Save More or Earn More

I would like to highlight an interesting mathematical relationship on why you should considered taking calculated risk in order to achieve your financial objective. In this case, the targeted financial goal to achieve $500,000 by age 62.

Don't forget the power of time! 37 years of accumulation which can be considered long enough to have achieved the expected rate of return of 7.68%. The expected annual saving would be just $5,596!!! ( i.e. only $466 monthly investing).

As compared with a return of 3.68%, you are required to save more!
How much more? $5139 (91%) more on an annual basis.


If these options are not attainable, work towards doing a little bit of both;
saving more money and earning a higher rate of return.

Having a good understanding on these relationship, you probably willing to take the calculated risk, so that you can make better use of that saving on other areas of financial concern.

Are your assets working hard for you?

Invest in appreciating assets.
So what are these types of assets to protect the value of money from eroding?

• Tailor-made well-diversified portfolio
• Stocks
• Bonds
• Real Estate
• Foreign currencies
• Gold
• Collectibles, subject to willing buyer
• Businesses, subject to proper management

Having the right mix of assets investment will cushion off the impact of inflation. Money idling in the bank is likely not earn enough interest to stop its purchasing power from declining during inflation, as illustrated above.

Therefore, selecting a portfolio that suits your financial objectives and risk profile based on your investment time horizon to grow your wealth to battle against inflation is a wise decision to make!

The Cost of Waiting!

There is never a right time to do your financial planning.
However, I would encourage you not to delay it because procrastination will hinder you from becoming financially successful.

 As illustrated, if you set aside $200 per month for the next 25 years (assuming no taxes and 6.5% annual rate of return), then by starting:

• TODAY, the outcome is $150, 579.
• After 5 years of delay, the difference is $51,963!
• After 10 years of delay, the difference is $89,541!!

So simple consistent savings will lead to big payoff.
Don't delay!
Start now!

Related article of interest "Systematic & Disciplined Investing that pay."

Don't put all your eggs in one basket!

One of the time-tested investment rules is "Diversify! Diversify! Diversify!"

Never put all your investment eggs in just one basket.
Different types of investments are exposed to different levels of risk and by diversifying, the losses in some investments can be offset by other investment gains.  (Refer to article here)

The whole idea is to reduce the overall risk by investing in a broad range of economic sectors. Studies show that proper allocation accounts for more than 90% of the total return.

How you could spread the risk...

• Different asset classes
• Different regions in the world
• Different industries
• Different companies
• Different currencies
• Different maturity dates, etc.

Dependers, Spenders, Accumulators & Preservers; who are they?

DEPENDENTS - Children are the joys in life and we are the key to their future. Helping them achieve their dreams by planning for their financial future. This is a very important and early Life Stage. It is an opportunity to provide security and peace of mind for those who are so near and dear to you and depend on you. If you have young dependants, you may want to start saving for their university education as early as possible. You may also want to be well protected should something unexpected happen to you, such as a serious illness, disability, accident or even premature death. Why? Because with adequate coverage, you can ensure that your loved ones can afford to go on living in the family home and maintain their standard of living, and that your children’s education is assured.


SPENDERS or Savers? You may be young and single, starting out on your career or enjoying married life before children come along. Fulfill your aspirations by planning for your financial future. You may want to provide adequate protection, especially if you have just got a place of your own. With the financial commitment of a housing loan, as well as other debts, you will want to consider whether you or your family can pay off the outstanding loan should something unexpected happen. Also, this is a good life stage to begin developing skills in the areas of saving and investment. Why now? Because this is the stage in life where you begin to think about a plan to help you fulfill the goals you want to achieve as you grow financially.


ACCUMULATORS - You have worked hard to make adequate provision for yourself and your family. Your career is advancing ... are you also advancing financially? Now you can think about saving and investing for the future — and it pays to start early. Probably, your children may have grown-up, so you can stop worrying about providing for them and start planning for improving your own lifestyle. This is the life stage where you start to think about saving and investing wisely to maximize your potential returns. You may be in a position to save and invest even more. Why? Because your financial commitments may be lessened if you have paid off your housing and car loans. Now, maybe your need for life protection will be less, although you may still want to ensure adequate protection for your health.


PRESERVERS - You want to enjoy your retirement and health is important. In addition, you would like to leave a legacy for your loved ones. Enjoy your golden years by planning for your financial future. After a lifetime of hard work, you deserve to have a comfortable retirement. In order to maintain your standard of living during your retirement years, you may want to invest in an annuity plan or income investment portfolio which will give you a regular monthly income for life. With rising medical costs, you should also ensure your medical and long term needs are well protected. Another important need you may have at this life stage is preserving your hard earned wealth for your loved ones and arranging funding for your estate planning needs.

DII : Loss of Integrity - Financially, Emotionally or Both?

Whist it is appropriate to plan for retirement and premature death, it is also important to protect one’s earning capacity, whether as an employee or self-employed.

You could lose the earning power should you become disabled as a result of injury or sickness. If that happens, you are likely incapable of paying premiums to keep your life plan in force. On top of this, your family’s current expenses need to be paid and these expenses may even increase as a result of your medical treatments or the need to employ a personal nurse to take care of yourself. In addition, you may still have outstanding loans to repay. Most of the time, such families will be financially worse off with the incapacity of the bread-winner than they would be had the bread-winner died.

