Common Retirement Planning Pitfalls

Here are an article about common retirement planning pitfalls. Procastination is the norm when it comes to retirement planning. There are many reasons why people procrastinate; it is common to hear such comments from clients such as…

“There are many more years before I retire”

“There would be enough in the CPF when I retire”

“It is too complicated and I do not have the time now to try and understand the issues involved.”

“Retirement planning pitfalls are non-existent as my plan is solid proof– properties are the answer to everything!”

No joke, had a super enthusiastic  property agent client of mine who told me this! (Gulp!)

By reading this article, hopefully you will be able to spot the common retirement pitfalls Singaporeans make and how to properly address them.

The 5 common retirement planning pitfalls are:
1) Starting too late

Most Singaporeans in their 20s and 30s are busy concentrating on their careers and there are many more pressing financial needs, such as paying for the house, maintaining their parents needs. Unfortunately, the later the plan is postponed , the less there will be at retirement. The main motivation for this group would be to satisfy immediate needs such as getting a car and to travel. Often, these shorter term goals have more emotional importance than longer term goals. Typically, the net worth of these individuals is small and debt is heavy.

On the plus side, from an investment perspective, this group of individuals would have the longest time horizon that would enable them to take a moderately higher risk in return for an above average return over time.

In order to avoid this retirement planning pitfall, it is important that one must get his/her own finances in proper order through budgeting to ensure that every penny of his income is properly accounted for and not spent on unnecessary items. Major financial decisions such as getting a house would require more time to think as it can have a huge impact on the person’s monthly expenditure for the next 20–30 years.

2) Saving too little

The next common retirement planning pitfall is not saving enough. More often than not, it boils down to lifestyle choice. Most individuals in this age  group (20s-30s) tend to spend their money rather than save it for tomorrow. As a result, even though they may set aside some money towards a retirement goal, it is often too little. However, with effective financial planning and budgeting, a more meaningful sum could be set aside.

3) Investing too conservatively

Many people tend to be far too conservative in the way they invest in retirement.The very word “retirement” tend to connote total risk aversion. How much risk one takes would depend very much on what phase of life cycle one is at. Risk is fine as long as it results in a correspondingly higher level of return. Caution is necessary, but an overly cautious dance may make a great difference between getting by and enjoying a comfortable retirement. It is a delicate balance and there is no one size fits all formula.

Common Retirement Planning Pitfalls

4) DIY Planning / Not seeking proper professional financial advice

Planning for the longest holiday of your lifetime (one that could potentially span 25–30 years) would surely need a “tour guide” in order to save you money, time and effort.  Think about it, if you were to go to Europe, would you DIY and free and easy or just pay a tour guide to bring to the best of places to stay and eat?

Bringing this analysis to retirement planning, the fee you pay for a professional fee based financial planner is extremely small ($2-$5k) compared to the amount of wealth you are thinking of bringing into retirement (normally $750k– $2 million). 

The cost savings in getting the right product  just by product comparison of a hedging against costly medical care (Hospitalisation & Surgical Plans) can already go into $30k-$40k over 10 years, assuming you compare amongst the 6 insurance companies in Singapore and get the cheapest one.

The fee you pay is ALSO inclusive of :

• Not making costly financial decisions (Eg at age 52 your friend ask you to invest in gold, you consult your financial adviser for a 2nd opinion before making any emotional decisions which you may regret later on)
• Giving you multiple instruments for your own financial decision making(For e.g. many people do not know that CPF Life is NOT inflation hedged and there are alternatives to it)
• Ensuring that you are reducing your retirement deficit  gradually over the years through annual reviews
• Making sure that you stick to the investment plan

The other problem here is seeking the wrong professional for advice. It is okay to go to your tied agent (but do note that no matter how comprehensive their financial plan is, Agent Jerry from ABC Company can ONLY recommend ABC products). Independent Financial Advisers (IFAs) aren’t necessarily the best if they are sales orientated and if they do not do a proper complete financial plan and have your interest at heart.

Ultimately, my advice is to seek professional advice from a fee based financial planner who places your interest above his/her own so as to avoid any conflict of interest. Note that the financial planner you choose will have a huge implication on how comfortable or how long our retirement can last.

5) Not having a goal

If you do not have a written down financial plan of how much you need to retire, you might fall short of the target come retirement age, hence prolonging your working life. Further to that , vague retirement targets like ” (70% of my post retirement income) or $750k for my entire retirement ” account for nothing as they do not account for inflation. According to HSBC survey conducted in 2012 of 17,000 people worldwide, those who both plan and seek financial advice benefit far more with over 21/2 times or 264 per cent ($180,000) the retirement assets of those who have not planned or sought financial advice ($68,000).

