Women in their forties may have attained a high earning power but they also have more responsibilities.  Among the heaviest would be thier children’s entry into university within a few years and their own encroaching retirement.  Here’s how they can meet the hefty financial demands.
By Kenice Tay.
Profile One
Our first candidate is a 45-year-old mother of three children aged 10, eight and five. She is recently divorced and is supporting her three children all by herself, with only a contribution of S$1,000 a month from her former husband. Her current annual salary is about S$60,000. From her divorce, she received S$300,000 from the sale of the private apartment shared with her ex-husband.
Recently, she bought a re-sale four-room HDB flat at about S$250,000. She used her CPF savings to foot the downpayment of S$50,000. She also took a 10-year loan to pay for the flat. The outgoings for her house have depleted her CPF funds to S$200,000.
She has about S$300,000 in savings but no investments. The bulk of her expenses go to funding her children’s education and engaging a nanny (S$500), tutor (S$1,000) and a maid (S$500). Her personal expenditure totals about S$2,000 every month and she has a credit-card bill of S$8,000. She is insured for S$50,000 and pays a monthly insurance premium of about S$100.
She hopes to retire in 10 years’ time. Meanwhile, she hopes to set aside sufficient funds for her three children’s education. As she has more than S$500,000 in savings and her CPF account, she hopes to make maximum use of the funds for investment. At her age, she is not a risk-taker and will not consider any risky form of investment.
After retirement, she hopes to have a monthly income of about S$3,000 to sustain her lifestyle. She also wants to buy a S$90,000 car in two to three years’ time if she has excess cash. If possible, she desires to retire in five to eight years’ time instead of 10. She hopes that her retirement income may be in the form of profits from her investments as she is averse to working part-time in her leisure years.

The plan

From Andrew Ang, a senior investment planner from UOB:

