What if you can't afford to retire (Sunday Times)

[Starfire]

This article written by Lorna Tan is very relevant to current situation for many old folks in Singapore. Some whom i’ve encounter seeing them still working at their old age cleaning our office tower’s toilets, offices and maintaining the greens. The reason: They cannot afford to retire. For most, they make about $600-$800/month. Some have issues with their health which need constant medication and they have no medical insurance other than medisave. Most of them stay in HDB flats. The 3 options mentioned by the author have it pros and cons. And it seems like most financial experts (including Dennis, though he also prefers the Subletting the HDB over the Lease Buyback Scheme) agrees the best is option 3 – to downsize to a smaller flat or HDB studio apartment, cash out and place the cash into an annuity that give a monthly payout ranging between $450~$526 (for a $79,000 annuity policy).

I personally prefer Option 2 – Subletting (provided that the owner does not mind losing some degree of privacy) for the following reasons:

1.If they are staying in the 4 rms flat. By renting out 2 rms, they can get about $1000/month in rental. ($500/room/month rental). Which is far better than option 3.

2.New tenants can also help to look over the old folks should they encounter any accident at home. Too many such accidents happened before.

3.The price of HDB will continue to appreciate in value. The article mentioned 5% per year.

[Dennis Ng]

This article written by Lorna Tan is very relevant to current situation for many old folks in Singapore. Some whom i’ve encounter seeing them still working at their old age cleaning our office tower’s toilets, offices and maintaining the greens. The reason: They cannot afford to retire. For most, they make about $600-$800/month. Some have issues with their health which need constant medication and they have no medical insurance other than medisave. Most of them stay in HDB flats. The 3 options mentioned by the author have it pros and cons. And it seems like most financial experts (including Dennis, though he also prefers the Subletting the HDB over the Lease Buyback Scheme) agrees the best is option 3 – to downsize to a smaller flat or HDB studio apartment, cash out and place the cash into an annuity that give a monthly payout ranging between $450~$526 (for a $79,000 annuity policy).

I personally prefer Option 2 – Subletting (provided that the owner does not mind losing some degree of privacy) for the following reasons:

1.If they are staying in the 4 rms flat. By renting out 2 rms, they can get about $1000/month in rental. ($500/room/month rental). Which is far better than option 3.

2.New tenants can also help to look over the old folks should they encounter any accident at home. Too many such accidents happened before.

3.The price of HDB will continue to appreciate in value. The article mentioned 5% per year.

I agree with you.

I have mentioned some reasons why I prefer sub-letting, but the reporter did not published the reasons I mentioned.

[Dennis Ng]

Below is my full reply to Sunday Times Lorna Tan's questions, a portion of which is published in the Sunday Times article.

1. Plse comment on the pros and cons of each option: a) Lease buy back - available for 2- & 3-room hdb flat

Lease buyback the advantage is that you don’t have to share the home with anyone. However, the disadvantage is you will lose the house since you have sold it back to HDB.

However, I personally think that the S$500 to S$600 you get per month is actually very little, since one can easily rent out 1 room and get $400 to even $500 rental but one would still retain ownership of house.


For older folks, actually staying without younger persons can be dangerous, in case of any accident or medical emergency. Thus, having tenants, (renting 1 room out) might actually be a “safer” choice than lease-buy back.


b) Subletting eg the pro is that the indiv can sublet rooms and still get to stay in his own flat

I would personally prefer this choice due to reasons explained above.


c) Downsizing

yes, eg. selling and buying a studio unit from HDB. Most of these units, cost less than S$100,000, so if you can sell your property for S$300,000, you can get back quite a sizeable Cash amount.

Most old folks if leaving alone, don’t need so much space, and the big floor space of say 4 room or 5 room flats actually pose problems of maintenance and cleaning.


d) Reverse Mortgage (but no provider for this currently cos Income and OCBC Bank stopped offering the svc)

Not a good deal actually, interest rates are at least 5% (even when it was offered). It does not make financial sense to pay off Housing loan charging 2.6% and end up paying 5% for reverse Mortgage on a fully paid house.