You can see that all these 5 common retirement planning pitfalls can be easily avoided by hiring a competent and professional adviser . He/ she will help guide you to make better financial decisions so as to enable you to lead a worry and stress free , comfortable retirement.

Retirement Planning Pitfalls is just one of the articles of retirement in this site, feel free to check out the others over here.

Titled the Top 10 Common Myths Of Singapore Health Care, it sets out to help people navigate the health-care system and touches on hospital and chronic-care bills, the financial aid schemes available and medical insurance.

An MOH spokesman said the material was compiled from feedback from the public, hospitals and even letters to the Forum page of this newspaper; the myths are not ranked in any way.

The brochures, in the four official languages, are available at places such as hospitals, polyclinics and community centres. An online version was put on the MOH website this month.

The following is a summarised version of MOH’s responses to the 10 myths:

MYTH 1: Hospital bills are unaffordable.

Response: In the example cited, that of a $9,800 bill for an eight-day stay in hospital for a hip fracture, a C class patient pays nothing out of pocket, with the bill covered by the government subsidy, MediShield insurance and Medisave.

MYTH 2: Those who have MediShield do not need ElderShield.

Response: These insurance schemes cover different things. MediShield is for hospital treatment, and ElderShield, for long-term care expenses.

MYTH 3: With hospital means-testing, some people can no longer go to a B2 or C class ward.

Response: Anyone can choose these wards. The means-testing just decides on the amount of subsidy the patient receives.

MYTH 4: I can change between different integrated Shield plans without affecting my insurance coverage.

Response: This assumption is wrong because a new insurer may not cover you for a pre-existing illness.

However, the basic MediShield coverage, which all integrated plans include, will not be affected.

MYTH 5: I’m not working, so I cannot afford dialysis.

Response: The Government subsidises needy patients at the National Kidney Foundation and the Kidney Dialysis Foundation. Patients can also turn to the hospital’s medical social worker for financial aid.

MYTH 6: There is no assistance available for nursing care for elderly, bed-ridden patients.

Response: The Government gives up to a 75 per cent subsidy. The Agency for Integrated Care can provide more information.

MYTH 7: I have to buy expensive insurance as MediShield and Medisave are not enough to cover my bills.

Response: MediShield and Medisave combined are enough to pay most hospital bills for patients in B2 or C class wards. More expensive insurance is for people who want to be treated in an A or B1 class ward.

MYTH 8: I don’t have enough in my Medisave for my treatment.

Response: You can use the Medisave of your spouse, child or parent. If you are still unable to pay the bill, seek out the hospital’s medical social worker.

MYTH 9: MediShield and Medisave can be used only for hospital treatment, and not for chronic illnesses.

Response: They can cover dialysis and some outpatient cancer treatments. From next year, up to $400 a year, rising from $300 now, from Medisave can be used to pay for treatment for 10 chronic ailments in public or private clinics.

MYTH 10: I’m young and have company coverage, so I don’t need health insurance.

Response: Your company coverage ends when you stop working. If you develop a medical condition after you retire, for example, you may not be able to get insurance coverage.

Originally published in The Straits Times

COME October, investment-grade gold will effectively be 7 per cent cheaper as Singapore has decided that it will scrap the goods and services tax (GST) on the import and supply of precious metals to encourage more gold trading here.

What this means is that investors — whether retail traders, gold exchange-traded funds (ETFs), or private banking clients — will soon be able to trade and store their gold in Singapore free of GST.

At the moment, most investments of this sort are done offshore or kept within the free trade zone at the Singapore Freeport.

Before a young investor enthused by this prospect runs out to buy himself bullion gold bars or coins though, here are some issues to consider.

Is gold still a ‘safe-haven’ asset?

Gold has traditionally been seen as a ‘safe-haven’ in times of economic uncertainty and as a hedge against inflation. Many still view it as such.

‘Given the on-going eurozone debt crisis and concerns regarding a slowdown in global economic growth, gold continues to be a safe haven for investors to park their funds,’ says Kelvin Ngo, head of investments at independent financial advisory firm Providend.

In the past two weeks, ‘gold prices have come down due to the US showing better economic and jobs data’, observes Lynette Tan, investment analyst at Phillip Futures.

‘Similarly, with the Greek debt deal temporarily resolved, investor appetite could return and gold could be sidelined for now,’ she adds.

With the focus now on economic growth in China, Europe and the US, if investors begin to feel uncertain about sustained growth again, ‘safe haven demands’ for gold may return.

But there are those who do not see gold as a safe haven asset. ‘Gold is not like bonds, where there is a regular cash flow from interest,’ says Wong Sui Jau, general manager of Fundsupermart.com, the online unit trust distribution arm for iFAST Financial.

