"No one knows the future." This phrase is often cited to avoid planning for the future. Since we do not know how long we have, there's little need to devote our precious time to making grand plans we will never execute or being frugal with money we will never get to spend.

 

But, what would happen if we end up living much longer instead?

 

Singaporeans already have one of the longest life expectancies in the world – at 83.5 years today. This may further increase in our lifetime, and there's also a chance that we live beyond the average life expectancy.

 

Planning for our financial future will ensure our finances are well taken care of during our retirement years. If we haven't already started, it is never too late (or too early). 

An overview of our finances will help paint a picture of how much money is coming in, and how it is being spent. This will act as our personal framework to allocate more toward savings and perhaps cut certain unnecessary expenses.

 

For most of us, our salary is our main source of income. Besides our take-home pay, as much as 37% of our salary (20% from us and 17% from our employer) is channelled towards our CPF accounts. They can be used for various needs, such as our monthly home loans (Ordinary Account), growing our retirement nest egg (Special Account), and paying for certain medical expenses (MediSave Account).

 

We also have to get a sense of how we are spending our money. All of us will have a list of non-negotiable monthly expenses, such as our home loan, utilities, mobile and home broadband subscriptions, groceries, insurance, and others. While we cannot do away with them entirely, we can try to reduce some of these expenses.

 

Of course, we also need some entertainment and luxury – dining out, travelling, buying new clothes, buying a car, or taking cabs to get around. As we all have our own definitions of what "living life" entails, we need to decide which luxuries are most fulfilling for us.

There's a common phrase we can live by to ensure we build a regular savings habit: "pay yourself first". No matter how much we earn or want to spend, we need to set aside "payment" towards our savings pot every month.

 

The tricky part is figuring out how much we need to pay ourselves.

 

We all have different financial goals. Some of us may be planning a holiday, while others may want to host a big wedding banquet or save for a down payment on a home. Young parents may want to start a university fund for their children. One common financial goal all of us will have is to strengthen our retirement nest egg.

 

Listing down all our short- and long-term financial goals can guide us to saving enough, and we can tweak based on what's practical. Every year, we may need to re-examine our financial goals to create new ones, check off those we've achieved and even de-prioritise certain financial goals.

According to the Life Insurance Association of Singapore (LIA), the average working adult has a mortality protection gap of nearly $169,673 and a critical illness protection gap of almost $256,826.

 

As individuals, we may require higher or lower insurance coverage when we hit new milestones in our lives. When we buy a new home, have more children, earn a promotion, or start supporting our parents, we will naturally need more coverage to protect our loved ones who depend on our income.

 

Similarly, when we have fewer financial obligations, especially when our children graduate from school and get jobs, we may not require as much coverage.

 

An annual sit-down with our financial advisor to go over our protection needs can spur us to close our insurance protection gaps early.

While no one can predict emergencies, we know it will likely happen at some point. Creating an emergency fund can help tide over the financial stress that will inevitably arise during emergencies.

 

The general rule of thumb is to save between 3 and 12 months' worth of expenses in an emergency fund. This can be used to cover our daily living expenses if we lose our job or have any unexpected medical expenses.

 

One other thing we can do is create a plan to cut costs and access credit when an emergency hits. The last thing we want to do is scramble for money when we need it most.

 

We can earmark luxury expenses that will be the first to go during financial emergencies. Being able to refinance our home loan over a longer term is something we can consider. We can also take premium holidays on certain insurance products so that our policies don't lapse due to non-payment.

When we invest, returns are not guaranteed and we can even make a loss. Paying down our high-interest debt can guarantee a "positive return".

 

For example, credit card debt can compound at upwards of 25% per annum. This is much higher than any investment return we can hope to achieve. Thus, by paying down our credit card debt, we can "earn" instead of pay the 25% per annum.

 

This is not a hypothetical scenario either. As of the 3rd quarter of 2022, credit cardholders in Singapore had racked up close to $5.8 billion in rollover balances.