There are also risks, if value of your property drop, the provider can actually stop payment to you as they work on some internal limit on amount disbursed plus future interest compared the Current Market Value of house. I know of at least 1 client who suffered this when she took reverse mortgage from NTUC income.

2. What are other options available to the elderly in Spore? eg work longer/retire later etc

I think most Singaporeans don’t have enough money to retire becos they either save too little, put too much money into their property (asset rich, Cash Poor) and most of them don’t know how to invest to earn a returns that beat inflation.

For example, I myself didn’t earn high income, my average income was $6,000 from 1993 to 2008, or total gross income of S$1.08 milllion. Yet at end of year 2008, I accumulated S$1 million (excluding value of my house). How I did it? Just by saving 20% of my income but I managed to grow the money. For eg from year 2002 to year 2008, I grew my money by over 300%, growing S$200,000 to over S$800,000, merely by taking advantage of the Bull market in stocks and property market.


Actually if a person loves what he does, he does not want to retire. Look at MM Lee and Warren Buffett as example.

I personally also “stopped working” since year 2000 after I resigned from bank, becos now what I’m doing, helping others plan their finance, save intersts on housing loans and sharing how to invest into stocks and property is my passion and interest, and is not work to me, even though I so-called work average of 10 hours a day.


3. Any other comments

The solution to retirement problem in Singapore is NOT by HDB lease buy back, not by extending retirement age, but BY raising Financial Literacy.

If more people know how to make money grow like I do, they can be Millionaire, if not by age 39, but would be easily achieveable by age 60. Merely saving S$300 a month for 40 years, and earning 8% annual returns one can have S$1.07 million….This is why I set up a Financial Education website. www.MasterYourFinance.com in year 2009, after I myself reached Financial Freedom in year 2008.

HDB leasebuy back only pays S$600 a month. This is not solution becos NOW this amount is sufficient but what if in 30 years’ time, with inflation at 3%, S$600 today is less than S$3000 in 30 years’ time. So when money still not enough then, how? The person has NO other asset left to convert to cash….

[star88]

Dennis,

How do we earn 8% annual return?

[Dennis Ng]

Dennis,

How do we earn 8% annual return?

It is not impossible to earn 8% returns. eg. last year I made over 40% returns from stocks.

From year 2002 to year 2007, I made over 300% total returns, or average annual compounded returns of 31.9% over the 5 years....of course in year 2008 (Global Financial Crisis), I didn't make money.....slightly down...but in year 2009, I made 40% returns...

So it is possible to earn average of 8% or higher returns a year, just that Real Returns in Real Market is not a "straight line". The KEY thing is to make sure the average returns at least beat Inflation rate of 3% for you to be Richer over time.

If your returns is 3% or less, then you're actually becoming Poorer over time, since your returns cannot exceed inflation rate.

Even if a person does NOT know how to invest, can invest in eg. UK Traded Endowment, with returns ranging from 4% to 8% a year.

[jon]

Hi Dennis,

I would like to advise my parents (both >65 yrs) to sell their subsidized 4-rm HDB flat (market value ~$350K) to buy a new studio apartment from HDB.

Reasons:

1) They do not like living w/ strangers so this make their 2 vacant rooms a waste of opportunity cost & additional maintenance (cleaning) work

2) The new studio apartments are near to MRT & polyclinic, and their interiors are all furnished w/ cabinets, wardrobes, etc. & elderly-friendly

3) Their children each has his/her own flats so there is no need to keep it for anyone.

4) They can cash out their current flat's value for their retirement needs, there is no need to pay the resale levy as the amt will be used to offset the new studio apt selling price

The only downside I see is that the studio apartment is 30 yrs lease, and must be returned to HDB, cannot be sold in open market. But I think 30yrs is a reasonable time frame for them to live (till >95 yrs old)

I also thought abt downsizing to a new 3rm HDB, but they will need to pay a $40K resale levy for the sale of their 1st HDB flat, and the cash-out would not be significant. What do you think?