A Disability Income Insurance (DII) would be a useful insurance protection, income protection, to help safeguard a person’s earning capacity in the above situation.

DII is also known as Income Replacement Insurance. It is designed to help you to maintain you and your family’s standard of living. It provides a regular monthly income to cover your expenses in the event of a disability due to illness or accident. [Refer table below to understand between DII & Total Permanent Disablement (TPD)]

DII	TPD
Can be issued on a stand-alone basis or as a rider	Usually incorporated into life policies. Can also be issued as a rider
Max sum assured is a %age of the monthly salary	Sum assured not pegged to salary
Escalation benefit available	No escalation benefit
Partial disability benefit available	Partial disability benefit not available
Choice of deferred period	No deferred period (only proof of TPD)
For working adults only	Available to both people who are working and not working
Provides income replacement	Accelerates the death benefit payable under a life policy
Benefit payable on a monthly basis	Benefit could payable in installments

 

If you were sick or hurt tomorrow and wouldn’t go to work… 

how long could you live on your savings? .

There was an adviser, call “John”. He has a strong conviction and work very hard as a life insurance adviser with an insurance company. As usual, he did a complete life insurance programming for this particular client. “Mr. Tan” was impressed with his conviction and his presentation on what life insurance can do for him. After policy delivery, he thought to himself, another job well done; another family well protected.

After 2 years, Mr. Tan was diagnosed with an unusual disease which affects his nervous system. He was hospitalized for medical examinations and unable to go to work for a long period of time. They could not find any cure for this unusual disease. As the medical bill was escalating, the family decided to bring him home and take turns to nurse him.

John went to paid him a visit. There, the property agent was there to discuss the selling of their home. The wife was completely distraught and crying. His son who was in his 2^nd year of undergraduate studies decided to quit the faculty and to take a job that he could help out with the household expenses.

John saw Mr. Tan lying on his bed… destitute, penniless, helpless. John was wondering: “What do you say to a man like this?” “How do you comfort him?” John mumbled a few vague words and left as quickly as possible. With a heavy heart, he left for his office and work out his “balance sheet” for Mr. Tan, as follows:

• Here is the man who bought life insurance for last expenses; but didn’t die.
• He bought life insurance for guaranteed income to his widow; but he doesn’t have a widow; he has a wife.
• He bought life insurance for the savings which could be had; but they are long since gone and his new policy has not accumulated any.
• He bought life insurance to guarantee the mortgage on his home; but he lost his home anyway.
• He bought life insurance to insure the college education of his son; but his son didn’t even finish his university.
• He bought life insurance to guarantee a pleasant retirement; he won’t live that long.

John has helped his clients to understand what life insurance can do, but life insurance has its limitations. Though Mr. Tan has medical coverage, it does not cover all expenses.

 

[1] So what measures could he have taken to protect the value of his earning power? 

[2] How much money will he need in such a situation? 

[3] Where is the money going to come from?

Let’s do the sum. 

Assuming “Joe” is 35 and currently earning $5000 per month. Between now and his age of 65, he stands to earn [(65-35) x $5,000 x 12] $1,800,000 and could have accumulated assets (house, car, CPF, Savings, etc) which going to worth about $1,000,000. Assuming the annual premium for DII is estimated $2,000, this premium is about 0.2% of his potential growing net worth. So does it make sense to insured his income potential?

Our most valuable asset is our ability to get up in the morning to earn a living. It is this earning power that is one asset that allows us to have the others. So how about setting aside about 1% of your income take care of the other 99%?

Save Smarter, Not Harder...

What is Investment-Link Policy (ILPs)?

Briefly, Investment-link policy offers a combination of permanent and term life insurance protection and the growth potential of variable fund investments.

Its unique features is that the policy’s cash value is invested in an account made up of one or more funds of equities, money-markets or bonds. The policy owner decides where to invest the money and, periodically, within contract limits each year, may transfer funds from one fund to another.

The policy guarantees a minimum death benefit, but the actual death paid may be much higher if the investments perform well. In addition, the cash value also fluctuates with the investment performance, and has the potential of greatly surpassing the return on traditional life insurance policies, as well as those of universal life.

There is also risk with this type of contract. The cash values are not guaranteed. If the investments to which they are linked perform poorly, the variable life cash values may grow at a lower rate than in traditional products or not at all.

Investments-link products policy owners might pay a level premium for the duration of the policy. There are flexible premium payments with this product. Each premium is reduced by an amount needed to maintain the minimum guaranteed death benefit.

The product is entitled to tax-free death benefits. However, investment-link product policy is both a life insurance and equity product. For this reason, field underwriters who sell it must be life licensed.

Is Investment-linked policy suitable for you?

Please take note of the following points:

• You should have a basic understanding of investments and believe they are capable of making good investments decisions.

• You must have relatively high risk tolerance. If the sometimes uncertain, non-guaranteed nature of this product makes you uncomfortable, this is not the product for you to buy.

Of course, after what have been said and done, it is best to get appropriate advice from qualified financial planner who has the capability to address your financial concern, needs and goals.