MoneySENSE 6: Retirement Planning

There is an increasing lack of concern amongst pre-retirees as to how they will cope financially after retirement, and this is problematic. Olivia Mitchell, Wharton professor of insurance and risk management, and chaired professor at Singapore Management University said, ‘My research shows that many workers are underestimating retirement challenges including the risk of outliving their assets, the future cost of healthcare and the erosive power of inflation in retirement’. As a result, Boomers live with a ‘false sense of security’, and may face a ‘rude awakening’ when it is too late to do much about it (http://knowledge.smu.edu.sg/article.cfm?articleid=1074).

Mitchell suggested several ways to cope with costs of living after retirement. One way is to mitigate risk by making positive lifestyle choices, such as by having a proper diet and exercising. Another way is to finance risk through savings, investing and buying insurance on the other. Mitchell also strongly supports staying in the workforce longer so that one can earn and save more.

Do you agree that the lack of concern for retirement planning is worrying? What are the possible consequences of not planning for your retirement? Besides the measures mentioned by Mitchell, how else can retirees avoid outliving their assets?

                                                                                                                                
Suggested Readings:
– ‘Managing Retirement Risk in an Ageing World: The Global Picture’. Knowledge@SMU. 2 July 2007. <http://knowledge.smu.edu.sg/article.cfm?articleid=1074>.
– ‘Retirement Planning: Most People Don’t Know How Nor Even Think About It’. Knowledge@SMU. 3 April 2008. <http://knowledge.smu.edu.sg/article.cfm?articleid=1129>.
– ‘CPF Retirement Planner – Interactive Journey’. Central Provident Fund Board. <http://www.cpf.gov.sg/cpf_info/elearning/cpf-journey/main-c.asp>.
– ‘MoneySENSE Worksheet to Managing Your Retirement Funds’. MoneySENSE. 31 December 2007. <http://www.moneysense.gov.sg/publications/guides_publications/managing_your_retirement_funds/manage1.html>.

MoneySENSE 5: Budgeting/Saving

Lorna Tan, in the article ‘Start early, and time is on your side’ (The Sunday Times, 27 May 2008), suggests that the greatest benefit of saving early is the ability to reach financial independence more easily. This is achieved through the effect of compound interest. Compound interest allows one to earn interest on interest, thus the larger the amount you save now, the easier it is to attain a particular amount of money in the future. This is well exemplified in Tan’s article: 

Consider this: If you start saving at the age of 20, putting away $2,000 a year until you reach 30, and you continue to stay invested without any further input of cash till you turn 63, you will have nearly the same amount of money socked away as a person who also saves $2,000 every year but starts a decade later, between the ages of 30 and 62.

To illustrate this, let’s assume Mr A started a yearly investment of $2,000 at age 20 and stayed invested for 10 years, at a rate of return of 6 per cent. Then, from age 30 to 63, he allowed his investment to continue growing at 6 per cent without any further annual inputs of $2,000. At age 63, his investment would total about $191,150.

In contrast, take the case of Mr B, who embarked on a yearly investment of $2,000 only when he turned 30. He must continue putting in $2,000 a year all the way till he turns 62 before the total value of his investment grows to about $192,690.

Besides the effect of compound interest, what other factors would you consider when deciding how much to save now?

Also, why is saving important? Is there an appropriate amount to save/danger of over-saving?

 
Suggested Readings:
– ‘Start early, and time is on your side’. The Sunday Times. 27 May 2008. <http://www.asiaone.com/Business/My%2BMoney/Planning%2BYour%2BRetirement/Investment%2BAnd%2BSavings/Story/A1Story20080526-67088.html>.
– ‘Budget Beginnings’. MoneySENSE. December 2003. <http://www.moneysense.gov.sg/resource/publications/guides_publications/Budget_Beginnings.pdf>.
– ‘Managing Your Day to Day Money’. MoneySENSE. December 2003. <http://www.moneysense.gov.sg/resource/publications/guides_publications/Managing_Your_Day_To_Day_Money.pdf>.

MoneySENSE 4: Personal Investing

According to the article ‘Unit trusts overtake shares as CPF investment choice’ (The Straits Times, 30 Jan 2008), Singaporeans are increasingly turning away from shares, and putting their Central Provident Fund (CPF) cash in unit trusts instead. The article suggests that some Singaporeans turn to unit trusts because stock market volatility generates a dislike for shares. Moreover, the shift to unit trusts can be traced to more people enlisting the help of financial advisors. These advisors tend to advise their clients to invest unit trusts as they may offer more diversification for investors’ portfolio.

Given the advantages of Unit Trusts, why do you think some people still prefer to invest in shares? Also, what are some of the key areas you should keep a look out for before making an investment decision?
 