With the cash that they obtained from the sale of their flat, what would you advise for them to invest in for a reasonable rate of return? Assuming the amt is about $190K. Thanks!

[Dennis Ng]

Hi Jon,

agree, I think for them, this is a possible choice.

As they are already aged, the No. 1 objective for them is "do not lose money", so they need to ensure that this money (S$190,000) they have is Intact but at the same time, need to generate returns higher than inflation rate in order not to "get poorer over time."

Majority of their money eg. 50% or more can be put into investments with Capital Guarantee, eg. UK Traded Endowment, with annual returns of 4% to 8%. They should set aside enough money to last for 3 to 5 years of living expenses, so that there is NO risk of having to sell "Liquidate" investments at a low price when times are bad.

Remaining 20% of their money perhaps can be invested to take slightly more risk, such as Stocks. The risks can be reduced by putting part of their money into stocks with high dividend yield and trading at discount to NAV, and put into say, 5 to 10 stocks, instead of just 1 or 2.

About 5% to 10% can be put into Silver, as "insurance" against Economic Uncertainties and Risk of High Inflation.

Please NOTE that I'm NOT giving you Financial Advice, just sharing with you personal comments on what possibly can be done. Whatever I mentioned Financial Planners trained in the conventional way may not agree with what I said.

At the end of the day, need to remember that each of us are responsible for our Financial Decisions and Investment Decisions, but at least, we are Aware of the Basis of making the decisions.

Cheers!

Dennis Ng

Hi Dennis,

I would like to advise my parents (both >65 yrs) to sell their subsidized 4-rm HDB flat (market value ~$350K) to buy a new studio apartment from HDB.

With the cash that they obtained from the sale of their flat, what would you advise for them to invest in for a reasonable rate of return? Assuming the amt is about $190K. Thanks!

[jon]

Hi Dennis,

Thanks for the valuable suggestions given! Yes we are to be personally responsible for our own financial decisions.

If they ever get to downgrade to studio apt, I will try to help them though it will be challenging to explain diff investment vehicles to them at their age when they have ZERO financial background. UK Endowment is a good way to start.

What do you think of getting an annuity for their case?

[Dennis Ng]

Hi Dennis,

Thanks for the valuable suggestions given! Yes we are to be personally responsible for our own financial decisions.

If they ever get to downgrade to studio apt, I will try to help them though it will be challenging to explain diff investment vehicles to them at their age when they have ZERO financial background. UK Endowment is a good way to start.

What do you think of getting an annuity for their case?

Hi jon,
annuity returns too low, about 3%.

UK Endowment can be "structured" to be like an annuity, just by staggering the maturities of a few UK Endowment policies. I can get my staff to explain on a no-obligation basis.

[ein55]

Hi Dennis,

I assume 4-8% return for UK endowment includes terminal bonus (a lump sum paid at maturity), then divided over the years (eg. 32% return over 8 years left, avg 4% per year), right?

Based on your experience, can you share with us the ratio or % (just take a typical/avg performance policy) of total annual bonus vs terminal bonus? Eg. 60% from total annual bonus (say over entire 25 years) vs 40% from terminal bonus?

[Dennis Ng]

Hi Dennis,

I assume 4-8% return for UK endowment includes terminal bonus (a lump sum paid at maturity), then divided over the years (eg. 32% return over 8 years left, avg 4% per year), right?

Based on your experience, can you share with us the ratio or % (just take a typical/avg performance policy) of total annual bonus vs terminal bonus? Eg. 60% from total annual bonus (say over entire 25 years) vs 40% from terminal bonus?

it's different for different insurers, till now I haven't found a way of working out estimates as you have mentioned.

