There was a letter written to the Sunday Times on 19th February 2017 about a high networth (or at least behaving like one) who was so cash scrapped that she asked whether the government can help her. Here is the letter:
A few facts that can be directly derived from the letter:
- The writer is a retiree.
- The writer has two housing loans.
- The writer refinanced the two loans to get a lower interest rate.
- However, the new loans are at a shorter tenure because of regulation.
- The previous monthly mortgage installment was $11,245 and $5,269.
- The new interest rate after refinancing is 2.7%.
The following can be inferred from the letter:
- The writer has a passive income of at least 11245+5269 = $16,514 a month otherwise she cannot support the monthly loan.
- Taking into account of the need to support her own expense, she has a passive income of at least $20,000 a month.
- She has at least two investment properties. This means probably having three properties including the residential one.
- The interest rate of 2.7% looks really high even after refinancing. Perhaps it has to do with her poor credit rating.
My speculation is that this is actually a retiree who is a high networth but has overleveraged. My guess is that majority of her passive income is derived from rental income. As the current rental yield is around 3.5%, her assets are worth at least 12*20000/0.035 = $6.8m.
Given that she says she is cash strapped, this is typically an asset rich cash poor retiree.
The following are my general comments:
Poor financial literacy
I have come across countless clients who are in the same boat. The balance sheet looks nice in terms of assets but actually the balance sheets are terrible. If the balance sheet represents a listed company, its stock price would probably be trading at $0 and be delisted long ago.
Typically the balance sheet for such an individual has a super duper high gearing ratio.
Secondly, the balance sheet has a huge amount in illiquid assets like private properties and commercial properties. Thirdly, the yield is either around 3%pa or negative. The yield is negative when the property cannot be rental out but yet still need to pay for maintenance and property tax.
The root cause of why this happens has to do with poor financial literacy of not wanting to learn how to manage a proper investment portfolio. One can create a diversified portfolio of investments at 3% at a much lower risk than properties.
Too many biasness
I have also come across many clients who has too much biasness to the extent that it actually cripples them to make proper retirement planning decisions. Here are some examples:
- “If the property cannot be rented out or sold, at least I still can feel it physically unlike financial assets like stocks.” (My response: Can you eat the bricks?).
- “I lost so much money in XYZ and I never going to touch it again. (Typically XYZ is unit trusts.)” (When I checked further, I discovered they did not even know what they bought. They blame the products instead of themselves.).
- As long as I don’t sell ABC, I am ok because at least I get dividends. (When I checked, they already lost 90% of the original capital).
- “The product proposed has such a low return.” (But they would be more contended to leave their money in the bank earning negative interest after inflation).
- “I want to remain liquid just in case.” (Just in case? Normally they don’t do anything for the next 20 years because they don’t know what is a good investment opportunity when it does come by. The only investment opportunity they are looking out for is property.)
The fact that Singaporeans have too much biasness to the extend they cannot make proper investment decisions anymore.
Too late to make retirement plan
Most of the clients I met spend too much of their working life doing everything except building up their financial knowledge. As a result, when they are near to their retirement, they no longer have the ability to make proper retirement planning decisions. It is strange that people spend most of their life earning money but they don’t spend sufficient time to learn how to manage it?
Why do I say its too late for them to learn financial planning? A huge portion of financial planning is investment planning. Different people has different risk appetite and ability to take risk. The only way to truly understand one’s risk appetite is to invest and start learning when young. This requires a learning curve of a few decades (because you need to go through a few business cycles to figure it out).
This is where I come in. Unfortunately, I can only suggest solutions. As it is too late for them to learn about financial planning, they usually will find it very hard to implement my solutions. Their difficulty is understanding the retirement solutions. If they cannot understand, they cannot implement.
My retirement solutions are not a trade secret. Here are the things I will recommend to a typical client approaching retirement:
- If your largest asset is the house, I will tell you to monetise such as downgrading or sell. If you don’t downgrade, you cannot retire. Simple. Normally the client will not want to downgrade or give excuses they will downgrade X years later (which I know will not be true because they have fallen in love with the property).
- If you have held to a small portfolio of stocks forever, I will tell you to sell everything. Reason: you are not investing as the approach is more like buy and forget. Moreover, the small portfolio does not produce significant income for retirement. Most clients will not follow this advice because they don’t want to cut lost. Usually the buy and forget stock portfolio are made up of mostly loss making stocks.
- If you are confident with the government, I will tell you to top-up your CPF to the maximum allowed to create a life long annuity income from CPF Life. If you are not confident with the government, I will tell you not to top-up. Normally the client will not want to top-up (regardless of their political inclination) because they want to use all the cash they have to buy properties.
- For those who are more than 65 years old, I’ve nothing to recommend other than investments. But if the risk profile is conservative or there is no ability to take risk, I really have no products to recommend. So there is no need to consult a financial planner.
Best age to start retirement planning
The best age to start retirement planning is when you just finish school. But the problem at this age is usually lack of budget because there will be other more pressing needs such as getting married, buying the first property, kids etc.
Thus, the next best age to plan for retirement planning in a really big way is in early 40s. This is the age when your income is stable and cash flow is significantly higher. Clients at this age are still more adventurous and their number of biasness they have developed are few. I have the greatest fulfillment in handling clients in this age range.
The most frustrating age range to do retirement planning is 50 and above. Usually, most of my recommendations will not be implemented. Sometimes it’s because there are hardly any good products for this age range. The older a person is, the fewer the available retirement products. Sometimes the clients have already developed too many biasness that they no longer have the capability to make proper investment decisions.
Best age to plan for retirement is when just finish school. But budget will be a limiting factor.
Next best age to plan for retirement is early 40s.
Those above 65 need not plan for retirement as it is too late. Their retirement plan is to work as cleaners and sell tissues.
Those 50s can plan for retirement but they have likely lost their investment decisions capability.
For those who fell in love with their properties, their retirement plan is to eat bricks off their properties.
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