‘Historically, gold and gold equities have shown fairly high volatility as well. Thus we don’t believe it exhibits the qualities of a safe haven asset,’ he says. In his view, gold can be an investment to consider for diversification purposes, but should not be seen as low risk. ‘Based on three-year annualised volatility, gold has almost as high a volatility as equities,’ he says.

How much longer will the gold bull run last?

Gold prices have surged in recent years, which gives investors reason to ‘be cautious in their investment stance, especially if one is looking to make a quick profit’, says Mr Ngo.

But he thinks the bull run could continue as long as global risk aversion remains high, real interest rates stay negative and the outlook for the USD, euro and yen remain negative. He sees three main catalysts today — the eurozone debt crisis is not expected to be solved in the near future, the Federal Reserve has indicated that interest rates could remain low till 2014, and the printing of money is expected to weaken the US, euro and yen. ‘Hence, the gold bull run could easily continue till the end of 2012,’ says Mr Ngo.

Agreeing, Ms Tan says if more talk of economic stimulus or monetary easing arises from the Fed or the European Central Bank this year, implying that the economies require more liquidity to aid growth, this will support gold prices. ‘Due to gold’s special status as a store of value, we are likely to see sustained investment demands, particularly when economic growth remains uncertain,’ she says. Phillip Futures is thus ‘still bullish on gold in the long term, with prices likely to test a new high above the US$1,920 an ounce level reached in the second half of 2011,’ Ms Tan adds.

On the other hand, Fundsupermart’s Mr Wong is ‘cautious, if not outright negative on gold’. ‘We believe the bull run, which is now 11 years, has gone on for too long,’ he says, explaining that demand for gold, outside of holding it as an investment, has not shown growth.

One reason why he is negative is the difficulty in justifying the price of gold. ‘There are no earnings which gold can be tied to like traditional companies where valuation mea-sures will make more sense,’ says Mr Wong. His view is that gold prices have risen so much over the last few years simply because people are more willing to pay more for it. However, the ‘safe haven’ status driving this willingness is ‘suspect’, he says, especially as confidence in the US dollar rebounds with recovery in the US economy.

Albert Cheng, managing director, Far East, at the World Gold Council, a gold producers’ association, would disagree. Investors need to note that gold is also a commodity, so the way market fundamentals and the dynamics of demand and supply change matters.

On the demand side, about half of gold demand stems from demand for gold jewellery, over 30 per cent from investment demand and about 8 to 10 per cent goes to industrial uses such as in gold wire for electronic goods, while a small portion is purchased by central banks, Mr Cheng says.

On the supply side, about 2,500 tonnes come out of the world’s gold mines each year. Another 1,000 to 2,000 tonnes of recycled gold is also supplied to the market, making a total of about 4,000 tonnes of gold annually.

While supply remains relatively constant, demand is likely to keep rising, driven by China’s and India’s rising middle class and their demand for jewellery, as well as the rise in investment demand for gold as a liquid asset to act as ‘an insurance policy to portfolios’.

Mr Ngo agrees that the gold market will remain bullish in the short term, but adds that investors ought to keep in mind that gold is a non-yielding asset with little industrial use, so its longer-term performance may be lower than that seen over the past decade.

How should a young investor invest in gold?

Apart from understanding the gold market and the dynamics driving gold prices, a young investor may wish to consider how to incorporate gold into his or her portfolio.

‘Young people would like to take a little more risk, so in terms of gold investments, their allocation would be much smaller, compared to people in their 40s or 50s,’ says Mr Cheng.

With time on their side to ride out economic cycles, young investors ‘should allocate more to equities given that historically, equities outperform most asset classes over the long-term’, says Mr Ngo.

‘However, a small allocation in gold could be useful to provide diversification benefits, especially in times of crisis, or may be used as a hedge against inflation, deflation or currency devaluation,’ he says.

While physical gold remains the ‘safest way’ of getting exposure to gold, as it removes counterparty risks, there are issues of space, security and storage costs to look into. ‘As such, gold indices and ETFs, which are backed by physical gold, would be the next best option available for investors,’ Mr Ngo says.

Mr Wong prefers gold equities, which can be invested in through resource unit trusts or commodity funds, as they are more diversified across companies, and ‘even if the gold price stagnates — a high possibility in our opinion — a gold mining or gold related company can still have avenues to raise profits by controlling costs’.

Other options may be to trade gold ‘in the form of Spot Loco London contracts in the over-the-counter market and in the form of futures, ie, exchange-traded contracts in COMEX, CBOT, TOCOM,’ says Grace Chan, director of marketing and sales channel, Phillips Futures.

But this would only be suitable for ‘savvy investors’, as futures trading involves leverage which means the investor could sustain losses in excess of his initial funds and then may need to deposit additional funds at short notice, Ms Chan says. Only those 21 years and above can open a futures trading account, and need to be assessed to understand the products in order to trade futures.

By Teh Shi Ning