What we do is monitor the yearly maturities of UK Endowment policies of different insurers to gauge whether the returns are sustainable or not.

[Dennis Ng]

As Its Economy Sprints Ahead, China’s People Are Left Behind, as I read the article, about problem of rising cost of living, high property prices, it seems to describe the situation in Singapore as well, Singapore is moving ahead but many Singaporeans are left behind.

Cheers!

Dennis Ng

Endangered Dragon
As Its Economy Sprints Ahead, China’s People Are Left Behind
Shiho Fukada for The New York Times

JILIN CITY, China — Wang Jianping and his wife, Shue, are a relatively affluent Chinese couple, with an annual household income of $16,000 — more than double the national average for urban families.
Endangered Dragon

The Price of Growth

Yang Yang and her son, Guo Liming. To save money, Ms. Yang, her husband and son recently moved in with her parents.

They own a modest, three-bedroom apartment here in this northeastern industrial city. They paid for their son to study electrical engineering at prestigious Tsinghua University, in Beijing. And even by frugal Asian standards, they are prodigious savers, with $50,000 in a state-run bank.

But like many other Chinese families, the Wangs feel pressed. They do not own a car, and they rarely go shopping or out to eat. That is because the value of their nest egg is shrinking, through no fault of their own.

Under an economic system that favors state-run banks and companies over wage earners, the government keeps the interest rate on savings accounts so artificially low that it cannot keep pace with China’s rising inflation. At the same time, other factors in which the government plays a role — a weak social safety net, depressed wages and soaring home prices — create a hoarding impulse that compels many people to keep saving anyway, against an uncertain future.

Indeed, economists say this nation’s decade of remarkable economic growth, led by exports and government investment in big projects like China’s high-speed rail network, has to a great extent been underwritten by the household savings — not the spending — of the country’s 1.3 billion people.

This system, which some experts refer to as state capitalism, depends on the transfer of wealth from Chinese households to state-run banks, government-backed corporations and the affluent few who are well enough connected to benefit from the arrangement.

Meanwhile, striving middle-class families like the Wangs are unable to enjoy the full fruits of China’s economic miracle.

“This is the foundation of the whole system,” said Carl E. Walter, a former J. P. Morgan executive who is co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.”

“The banks make loans to who the Communist Party tells them to,” Mr. Walter said. “So they punish the household savers in favor of the state-owned companies.”

It is not just China’s problem. Economists say that for China to continue serving as one of the world’s few engines of economic growth, it will need to cultivate a consumer class that buys more of the world’s products and services, and shares more fully in the nation’s wealth.

But rather than rising, China’s consumer spending has actually plummeted in the last decade as a portion of the overall economy, to about 35 percent of gross domestic product, from about 45 percent. That figure is by far the lowest percentage for any big economy anywhere in the world. (Even in the sleepwalking American economy, the level is about 70 percent of G.D.P.)

Unless China starts giving its own people more spending power, some experts warn, the nation could gradually slip into the slow-growth malaise that now afflicts the United States, Europe and Japan. Already this year, China’s economic growth rate has begun to cool off.

“This growth model is past its sell-by date,” says Michael Pettis, a professor of finance at Peking University and senior associate at the Carnegie Endowment for International Peace. “If China is going to continue to grow, this system will have to change. They’re going to have to stop penalizing households.”

The Communist Party, in its latest five-year plan, has promised to bolster personal consumption. But doing so would risk undermining a pillar of the country’s current financial system: the household savings that support the government-run banks.

Here in Jilin City, where chemical manufacturing is the dominant industry, the state banks are flush with money from savings accounts. The banks use that money to make low-interest loans to corporate beneficiaries — including real estate developers, helping fuel a speculative property bubble that has raised housing prices beyond the reach of many consumers. It is a dynamic that has played out in dozens of cities throughout China.