In the rising interest rate environment today, paying down any unsecured debt (which typically incurs the highest interest rates) may be a sensible thing to do before we start investing.

With people as our only natural resource, lifelong learning is a key tenet many of us and our employers may subscribe to in Singapore. Improving our skillset can lead to better and/or higher-paying jobs.

 

Today, many of us also have the flexibility and access to own a side hustle. According to the Labour Report in 2021, almost 20% of "Own Account" workers were doing it on the side and had multiple jobs.

Another way to secure our financial future is to make our savings work harder through investing. Those who are more financially literate can invest on their own. They can buy individual stocks and bonds if they are willing to put in the time and effort to research their investments. They can also invest in various Exchange Traded Funds (ETFs) on their own.

 

When we invest, we need to understand our risk tolerance. The higher our risk tolerance, the more risk we are willing to accept. We also need to have an investment thesis that we should review regularly. Lastly, we should also have a plan to divest our investments when we need them, especially during our retirement. Some of us may not be confident enough to do all this on our own.

 

Individuals who are less confident can tap on the expertise of industry professionals to build their portfolios for them. We can rely on robo-advisors as well as certain investment-linked policies, such as AIA Pro Achiever 3.0. While such products encourage us to invest regularly over the long-term, they typically come with a management fee (and other types of fees that we must question before investing).

Like any other skill you can pick up, the earlier you start investing, the better you will likely be at it over time.

 

Giving your investments enough time in the market is another crucial element to achieving your financial goals. The earlier you start investing, the longer the runway you have to compound your returns.

 

On top of encouraging you to start your investment journey from an early age, AIA Pro Achiever 3.0 ploughs 100% of your premiums into investments from the start. Moreover, you also enjoy a boost of up to 75% in Welcome Bonus over the first three years. In the 10th policy year, you start to further compound your portfolio with a 5% Special Bonus. This rises to 8% per annum in the 21st policy year.

 

By investing early, we are also able to ride out economic booms and busts as our investments have sufficient runway to recover and continue growing.

 

While we ought to continue investing regularly, there may be instances when we need to pause our investments, especially if we become personally affected by the economic downcycle. Being able to pause our investment gives us some freedom to get back on our feet before we resume investing.

 

Self-directed investors can easily stop investing. Similarly, investors who are on regular investment plans with robo-advisors can pause investments, or if you own an investment-linked policy such as the AIA Pro Achiever 3.0, you can also request for a premium pass – where you can opt to pause premiums for a year, at no charge.

 

When we invest with a financial goal in mind, liquidity is an important requirement. The risk here is that our investments suffer a major market crash right before we want to make a withdrawal. For example, during the COVID-19-led market crash in 2020, stocks fell about 30% within several weeks.

 

Self-directed investors can glide into a less risky portfolio if they are confident.

Those who invest via an investment-linked policy can choose a relevant investment horizon and pivot to receive dividends from their policy or make partial withdrawals.

 

When we invest on our own, we have to choose an appropriate portfolio for the long-term. Besides money, we also need to invest our time and effort to monitor and build our portfolio, and have the expertise to drawdown from our portfolio in our golden years.

 

By leveraging on investment-linked plans such as via AIA Pro Achiever 3.0, we can tap on expert guidance from globally-recognised asset managers such as Baillie Gifford, BlackRock, Capital Group and Wellington Management to construct our portfolio based on our varying risk appetites – AIA Elite Conservative, AIA Elite Balanced, and AIA Elite Adventurous.

 

There are typically two layers of fees – at the investment fund level (usually below the 2% mark) and annual supplementary charge by AIA during our investment timeframe (at 3.9%). These are partially offset by various bonuses that investors receive. You should check in with an AIA Financial Services Consultant to discuss whether the investment is suitable for you.

 

 

Author: Dinesh Dayani, DollarsAndSense.

 

Content originally published at Guide To Future-Proofing Your Finances In 2023.