In this first of a six-part series, three financial planning experts recommend how a young, single woman can start the process of financial planning.
by Kenice Tay.
Women are shouldering a growing number of financial obligations amid fast-shifting times. At different stages of their lives, they juggle a combination of dependant aged parents, kids’ education, household expenses, maybe divorce, widowhood, illness, retirement and self-development needs. It sounds daunting but planning ahead can smoothen the kinks, assure financial planners.
Our candidate this month is a 25-year-old, single woman who is living a carefree lifestyle. She splurges a substantial portion of her monthly income of S$2,500 on designer clothes and is accumulating a credit-card debt of at least S$1,000 every month. She is also giving her parents S$300 each month.
She has neither an insurance policy nor any investments. Over the years, she managed to save about S$10,000. Every month, she has an after-expenses surplus of S$300.
She needs to make financial provisions for her aged parents, to accumulate wealth for retirement and funds for emergencies. She is also looking towards buying insurance. How should she stake out her financial future?
From Carol Seah and Sim Kwee Eng, independent financial planners from Wynnes Financial Planning:
- After subtracting her credit-card debt, we figure that her net worth is about S$9,000. Her monthly expenses are about S$1,400, which is about 56% of her gross monthly income of S$2,500. We recommend that she sets aside three to six months of her salary for emergency funds, which is between S$7,500 and S$15,000. She needs to look into her spending patterns too.
- Assuming an 8% annual increment in her salary, we estimate that she is able to accumulate about S$3.681 million in earnings by the time she is 55 years old. In the event of her premature death, her aged parents still need to be financially supported. Assuming that she gives about S$1,000 a month to her parents after they retire, we estimate that she will need about S$41,500 to support them. After setting aside funds for emergency needs, she needs to look into having adequate insurance coverage.
- As healthcare costs are escalating, we recommend that she may want to look into a healthcare insurance policy that offers about S$100,000 to S$200,000 coverage.
- She needs to make provisions for any unforeseen events that may cause her to lose her earnings if she becomes disabled. She should have an insurance policy that provides disability income coverage of about 75% of her current monthly income. In this case, it works out to be about S$1,875.
- Depending on her risk profile and in anticipation of her changing roles in the future, as a rule of thumb, she must save an amount that is equivalent to at least 50% of her salary before considering saving for other longer-range goals like buying a car or property. She should avoid any high-risk investments for the time being until she has accumulated more than her annual salary in savings.
From Joseph Chong, First Independent’s head of financial planning division, the financial-planning unit of Lum Chang Securities:
- First, she needs to reduce unnecessary spending on designer goods. She should pay her credit-card debt of S$1,000 every month within the interest-free period so that she will not have a rollover debt at an interest rate of 24% per annum.
- As a single working woman, she should set aside enough funds for six months’ expenditure in case she loses her job. For her, this amount is S$10,000. It can take up to six months to find another job in the event of retrenchment.
- To plan for retirement, she should start a regular savings programme. Assuming that there are no other financial commitments, she will need a monthly income of S$1,700 to sustain her lifestyle. To achieve this, we recommend that she put aside S$110 every month in order to accumulate S$340,000 to fund her retirement. The yearly savings should also increase every year to keep pace with inflation. Of this S$340,000, S$40,000 will come from her CPF minimum sum.
- She is under-insured by about S$300,000. Should she be disabled, she will not have sufficient funds for herself or for her parents. She should take up an insurance term policy of S$300,000 with crisis coverage. The recommended policy will provide a payment of S$300,000 in the event of death or total and permanent disability, and S$100,000 for any of the 30 major critical illnesses. She should also seek to insure herself against prolonged hospitalisation. She will need to budget about S$150 per month for all of the above insurance plans.
- The total sum she is required to set aside is about S$260 per month. This modest sum is sufficient because she has the power of compounding her savings over a long time horizon as she is still young. Should she desire a higher retirement income or an earlier retirement date, we recommend that she increase her monthly investment. Also, should she engage in other financial commitments, the above recommendations should be revised.
- The preceding analysis is based on these assumptions:
Calculations are in real dollars, which means the effects of inflation are sanitised. Returns measured after inflation are less volatile than nominal returns and real calculations model the accumulation pattern of savers more accurately.