  • First, financial protection should be her primary concern. Without proper insurance planning, a person’s assets could be eroded substantially due to catastrophic events, such as the development of critical illness or disability, among other things. A person’s life coverage should be about seven to 10 times of his or her income. In our candidate’s case, she should have an insurance coverage of approximately S$420,000. This sum of coverage would ensure that her children’s material needs would not be too adversely affected if she meets dies unexpectedly. 
  • Her present insurance coverage of S$50,000 is inadequate and she should purchase an additional life insurance scheme of about S$150,000. Considering the small amount of cash she has, her family’s finances will not be taken care of should she meet with an early demise. Other appropriate tools that she could consider buying are single-premium endowment plans, investment-linked products and deferred annuity as they serve to enhance her insurance cover. Her additional insurance programme would cost about S$8,113.50 in premiums a year. 
  • To supplement her insurance coverage, she should consider an investment-linked product (ILP) that gives her possibly higher returns. As she is a conservative investor, she should purchase an ILP that is linked to global equities. We recommend that she invest about S$50,000 into an ILP with 150% insurance coverage and a cash value as high as S$85,520, based on an annualised return of 9% for a period of eight years. And although she is a conservative investor, equities should not be excluded from her overall investment portfolio. A person’s risk tolerance is based on many factors and risk appetite is only one of the several. Her time horizon and the relatively small proportion of investible assets explains why she should consider an ILP. An example of an ILP would be UOBLife’s Lifelinked Global Fund, which feeds into UOBAM’s United International Growth Fund.  
  • As she is using her CPF savings to finance her flat, she should use her CPF funds to purchase a home ownership protection scheme (HPS). In the event of her death, her children would have a roof over their heads without being pressured to repay the mortgage.
  • Assuming that she retires at age 53 with an average life expectancy of about 80 years and that the annual inflation rate is 4%, she would need to accumulate about S$820,000 to meet her retirement needs.
  • To achieve her retirement requirements, she should use her CPF funds to purchase a deferred annuity of approximately S$150,000. That would provide an income of about S$988 every month from the day she is 55 years old. From that age, the monthly payout would increase by 3% annually. Therefore, the addition insurance coverage of 5% is a bonus. 
  • In the tenth policy year, her ILP could yield S$99,750, based on a projected return of 9% annually. If at that time she wishes to surrender the ILP and deposit it into a savings account that yields about 1.5%, she could draw a monthly income of about S$481 for 20 years.
  • If she desires to receive a monthly income of S$1,500 by the time she retires at 53, she would need to accumulate about S$375,000. In order to achieve this sum, she could consider investing about S$220,000 in a portfolio of globally diversified bonds and equities. By doing so, the portfolio could yield a return of about 6-8%. Based on her conservative risk profile, her portfolio should consist of 30 % cash, 10 % equities and 60 % bonds. This portfolio provides some potential for capital appreciation while the principal focus is geared towards income generation. 
  • Assuming that a three-year tertiary course at a local institution would cost about S$8,000 a year, she would need to have about S$136,000 by the time her children enroll in the programme. We recommend that she should channel her cash in the form of a single-premium endowment plan, which has maturity dates coinciding with the years each of her children turns 18.
  • As her marital status has changed recently, we recommend that she should engage a lawyer to prepare a will. 
  • We recommend that she use her present cash savings to pay off her outstanding credit card bill of S$8,000 so that she does not need to pay the high interest charge.
  • She should consider carefully her aim to buy a car. After all, her monthly expenditure will increase once she owns one. 
Profile Two
Our second candidate is a 42-year-old mother of two sons aged 12 and 10. She has a monthly income of S$4,000 and has invested S$20,000 in unit trusts and equities and keeps about S$150,000 in fixed deposits. On top of her savings, she has placed aside about S$20,000 for her children’s education. Being a private tutor, she does not have any CPF contributions.
She bought a five-room HDB flat with her husband 15 years ago and the value of her flat is about S$350,000 now. The apartment is fully paid for.
Recently, she bought a S$90,000 car and is currently servicing an outstanding loan of S$45,000. She spends about S$1,000 every month to maintain her car as well as to repay the car loan. She also spends S$1,000 on household necessities and another S$500 on shopping, food and entertainment. She chalks a credit card debt of about S$2,000 every month.
She is insured for S$50,000 and has invested S$30,000 in another endowment policy that will mature when she turns 55. She has also purchased two endowment plans for her two children. The plans are S$30,000 each, with maturity dates coinciding with each son’s 21st birthday.
She aims to retire in eight years’ time. She hopes to see her children through their
tertiary education and has been saving for that purpose. She also plans to upgrade to a S$900,000 private condominium in two years. When she retires, she plans to start a small café or restaurant business and she figures that she needs about S$300,000 to S$500,000 in start-up capital. In her retirement years, she aims to be frugal and figures that she will need only S$2,000 a month for living expenses.
The plan
From Jeffrey Yuen, branch manager of Maybank Singapore:
  • Considering her lifestyle and financial goals, she may need about S$760,000 to retire in eight years’ time. We assume that she requires another S$400,000 to establish her business, and S$66,000 to fund the children’s education on top of her retirement funds. In short, she needs about S$1.226 million upon retirement. 
  • Her existing investment portfolio, which consists of her five-room HDB flat valued at about S$385,000 and S$170,000 in cash savings plus S$20,000 in unit trusts and shares, is estimated to provide a projected future value of S$863,000 in eight years’ time. The projected growth rate of an average 6% annually will be insufficient to provide her with enough funds to achieve her financial objectives when she retires.
  • Assuming that she has bought her S$900,000 new house, her portfolio will be structured this way: S$170,000 (13.5%) in cash equivalents, S$20,000 (1.6%) in equities, S$900,000 (71.4%) in property and S$170,000 (13.5%) in other investments such as a car or funding her children’s tertiary education. We note that her portfolio is currently too concentrated in her property investment, at 71.4% of her total portfolio and not diversified to absorb any downturn in the property market. Equity investments, however, occupy too small a proportion of her overall portfolio, at only 1.6%. After all, equities tend to offer investors the highest returns over the long term. 
  • In order to achieve the desired funds for her retirement objectives, her portfolio has to grow at a rate of return of 10.02% annually. Thus, she should readjust her portfolio: S$25,000 (2%) in cash equivalents for emergency needs, S$165,000 (13.1%) in equities, S$900,000 (71.4%) in property and S$170,000 (13.5%) in other investments. Assuming that the average annual yield on her cash savings is 3%, for equities 12% and for properties 5%, her portfolio will provide a sum of about S$977,019 when she reaches age 50. With this amount, she has a shortfall of only about S$248,981 to meet her desired retirement fund of S$1.226 million.
  • A S$90,000 residential property could cost S$927,000 in two years’ time after taking into account the rate of inflation. If she sells her HDB flat in two years’ time, she could get S$385,000. Therefore, she would need an additional S$542,000 to buy her new property. If she goes for a housing loan, the monthly installment would be about S$3,810.
  • She should consider a less costly property costing about S$750,000-S$800,000. This would reduce the risk of her investment portfolio. She should also be aware of the fact that the housing loan will be in place for 18 years and servicing the loan will be a burden on the family. 
  • Her wish to start a business may be risky and will not necessary guarantee a stable monthly income upon her retirement. As the new business may require a certain stabilisation period before contributing to her income stream, we recommend that she either take on a salaried job or lower her start-up cost to a range of S$200,000 to S$250,000.
  • She should consider remaining employed during her retirement years as the additional financial commitment to paying for the private residential property as well as funding her new business venture will create instability in the family’s cash inflows. 
  • In order to meet her financial objectives and to have a comfortable retirement, she should consider reducing her monthly expenditure so that it does not exceed her cash inflows. We recommend that she reduce her credit-card debt drastically so that it will not deplete her total assets.