Seeking Higher Growth in Fixed Deposits

Recently I checked out the highest fixed deposit rates across banks in Singapore, the highest so far that i have seen is Maybank’s iSavvy account which offers 1.68% pa.  However all this really does not fare well against the current rising inflation rates.

Fixed Deposits are generally “safe” refuges for today’s money. Traditionally the first option for people who have money in the tunes of 10k, 30k, 50k and above. It is relatively accessible & highly liquid.

With inflation currently at a record high of more than 5%, people are beginning to source out better alternatives to putting their money. Banks remain as the popular choice for the cash rich due to its accessibility and liquidity. Fixed Deposits stays on the top of people’s minds as the safest place to put money in. However the safest place now no longer offers the same refuge 20 years ago.

Money left in Fixed Deposits are depreciating whether you like it or not. Inflation is something out of our control, thus we can no longer say that Fixed Deposits are the best watch dogs to safeguard your money. So long for our money watch dog!

$50,000 now will only be worth 60% of its value 20 years down the road if inflation averages around
2~3%. With 1.68% interest, your money still gets depreciated by 0.32% to 1.32%. Is there any better alternative in this day and age???

Equities are the answer to this problem now. Why? Relatively low risk, better diversification as well as better growth, a decent investment should give between 10% to 17% growth yearly. A well planned equitiy portfolio guided by principles should give a respectable yield that hedges against inflation and still grow your money.

Why settle for a watch dog that doesn’t effectively guard your money when you can get a tree that feeds you?

Lets be creative with our money, using a mixture of instruments on the market we can create the tree that bears good fruit.

 

Inject the capital from your fixed deposit into a capital appreciating tool that gives you 4% pa.  By using the yearly dividend payout, invest into a regular investment linked policy for 20 years. At the end of 20 years, you will have more than double the money, along the way you can still have the flexibility of consuming the yearly dividends or reinvest into the investment linked policy. Surely this gives you a better alternative compare to fixed deposits. What is the risk? The risk is minimal, firstly, the capital appreciating tool retains its capital at the end of 20 years, and by using dollar cost averaging over 20 years, your investment is not affected by market fluctuations.

For more info on a capital appreciating vehicle go to http://ethan.insights.to/retirement and visit my other blog http://ethan.sincerely.to/you

About Annuities Part 2

Annuities comes in different forms. Today we will talk about the types of annuities available in the market.

Firstly we understand that annuities serve as an income distribution vehicle in our retirement years, or for some it may be used as a form of passive income during the life stage of financial independence.

1. FIXED ANNUITIES

Fixed annuities serve to provide a fixed income for a certain period of time the insurer guarantees. Each payout each year is fixed. Taking for example the latest CPF Life Annuity proposed by CPF Board, it is considered a fixed annuity because it promises a payout of example $610 a month for the rest of your life after age 65. The same amount of $610 in the CPF Life is fixed and it does not change, it does not take into account inflation or the time value of money. Since its payment if for life, say over 20 years, the value of money can change and its lowered value due to inflation will have some impact on the standard of living for someone who only relies on this CPF Life annuity.

2. VARIABLE ANNUITIES

These serve to provide a variable income based on the underlying performance of the invested funds in single subscription. It can also provide an income for a guaranteed period or for life. The payout is fixed at a percent of the current account value of the subscription. Or it can be looked as an increasing percentage of the single initial capital outlay. For example, Manulife’s Secure Retirement Plus provides an increasing percentage of payout each year because of loyalty bonus and the locking in of investment profits. If the underlying investment grows by 25% over 5 years, and the payout is 5% of the capital injection, say 5% of $100,000 = $5000 pa. the capital will have increased to $125,000 and thus the new payout has increased from 5% to 6.25% of the initial subscription. This continues to grow and despite market downturns and if the account value drops, the payout is still based on the previous higher account value.

Now through a variable annuity, the payout is now hedged against inflation and in ideal times, it out performs the rate of inflation, in conservative times, it at least gives a respectable match to inflation, in the worst times, it gives the basic fixed income.

With the above explanation of the 2 types of annuities, variable annuities have began to catch up in more highly matured financial markets as people begin to realize the importance of the impact of inflation.

Bringing Dreams to Life

I was reading thru a colleague’s internal publication called “The Best of Times” and encountered this power statement from Andrew Goh, a motivational speaker.

Abraham Maslow, father of modern motivational theory, once referred to ‘…capacities clamoring to be used which cease their clamor only when they are used sufficiently.”
We have the capacity to think big. Ask children what they want to be. Few would choose small, unexciting roles. Most declare they want to be President, or Superman, or the richest man on earth.

Somewhere along the way, dreams take a bashing and it becomes convenient (and professedly realistic) to think small. No wonder there’s so little excitement in adult lives compared to how children greet each new dawn!
Andrew Goh

Dreams are as such – as chidren we grow up with big dreams, no one tells us not to dream big dreams, we share our big dreams openly. Slowly as we enter the university of Hard Knocks, adults start to dispise our dreams, we are told to be “real”, we are told it will never happen. In due time, we slowly accept these into our believe system and we lose sight of a possible future for us and no longer dream anymore.