Suggested Readings:
– ‘Unit trusts overtake shares as CPF investment choice’. The Straits Times. 30 Jan 2008. <http://www.straitstimes.com/Free/Story/STIStory_201594.html>.
– ‘Introduction to Personal Investing’. MoneySENSE. July 2003. <http://www.moneysense.gov.sg/resource/publications/guides_publications/IMAS%20Personal%20Investing.pdf>.

MoneySENSE 3: Life Insurance

Excerpt from the ‘diary’ of an Economist.com correspondent:

The topic was insurance. One of the volunteers felt strongly that because the women were single mothers, they should have life insurance. She explained that means someone will receive a payment upon the insured’s death.
 
Patrice spoke up. “I don’t want that, someone betting on you dying, no way! Once you have that and you live with someone—friend, boyfriend, family or whoever—they will want to kill you.”

The volunteer tried to explain to Patrice that she can choose her beneficiary (and urged her strongly to select her child), but that did not help. She wanted nobody to profit from her death.

Do you agree that taking life insurance encourages others to scheme against your life? Also, what other factors would you consider before getting life insurance?

 
Suggested Readings:
– ‘Correspondent’s Diary’. Economist.com. 5 December 2008. <http://www.economist.com/daily/diary/PrinterFriendly.cfm?story_id=12675257>.
– ‘Your Guide to Life Insurance’. MoneySENSE. October 2007. <http://www.moneysense.gov.sg/resource/publications/guides_publications/YGLIEnglish.pdf>.

MoneySENSE 2: Credit Management

Inability to manage credit properly can lead to serious repercussions. Imagine that your friend is in heavy debt, like one of those mentioned below. The following scenarios are taken from The Straits Times article, ‘Take cautious line on credit cards’:

Scenario 1:  A 27-year-old I met recently at CCS had amassed credit card debts of $58,000 within a year, including $8,000 in interest. He had a dozen different credit facilities.

Scenario 2: An administrative assistant with a predilection for Prada purses turned to a voluntary welfare organisation to seek help with childcare fees when her husband divorced her and refused to pay her credit card bills.

Scenario 3: Another 36-year-old mother of two continued to spend the usual $500 a month on beauty treatments even after losing her job in April this year. She now has debts of $52,000, some of which stretch back to 2002.

How can you help him/her get out of debt?

Also, do you think we should save before we start spending, or save after we have spent? Why?

                                                                                                                                              
Suggested Readings:
– ‘Take cautious line on credit cards’. The Straits Times. 3 December 2008. <http://www.cpf.gov.sg/imsavvy/infohub_article.asp?readid=%7B699377036-1139-1477891206%7D>.
– ‘MoneySENSE Worksheet on Borrowing Money’. MoneySENSE. March 2006. <http://www.moneysense.gov.sg/resource/publications/guides_publications/Borrowing%20Money.pdf>.
– ‘Dealing with Debt’. MoneySENSE.  December 2003. <http://www.moneysense.gov.sg/resource/publications/guides_publications/Consumer_Portal_Dealing_With_Debt.pdf>.

MoneySENSE 1: Financial Literacy and the Subprime Crisis

Financial literacy is low not only in financially backward countries, but also in developed countries, and this may have serious repercussions. Tito Boeri and Luigi Guiso (http://www.voxeu.org/index.php?q=node/488) argue that financial illiteracy, in the form of ‘financial inexperience and myopia of consumers/investors’, is a main cause of the subprime crisis. Consumers fell for the prospect of getting a mortgage at rates never seen before and then extrapolating these rates out for thirty years. This myopia was encouraged and exploited by banks and other lenders eager to attract and retain clients. Thus began the process that led to today’s financial crisis.

With the help of the suggested readings, consider the following questions:
How did the financial illiteracy lead to the subprime crisis? To what extent can financial literacy prevent such a situation from reoccurring?

(You can just answer either one of the questions. Remember to limit your comments to 2-3 paragraphs; it’s really not worth writing a long essay! Each blog comment gets a maximum of 5 points; each correctly answered MCQ — which you will do on 27 June — gets 1 point. Please refer to the briefing slides that we emailed you for more information on the way we mark. Thanks!)
                                                                                                                                                              

Suggested Readings:
– Boeri , Tito and Lugi Guiso. ‘Subprime Crisis: Greenspan’s Legacy.’ Vox: Research-based Policy Analysis and Commentary from Leading Economists. 23 Aug 2007. <http://www.voxeu.org/index.php?q=node/488>.
– ‘The Downturn in Facts and Figures.’ BBC News. 21 Nov 2007. <http://news.bbc.co.uk/1/hi/business/7073131.stm>.
– ‘Sub-prime Mortgage Crisis’. Wikipedia: The Free Encyclopedia. 8 June 2009. <http://en.wikipedia.org/w/index.php?title=Subprime_mortgage_crisis&oldid=295086853>.
– ‘Financial Crisis of 2007-2009’. Wikipedia: The Free Encyclopedia. 8 June 2009. <http://en.wikipedia.org/w/index.php?title=Financial_crisis_of_2007%E2%80%932009&oldid=295132875>.