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 = 45% of their capital!
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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