Meanwhile, China’s central bank in Beijing also depends on the nation’s vast pool of consumer savings to help finance its big investments in the foreign exchange markets, as a way to keep the currency artificially weak. The weak currency helps sustain China’s mighty export economy by lowering the global price of Chinese goods. But it also makes imports unaffordable for many Chinese people.
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Shiho Fukada for The New York Times

Wang Shue and her husband live frugally and put much of their income into savings.
Endangered Dragon

The Price of Growth

This is the second in a series of articles examining China’s system of government-managed capitalism and the potential weaknesses that could threaten the nation’s remarkable economic growth.
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Shiho Fukada for The New York Times

Left, a billboard announcing Jilin Fortune Plaza, a real estate project in Jilin, China. Local governments have come to view such projects as a source of easy riches.

News reports of the nouveaux riches in Beijing and Shanghai snapping up Apple iPhones, Gucci bags and Rolex watches may conjure Western business dreams of China’s becoming the world’s biggest consumer market. But consumer choice here in Jilin and many other heartland cities is confined largely to the limited offerings of dingy state-run department stores and mom-and-pop shops. Any sales of global “brands” come mainly in the form of the counterfeits and knockoffs often sold at outdoor markets.

On a recent weekday at the Henan Street flea market, crowds sifted through stacks of clothes that included $3 T-shirts with images of Minnie Mouse and $5 imitation Nike sports jerseys. Just a few yards away, an authentic Nike store selling the real thing for $35 had nary a shopper. Because consumers have so little spending power, many global-brand companies do not even bother to open stores in cities like Jilin.

With the faltering economies of the United States, Europe and Japan limiting China’s ability to continue relying on growth through exports, the Chinese government knows the importance of giving its own consumers more buying power. Already, the central government has pushed to raise rural incomes and has even offered subsidies to buy cars and household appliances.

The question is whether the government can change its entrenched economic system enough to truly make a difference. “The central government is committed to increasing the share of consumption in G.D.P.,” says Li Daokui, a professor of economics at Tsinghua University and a longtime government adviser. “The issue is what is going to be the means.”

THE SAVERS

Frugality Born

Of Necessity

If China is to make consumer spending a much larger share of the economy, it will need to encourage big changes in the habits of people like Mr. Wang, 52, a highway design specialist, and Ms. Wang, also 52, who retired as an accountant seven years ago because of health problems.

“We’re quite traditional,” says Ms. Wang, who draws a pension. “We don’t like to spend tomorrow’s money today.”

But tomorrow’s money may not be worth as much as today’s — not as long as their savings account earns only a 3 percent interest rate while inflation lopes along at 6 percent or more.

Yet the Wangs see no good alternatives to stashing nearly two-thirds of their monthly income in the bank. They are afraid to invest in China’s notoriously volatile stock market. And Chinese law sharply limits their ability to invest overseas or otherwise send money outside the country.

Nor do the Wangs feel flush or daring enough to join the real estate speculation that some Chinese now see as one of the few ways to get a return on their money — risky as that might prove if the bubble bursts.

Mainly, like many in China, the Wangs save because they worry about soaring food prices and the high cost of health care, which the People’s Republic no longer fully provides. They also worry about whether they can afford to buy a home for their son, a cost that Chinese parents are expected to bear when their male children marry.

“If you have a daughter, it’s not so expensive,” Wang Shue said. “But with a son you have to save money.”

Housing prices have become crucial in pushing up savings rates. Here, too, analysts say government policies are shifting wealth away from households.

In the case of the Wangs, they are being forced to move to make way for a new real estate development authorized by municipal authorities — the sort of project that local governments throughout China have come to regard as an easy source of riches.

Although the Wangs and other current residents have received some cash compensation for the apartments they are leaving, the Jilin City government has sold the land to a developer that plans to demolish the current dwellings and erect a new complex with more, and more expensive, apartments.

The Wangs are not sure they will be able to find a home comparable to their current apartment from the money they are being paid. But the developer and the local government are expected jointly to earn a profit of more than $50 million.

