30s, when our health was still good,' he said.

Dr Chia recalled: 'We didn't buy anything more for the next five to six years, until someone came to do financial planning for us. He did a proper job of showing how little cover we had, and in that session alone, I laid down almost $8,000 to top up my insurance. I bought even more when we both became involved with financial planning and insurance.'

He became a financial planner and Mrs Chia entered the insurance industry. It was then that their eyes were opened to just how vital a carefully thought-out insurance plan is.

'Now, we're aware of the benefits of insurance. It's the first step in any investment plan, that's how important it is,' said Dr Chia.

And the Chias have planned their coverage according to this maxim. They bought more plans to make up for the gap in coverage, but held on to their old policies.

The lion's share of the family's insurance covers Dr Chia as the principal breadwinner. His personal plans amount to a total of $2.5 million in life insurance, split equally between term and whole-life plans, $350,000 worth of critical illness cover and $70,000 in annual disability cover.

Insurance for loved ones in the event of your death can be a rather grim topic, but he said with a chuckle: 'Two-and-a-half million dollars, if invested properly, could give my wife an income of $10,000 a month lasting for 20 to 30 years - that should bring her a smile at my funeral.'

Mrs Chia herself has life insurance cover of $1 million and $200,000 in critical illness cover.

Both of them - busy these days running a multi-level marketing distribution business with Nu Skin Enterprises - also subscribe to group hospitalisation and surgery plans through Dr Chia's financial planning firm as well as ElderShield.

As for their three children, aged 17, 15 and 13, they are insured for $100,000 each in whole-life policies.

But Dr Chia said that this protection is 'incidental', and part of an insurance-linked savings plan rather than an instrument wholly devoted to covering the children.

Aside from personal cover, the family has also insured its property, a 5,600 sq ft freehold semi-detached house in Seletar Hills, for its replacement construction costs in a fire policy worth $570,000.

With all their various plans and policies, do the family's premium payments weigh heavily on their shoulders?

'We should be happy to pay them,' Dr Chia declared. 'It covers my family, and that's what is most important.'

STI: Advice you can use!

Apr 27, 2004

Advice you can use!

Needs will dictate a change in focus

 

CHOOSING the right insurance coverage can be a daunting task. Here are five tips from Standard Chartered.

 

Don't rely solely on your company plan for coverage

 

Otherwise, you won't have any back-up policy when you leave or are retrenched.

 

Adapt your insurance to your needs

 

When you're just starting out, life insurance may not need to be the key focus, although some cover may be necessary in case of emergencies. Focus on disability plans, which will protect your savings and a loss of earning potential should you be unable to work.

 

If you have a family to support, however, life insurance is vital to protect your dependants against the loss of income should the breadwinner die. Disability policies become relatively less important as you build up your level of savings.

 

Finally, medical insurance is the top priority in your old age, whereas life insurance is less essential unless needed for estate planning purposes. Your insurance focus should therefore change according to your needs.

 

How to calculate the life protection cover you need

 

One of the most important things you must consider when buying life insurance is whether your dependants will be adequately covered.

 

Calculate the amount of cover you require by multiplying your yearly income by the number of years you will need to support your dependants. Subtract it by any existing protection you already have.

 

How to calculate the disability cover you need

 

Disability income plans replace around 60 to 75 per cent of your salary. This is different from the 'total and permanent disability' cover found in most life insurance plans. Disability income payments will usually stop when you have recovered, or by a specified age. They may, however, be reduced if you obtain additional cover from your employer.

 

To calculate how much disability income you need, take your total monthly salary and multiply it by 75 per cent. The result will be the monthly income you need replaced under your disability policy.

 

Apply for medical insurance in advance

 

With the rising cost of medical treatment, some insurance to cover this is necessary. Most plans, however, are for the 'healthy', and you may be disqualified from applying for a medical plan because of poor health.

 

So apply for medical insurance in a timely manner, to prevent poor health from making it difficult to find cover.