Last Updated on 2, September 2016
Do you know that a survey shows that Singaporeans comes up number one in financial literacy? The strange thing is that in the same survey, it was found Singaporeans failed in retirement planning!
The survey was done by Mastercard Index of Financial Literacy (2015).
May I propose 3 reasons why Singaporeans fail in retirement planning.
Reason #1: Overleveraged
Singaporeans are overleveraged. They borrowed too much money. It was estimated that around 29% of Singapore borrowers have a TDSR (Total Debt Servicing Ratio) above 40%. In other countries, financial institutions are reluctant to lend borrowers with TDSR of between 40% to 50%. Interestingly, MAS set the TDSR limit at 60%.
To be overleveraged has three implications:
The first implication is you will have less cash every month to save for retirement as majority of your salary goes to the housing loan. Thus, you cannot afford to systematically invest for retirement.
The second implication is that the long loan period implies you have to work longer for the sake of the loan. For example, if your loan will only end at 60 years old, you may have to work until 60 years old!
The third implication is the potentially large amount of interest you have to pay for the loan. One of the worst decisions I’ve seen is the purchase of expensive residential properties. Below is a chart to illustrate the potentially high interest rate.
If the loan amount was $1,000,000 and you pay 2% interest over a 25 years period, the total interest payable is $271,563! This means your property need to appreciate by the same amount just to breakeven! From what I see, you will end up working for the bank instead of working towards your retirement.
Reason #2: Too busy working for money instead of making money work for them
Another issue I see is Singaporeans work for the sake of working. In fact, Singaporeans work the longest hours in the world. That is to say they devote a huge amount of time working for money.
But the irony is that they do not necessary have a lot of money. Much of their money could have been lost due to investment losses, scams and inflation. Take for example if inflation is 2% per annum, over a 30 years period they would have lost 
Can you imagine 45% of your working hours is working for free? Yes that’s right. If you would to leave the money idling, the inflation monster would eat up your wealth by a whopping 45% when you finally want to retire!
Reason #3: Saving without a goal
Among those who does save, they save without a goal. Here are some examples of saving for retirement without a proper goal:
- A young investor invests in a large portion of high dividend paying stocks. This may not be proper because a young investor should be looking for capital gains and not income since he is working.
- An individual bought into a 3 years bond with a yield to maturity of 5.5%. 3 years was selected because the investor prefers short-term commitment although there is no plan to use the money three years later. This again may not be proper investment planning because the time horizon should match the timeframe for a goal. In this case, there was no goal. Without a goal, the investor just buys a short-term bond. In order to get an attractive yield, a junk bond was chosen.
- A few years ago, I met a client who bought an endowment that matures at 70 years old when there is intention to retire at 60. When I asked the client the reason, she could not provide any reason other than to say it was the financial adviser’s recommendation. I feel that this is merely an excuse. The real reason is due to poor financial literacy. See this article on: 3 steps to fix plunge in financial literacy
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The 4th reason is if you let insurance agents manage your finance you will never have enough to retire. Instead you are helping the agents to retire comfortably.
I am not maligning these conmen. It is true . The products out there are mostly scam products. The BIs always show higher than what it is actually paid out and worse none of the products can make your money work harder than inflation. If they cannot work harder than inflation how can REAL wealth be created?
Insurance is protection and not saving or investing. If consumers want to save and invest for retirement please see a qualified money manager like Wilfred and not a financial product salesman or worse a conman. . Insurance AGENTS only put their own interest first.
Visit any roadshows and watch these charlatans at work and you can notice they are peddling snakeoil products and they never ask financial planning questions to see whether their products suit your goals and needs.or not. The victims are usually middle aged aunties. They can harass and block the aunties for 50 metres before giving up.
So what is the solution to the above problem? The answer is “don’t let the insurance agents plan their own retirement with YOUR money.” In short , give them a wide berth and err on the safe side.
Totally agree with this 4th reason. About 10 years ago, a financial advisor advised me to buy some ILPs that turned out to be some bleeding policies. I’ve stopped engaging a financial advisor and decided to manage my own portfolio. Not all financial advisors know exactly what they are doing with their clients’ money.
4 main reasons I see are:
1) Spend too much on housing. Sinkies fail to realise that their homes are consumption item, not investment. This is particularly true for HDB flats where you legally don’t have true property ownership (there is no strata title deed & you are legally known as LESSEE), and HDB still owns the land and dictates rules on how you live, what you do, and when (if ever) to enbloc (SERS). Even for freehold private property, it is still a consumption item unless you are fully prepared to downgrade and have no emotional attachment to your home.
2) Start saving & investing too late and/or too little amount. To have a good chance of retiring by 50 or 55, you need to start saving and investing in your early 20s or mid-20s. You should build up at least 12 months of expenses as emergency cash savings. And put away at least 30% of your salary towards investing — investments should be in diversified low-cost ETFs or index funds with greater tilt towards blue chips or established large cap companies. I know people with average intelligence, average school results (many don’t have Uni degrees), average salaries (never earn more than $5K/mth in their lives) who are able to retire comfortably by 55, travel the world, etc. They all started saving & investing a significant amount of their salaries in their early 20s, mainly in dividend-paying blue chips.
3) Not properly insured. Particularly in medical & disability & mortgage insurance. Majority of people are buying junk insurance like whole life or endowment or ILPs which is too damn expensive and gives lousy insurance coverage amount and lousy returns / yields, and imposes heavy penalties on early withdrawal or termination (“early” is also a misnomer — first 20 years can be considered early, WTF). What the hell is insurance anyway?!?!? It is merely risk management, hedging in order to provide for your dependents if you die too early, to cover your liabilities like mortgage or other loans so that your left-behind family don’t have to sweat to pay back those. Or if you don’t die, to be able to cover your ongoing bills for medical, rehabilitation, living expenses, mortgage, etc etc.
4) Not living way below your paycheck. Too much self-gratification, self-reward & YOLO going on. Basically there is a lack of discipline, self-centredness in the mindsets of today’s people. Why?!? Because today many are getting away with this kind of thinking & lifestyle. The disastrous impact won’t be seen until 20, 30 years down the road. Actually you can see the impact if you just visit many of the govt-subsidised nursing homes, Pelangi village, HDB rental flats, homeless old folks in Chinatown late at night, etc etc. But these are currently swept under the carpet as the numbers are still relatively small. And really, who wants to know or read about them anyway?!? If you really expect to retire before 60 yrs old, you better start learning how to live happily on less than 60% of your salary. This is to give you the time & amount to save and invest sufficiently to build up your retirement monies, to also give you the training & discipline on lifestyle and money management. With the increasing free-flow of human resources and open economy, many Sinkies can expect to be retrenched or fired at least 2 or 3 times in the future, especially after 35 yrs old. And maybe having to settle for lower-paying jobs after retrenchment etc. How will this affect you if you are mortgaged to the hilt and/or having a lifestyle with large bills & expenses??
i think you are too harsh on dividend paying stocks. maybe because i am bias. it is a focus on not trusting the fund reinvest your money well enough and you want concrete returns to reallocate. unless you sell, all gains are on paper.
Jobs are no longer secure and pay check cannot catch up with the rising living expenses. The only way out is to educate ourself to build passive income aggressively for retirement planning.
Don’t let these so called financial adviser manage your monies. They are also the victim of a developed first world country. My advise is manage your own money wisely, be thrifty, live within your means, don’t expect to get rich these days. Sorry my fellow financial adviser, no hard feelings. Sometimes the truth hurts a little, the good times are gone now. All of us needs to work harder and save a little more