A POLICY’S HISTORY

Averting a Crisis,

But Forming a Habit

Why would China, which hopes eventually to surpass the United States as the world’s biggest economy, deliberately suppress the consumer market that might help it reach that goal?

Some analysts trace the current policies to habits formed in the late 1990s. That’s when the bloat of China’s giant, uncompetitive state-run corporations nearly brought China’s economic expansion to a standstill. Suddenly, with state-owned companies facing bankruptcy, the state banks were saddled with hundreds of billions of dollars in nonperforming loans; many banks faced insolvency.

To avert a crisis, Beijing allowed state-owned companies to lay off tens of millions of workers. In 1999 just one of those companies, the parent of PetroChina, a big oil conglomerate, announced the layoff of a million employees. And to shore up the banks, Beijing assumed tighter control over interest rates, which included sharply lowering the effective rates paid to depositors. A passbook account that might have earned 3 percent in 2002, after inflation, would today be effectively losing 3 to 5 percent, once inflation is factored in.

That is how Chinese banks can provide extremely cheap financing to state-owned companies while still recording huge profits. It has also helped the banks provide easy financing for big public works projects, which besides the high-speed train system have included the 2008 Beijing Olympics and the monumental Three Gorges Dam.

It was during this same period that the Communist government discarded the longstanding “iron rice bowl” promise of lifelong employment and state care. Beijing shifted more of the high costs of social services — including housing, education and medical care — onto households and the private sector.

Together, these measures added up to the managed-market system now known as state capitalism. They worked so well that they not only helped resuscitate China’s failing banks and state companies, but also fueled the nation’s economic boom for more than a decade. But the system also took an enormous economic toll on personal pocketbooks.

“We’d like to spend, but we really have nothing left over after paying the bills,” said Yang Yang, 34, a school administrator who lives in Jilin City with her husband, a police officer, and their son, 10. “Even though our son goes to a public school, we need to pay fees for after-school courses, which everyone is expected to take. Almost every family will do this. So there’s a lot of pressure on us to do it, too.” To save money, Ms. Yang, her husband and son recently moved in with her parents.

Nicholas R. Lardy, an economist at the Peterson Institute for International Economics in Washington, calculates that the government policies exacted a hidden tax on Chinese households that amounted to about $36 billion in 2008 alone — or about 4 percent of China’s gross domestic product. Over the last decade, Mr. Lardy says, that figure probably amounted to hundreds of billions of dollars — money that banks essentially took from consumers’ hands.

The distortions may have actually cost households far more, because his figures do not include hidden costs like artificially high prices for imports.

For many Chinese economists, the state capitalism that helped jump-start growth has become counterproductive.

“China is already beyond the point where the law of diminishing returns starts biting,” said Xu Xiaonian, an economist who teaches at the China Europe International Business School in Shanghai.

Mr. Xu argues that China risks repeating the mistakes Japan made in the 1980s and early 1990s, when it relied too long on a predominantly export economy, neglected domestic markets and allowed real estate prices to soar. Since Japan’s bubble burst in the mid-1990s, its economy has never really recovered.

“If we don’t change, we will follow those same footsteps,” Mr. Xu said. “We have already seen the early signs of what we might call the Japanese disease. China invests more and more, but those investments generate less and less growth.”

PREDICTIONS FOR CHANGE

A Radical Overhaul,

But Within Reach

Some economists predict major changes, noting that the Chinese government has the cash and the power to alter course as drastically as it did in the late ’90s, this time in the people’s favor.

“China has faced more daunting challenges in the past,” said Wei Shangjin, a professor at the Columbia Business School. “I don’t doubt that they want to do it. The question is, Can they successfully engineer such a major restructuring of the economy?”

Certainly, multinationals like McDonald’s, Nike and Procter & Gamble are still betting billions of dollars that China will grow into the world’s biggest consumer market within a few decades.