She is insured under CPF-Dependants’ Protection Scheme at approximately S$36,000.
She is covered under Medishield Plus Plan B or A.
She plans to retire at age 62.
Her risk-tolerance level enables her to bear the volatility of an aggressive portfolio (85% equities, 15% fixed income) before retirement, with an expected real return of 8.1% per annum.
Her risk tolerance changes to be moderately conservative after retirement. Her portfolio changes to be less aggressive (40% equities, 60% fixed income) with an expected real return of 5.2% per annum.
She will eventually need her own home. We have assumed that she will fund this from her CPF contributions.
From Wendy Tan, an independent financial planner with First Principal Financial Planning.
- The first step is for her to examine her financial goals. She may want to think about setting short-term goals, which may include career advancement, advancing her education, etc. She may also want to set medium-term goals like buying a piece of property, either as a single woman when she turns 35 or buy it jointly with her spouse. Depending on her expectations, a regular savings plan executed over five to 10 years will help to ensure her goals are reached.
- Her current savings of S$10,000 is a healthy sign. Before she looks into any form of investment, she should set aside in cash at least six months’ worth of expenses to cover any short-term or contingency needs. These savings can be used to protect her financially in times of retrenchment or voluntary unemployment. She should save more and keep a recording system to track where she spends the bulk of her money. She should try implementing a new campaign each month such as “frequent fewer restaurants”.
- She needs to spend less and pay her credit-card debt, which is S$1,000 each month, in time and regularly. It would be inadvisable to chalk up the credit-card bill by rolling over the debt each month. Since she has savings of S$10,000, her first priority would be to pay the credit-card bills by the due date. We discourage against borrowing money for her shopping and entertainment expenses, as it can be a dangerous habit.
- She needs to prepare for any event that may rob her of her income. The risk of poor health is something most women in their 20s ignore. Consider that she does not have any insurance policy. With her savings of only S$10,000, it may not be enough to deal with unforeseen calamities such as a major illness or disability. If such events occur, she will have to worry about the cost of medical treatment and also the income to cover the period when she cannot earn an income. She should check on the insurance policy that is provided by her employer. Normally, the employer’s insurance covers hospitalisation and surgical procedures. Next, she should consider policies covering disability and major illnesses. It is also necessary for her to put in place a plan that covers her loss of income due to an illness or in the event of her being disabled.
- She also needs to consider the financial issues that may arise if her aged parents cannot work because of a major illness or disability. Illnesses such as stroke and Alzheimer’s disease are common among the elderly and they usually require long-term nursing care. The cost of taking care of her parents may cause a huge strain on her pocket. So, it would be advisable for her to consider insuring her parents under a “long-term care” insurance policy. She needs to pay a yearly premium of about S$1,000 to S$3,000, depending on the age of her parents. This insurance plan will pay at least S$500 – S$2,000 per month in the event that her parents cannot perform at least three activities of daily living like feeding, bathing or going to the toilet by themselves. The money can then be used to hire a nurse or pay the fees for a nursing home.
- To start planning for retirement, she needs to first identify the amount that she needs in today’s dollar terms. Second, she has to evaluate how much she has in her CPF, savings and investments. After taking into account all these, we can calculate the amount of money she needs after making allowances for inflation and investment rates. As she is still at an early stage in her career, it is difficult to assess the projected retirement fund that she needs when she retires.
Although she is young, it does not mean that she can be a high-risk investor. She is probably at the age when she is not too sure when she needs the money and in what way she may need it. She should consider investing in unit trusts, or investment-linked funds, which belong to the lower-risk category, rather than make direct investments in equities. She should also invest periodically through a regular savings plan so that she can take advantage of the dollar-cost averaging.
Our series on “Smart Plans for Smart Women” is in six parts, representing each stage of a woman’s life:
- This month: Single woman in her 20s, just starting a career.
- October: Woman in her 30s, who has just started a family or plans to start one soon.
- November: Woman in her 40s with growing children whom she hopes to send to university.
- December: Woman in her 50s, whose children have just become financially independent. She is now preparing for retirement.
- January: Woman in her 60s, who is about to retire or has just retired. She has no more dependants.
- February: Woman who remains single throughout her life.