Our retirement is our enjoyment, we do not stop living a life we have worked for even when we have stopped working. Retirement is a destination we are destined to move to, the only difference between everyone is whether or not a person arrives at that destination with much or little.

Financial planning can create the desired retirement destination for you.  If you know exactly what you want for your retirement, take the necessary action to arrive there, not everyone is able to plan for themselves, therefore financial planners are there to assist you, because like consulting a doctor, you need that someone who is trained to prescribe the correct medication to effectively cure you. Like a house builder, he or she is someone trained to correctly build a house with all that is needed for you to live in.

Asset Rich and Cash Poor

I was once talking to my property agent and discussing property buying trends in Singapore and our topic of discussion slowly started to revolved around the issue of using CPF to finance homes in Singapore. Singapore has a unique situation whereby our CPF can be using in the Public Housing Scheme and Residential Properties Scheme. I would dare say without these schemes, there will be a lower property ownership compared to what we have now. However the current situation also gives us insight on how dependent we are on CPF to have a home. CPF has released a statistical newsletter stating the changing trends of home ownership. How it was growing and then how it was affected by national event such as SARS and economic downs.

What is certain is this; More and more people will use more of their CPF to finance a home. Public housing scheme has been utilized by more than 1.2 million Singaporeans. while private residences is tagged at at least 220,000.

From 2005 to 2006 alone, a net increase in 2 billion CPF withdrawn was used for housing purposes. This reflects strongly the the increased usage in CPF for housing. CPF board strongly advices Singaporeans to set aside sufficient CPF for our retirement nest.

A home loan issue is becoming increasing prevalent with already at least 25,000 Singaporeans at 55 financing their home loan not with CPF but with Cash. This figure is expected to increase and slowly and the retirement nest of Singaporeans are being eroded away by increasing home loans.

From now to 55. Statistics have shown that most Singaporeans do not have an issue paying their home loan using their CPF as long as they are working.

From 55 to 60, most Singaporeans may still be able to pay for their home loan using their CPF as long as they are working and contributing to their CPF.

From 60 to 65 is where a question arises. Most people are in retirement mode and even if they are working, CPF contribution rates would have significantly been reduced. Thus they have to use cash to pay for their home loan instead of CPF. The cash would have come from their hard earned retirement savings meant for their retirement. Or they would have to continue working and continue to pay for the home loan, otherwise seek further refinancing. So this is a serious problem when we use CPF to pay for our home loan.

Now, if given a choice when you are 60 facing such a home loan issue, which would you rather, Cash or CPF?

The good news is that a solution can be implemented today to avoid that situation in the future.  Every person’s situation is unique in some ways therefore to really know how to implement a solution correctly, it takes some effort to correctly establish the needs and address it appropriately.

Contact me at 9644 6924 to discuss how a solution implemented today can help you.

Recent CPF Changes – Opportunities for all

The recent CPF Changes have certainly raised many eyebrows and talk in the heartland of Singapore. The 1% increase in interest rates offered by CPF looks enticing, many welcome the changes as part of the government’s move to ensure a more stable retirement platform for the aging population of Singapore.

In a recent CPF Newsletter “In Touch with CPF”, the additional 1% interest is explained to give Singaporeans higher returns on their CPF OA, SA as well as their Medisave. However the additional 1% is not as straight forward as it seems.

1. 1st $60,000 of the combined CPF balance will enjoy additional 1% interest.
2. Only 1st $20,000 of the CPF OA will enjoy a guaranteed additiomal 1% interest
3. The 1st $20,000 of the CPF OA cannot be used for CPFIS approved schemes, starting from Jan 2008
4. The Special Acc and Medisave will enjoy additional 1% interest guaranteed for 1st 2 years only. thereafter it will be invested into a 10 year SGS bond in which can expect some fluctuations overtime averaging at higher than 4% (as mentioned in the CPF write up)

IN A NUTSHELL…

It simply means that that additional 1% of $60,000 which is up to $600 per year will be paid out to CPF members by the government. or rather up to $200 for the OA only per year, since the SA will be put into the SMRA scheme after 2 years.

POSSIBLE SCENARIOS
Current CPF scenario
$20,000 at the 2.5% in 20 years will give $16,386 based on future value calculation.

New CPF scenario
$20,000 at the 2.5% + 1% in 20 years will give $39,795 based on future value calculation.

ENDOWNMENT PLAN scenario
By taking $20,000 and putting it into a savings vehicle with 4.4% that has low risk for 20 years will give $47,319 based on future value calculation.

CAPITAL PROTECTED GROWTH PLAN scenario
$10,000 in a low risk fund at 4.4%  = $23,659
$10,000 in a higher performing fund at an average of 7% = $38,696
The above will come to a projected return of $62,356, which is far higher than the previous 2 scenarios.

The above example is simply talking about OA, not even the SA, given the same situation for SA based on the new scheme of using the 10 year SGS, a capital protected growth plan can still give potentially higher returns and yet protected the based principle from market fluctuations when compared to the new scheme.