But raising consumption will require a radical overhaul of the Chinese economy — not just weaning state banks off household subsidies but forcing state-run firms to pay much higher borrowing rates. It would also mean letting the currency rise closer to whatever value it might naturally reach. It would mean, in other words, a significant dismantling of the state capitalism that has enabled China to come so far so fast. “To get consumption to surge,” said Mr. Pettis, the Peking University lecturer, “you need to stop taking money from the household sector.”

[Dennis Ng]

Government policies to draw foreign talent into Singapore likely helped widen the income gap in Singapore, a study by the Institute of Policy Studies (IPS) found.

"Rising tide of foreign workers almost certainly impacted wage growth at parts of the income distribution and thereby worsened inequality," said Manu Bhaskaran, adjunct senior research fellow at IPS who chaired a panel on "Economics: Business as usual, no longer?" for IPS’ seminar on Monday.

Making a similar observation, Paul Cheung, director of the United Nations’ Statistics Division, said that while the influx of foreign talent and workers brought a significant boost to the country’s gross domestic product (GDP), it also indirectly contributed to greater income inequality,

The top tenth of Singapore households in terms of total income saw such income rise from 27.4 per cent in 2000 to 29.4 per cent in 2010, whereas that of the rest dropped over the period, he said. Households in the bottom 40 per cent saw their total income decline by 1.6 per cent, he added.

Cheung questioned the desirability of Singapore continuing to rely on cheap foreign labour to remain competitive as he pointed out that heavy reliance on foreign workers will not lead to increasing wage shares for Singaporeans.


He also highlighted the challenges faced by highly educated Singaporeans. In 2010, one in three permanent residents (PR) were aged between 30 and 39 in Singapore, compared to one in five in the same group in 2000, and many of the PRs had tertiary education background.

Singaporeans in this age group can expect the employment landscape to be more competitive and find it harder to move from their current income level to another, Cheung said.

“There is a high degree of anxiety among young professionals on whether they can make it in Singapore (and) whether the government is prepared to give them a fair chance in this touch competition,” he said. “If the middle-class feels that you work so hard and then you try to move up the income ladder but then lo and behold, you‘re competing with all these permanent residents – where’s the home court advantage?” he added.

However, Chua Hak Bin, director of Global Research at Merill Lynch, said last year’s Budget has helped to even out some of the differences when the government imposed stricter immigration laws and higher foreign worker levies. Chua noted that the income inequality gap remains large despite special government
transfers. More measures are necessary to help the lower income group, he added.

Also discussed during the panel was the adequacy of the current Central Provident Fund system to provide for Singaporean workers.

Those in the lower income group are especially at risk as their CPF will not provide sufficient savings for them in their retirement, and thesituation is made worse by major withdrawals such as housing purchases, said Professor Hui Weng Tat, associate professor at the Lee Kuan Yew School of Public Policy.

Assuming that HDB purchases made at age 30 at the maximum price supportable by CPF contributions with two spouses contributing to mortgage payments, the income replacement ratio would drop to between 17 and 28 per cent for the different wage groups, at the retirement age of 65.

This would mean that a person with post secondary education earning $1,500 as his starting pay at 22 years old can only expect to live on 45 per cent of their last drawn pay when they retire. If only one spouse is working and repaying mortgage, the effect would be doubled.

[ngtfook]

I think tips 3 is not realistic. I think 80X of gross income or $500K property is realitic, base on 25 year loan period.
RayNg

Plan to Retire with Adequate Savings

http://theonlinecitizen.com/2012/03/pla ... e-savings/

This is in response to the article "Retire on CPF savings? Think again," which was run on the print edition of Straits Times on Wednesday 21 March 2012. In that article Prof Hui Weng Tat of LKY School of Public Policy warned Singaporeans that there will be little money left for retirement after paying for a flat. Mr. Tan Kin Lian offers simple retirement tips for those starting out.

In recent years, many Singaporeans do not have adequate savings to meet their expenses during retirement. They cannot afford to retire and are forced to continue working, often for low pay.

Here are some of the key factors that have contributed to their predicament:

They spent too much of their savings in the Central Provident Fund on an expensive HDB flat or private property and upgraded their property a few times
They invested their savings on bad investments and made a capital loss
They lost their jobs unexpectedly.
I wish to share these tips for young people to avoid facing this unfortunate outcome.

Tip 1: Save 15% of your earnings, on top of the contribution to CPF

Tip 2: Invest the savings in a low cost investment fund, such as the Straits Times Index Exchange Traded Fund (STI ETF) available in the Singapore Exchange.

Tip 3: Do not spend more than 50 times of your gross monthly income on your property and upgrade only once during your lifetime. If your family income is $6,000, you can invest up to $300,000 on your property and not more.

Tip 4: Spend 1% of your income to buy a term insurance or accident insurance for a term of 25 years or shorter. You can get cover for at least 5 years of your income.

Tip 5: Do not worry about critical illness insurance. The incidence is likely to be low for young people and the expenses are likely to be covered by your employer. You have other more urgent things to worry about. Do not spend your savings on risks that are more remote.

These tips are explained in greater detail in my talk on Financial Planning which is conducted regularly by the Financial Services Consumer Association (FISCA). You can get more details from its website, http://www.fisca.sg.

Most people invest their savings in a life insurance policy which now gives a yield of less than 3% per annum – hardly matches inflation. If they have to terminate the policy due to unemployment, they may lose more than half of your accumulated savings.

They can get all the insurance protection through a term insurance or accident insurance at a modest cost of 1% of your earnings. This allows them to invest the remaining savings to earn a higher yield elsewhere.

The STI ETF is professionally managed and is well diversified in 30 blue chip shares in Singapore. During the past 20 years, the fund earned an average yield of 9%. In the future, the yield is likely to be lower, but is likely to be higher than 5%.

I used to manage an insurance cooperative for the past 30 years prior to my retirement. During those days, the cooperative was able to give a yield of more than 5% on the life insurance savings, due to higher bonuses and low expenses. Today, the yield on most life insurance policy is much lower.

[Dennis Ng]

Actually, I share the housing loan instalment should not exceed 35% of Gross income rule to determining Max price to pay based on a certain monthly Household income and taking loan of 25 years, and assuming a high interest rate of 4%.

And the answer works out to a family having Household income of S$3,000, max property price to purchase to afford comfortably is S$250,000 so for family with household income of S$6,000, max price is S$500,000. You can use this to calculate the max price of house you can comfortably afford by inputing your own Monthly Household Income. eg. household income of S$5,000 = (5,000 divided by 6,000) x S$500,000 = S$416,670.

Cheers!

Dennis Ng

I think tips 3 is not realistic. I think 80X of gross income or $500K property is realitic, base on 25 year loan period.
RayNg

Plan to Retire with Adequate Savings

http://theonlinecitizen.com/2012/03/pla ... e-savings/

This is in response to the article "Retire on CPF savings? Think again," which was run on the print edition of Straits Times on Wednesday 21 March 2012. In that article Prof Hui Weng Tat of LKY School of Public Policy warned Singaporeans that there will be little money left for retirement after paying for a flat. Mr. Tan Kin Lian offers simple retirement tips for those starting out.

In recent years, many Singaporeans do not have adequate savings to meet their expenses during retirement. They cannot afford to retire and are forced to continue working, often for low pay.

Here are some of the key factors that have contributed to their predicament:

They spent too much of their savings in the Central Provident Fund on an expensive HDB flat or private property and upgraded their property a few times
They invested their savings on bad investments and made a capital loss
They lost their jobs unexpectedly.
I wish to share these tips for young people to avoid facing this unfortunate outcome.

Tip 3: Do not spend more than 50 times of your gross monthly income on your property and upgrade only once during your lifetime. If your family income is $6,000, you can invest up to $300,000 on your property and not more.