Usually there are only a few possible reasons why people haven't gotten started on any wealth accumulation strategies.
Do not wish to take risk and lose money
Do not wish to lock up money for future use
No money to invest or lock up
Cannot afford to commit into something inflexible due to own/family circumstance
No interest to find out more about wealth accumulation strategies
Typically, if you haven't done anything yet with your funds, you fall into one of these categories. Otherwise, you would have done something by now.
Honestly, I don't have a strategy that is risk free and doesn't require locking up money which beats inflation. Realistically, if there's such an option, I'd be interested in it too! In my view, the closest actionable to help people get something started is to offer them solutions to take their first baby steps. In my line of work, I meet more people who are disinterested in financial planning than people who are extremely interested in investing and growing wealth. From my observation, those who are very keen on investing and willing to learn how to grow their wealth typically find financial advisors expensive. With that in mind, I'd think this article would benefit those who are keen to grow their wealth, haven't gotten started for various reasons and have no interest to learn how to, thus would like to outsource the work to someone else.
1. Take up a regular subscription/investing plan
This is the most flexible of the lot of strategies. You can get started for a monthly amount. Typically it's $100/month or more. It's basically investing into a portfolio of stocks/bonds/unit trusts. You can stop your commitment anytime you wish and you can liquidate your investments anytime you wish based on prevailing market prices. Depending on where you decide to start with, it's either a robot/computer programme managing the investing strategy for you or a human being. The known risk is that typically investment returns are non-guaranteed in nature and you would be susceptible to ups and downs. Needless to say, your capital would be subject to both gains and losses. There's also charges involved, depending on where you choose to get started on, the rates will vary. Contrary to popular belief, investing with an advisor may not be the most expensive option. I sometimes lower or waive my upfront rates for regular investment plans depending on my working arrangement with my clients.
Why is this strategy worth considering?
In my opinion, doing nothing and keeping your funds in a bank account with low interest rates is a definite loss. You will lose money to inflation unless there comes a day where we have negative inflation rates or your bank interests soars so much it beats inflation. That will create a new set of problems but it's a story for another day. As of now, the likelihood is that inflation rates remain at 2-3% and bank deposit rates remains at 0.05%-1%. While this strategy carries investment risk, it's highly flexible. Anyone with a reluctance to get something going has the flexibility to start and stop as and when they feel uncomfortable. Investing also gives a fairly good potential return and if risk is assessed properly can be a suitable entry level way to enter the investing world.
2. Start a regular savings plan through anticipated endowments
You can also get started with as low as $100/month. Some insurers allow even lesser but personally, I feel anything less than the ability to commit a hundred bucks might mean that you aren't financially healthy to start a commitment. It's better to just giro away the money to a separate bank account in the meantime and try to comfortably save a $100/month before starting anything. Saving money through anticipated endowments basically allows you to receive cashbacks if you wish to at the end of the 2nd year of the savings period. This cashback is essentially your own money with a little bit of returns generated from the plan. So mind you, please do not withdraw the cashback and put it back into your 0.05% bank account if you do not need it. There is a fixed commitment period. Usually it's 10 years and upwards. Early termination will result in losses and it's totally not recommended that you start a plan if you know you will terminate prematurely. Do also take note that the yield might not be very attractive especially if you do withdrawals.
Why is this strategy worth considering?
I know that for most lower income households, they cannot commit a huge savings amount. Having said that, they need to start something if not the cycle will perpetuate. In fact, leaving money in their bank accounts is dangerous because it will cause them to overspend, sometimes unnecessarily. I also know for most of us starting out, we are afraid of long term commitments because what if... Singapore starts to snow and we suddenly need to invest in winter clothing? Okay, this is a little far fetched but yes, what if there's something unexpected we cannot foresee and we need money. As anticipated endowments have a cashback option, clients can do partial withdrawals after the end of the 2nd year (2 years is considered very short). This sort of proxies a bank account because it replicates the behavior of how we save in the bank. We save money regularly and after a saving period, we withdraw a portion of our savings for our wants and needs leaving some of the money behind as buffer or long term savings. An anticipated endowment functions like this which is why people who feel insecure about taking up a commitment with no liquidity can consider this. There are principal guaranteed anticipated endowments so I wouldn't suggest taking up one which isn't on paper.
3. Start a regular savings with short savings period and secures your capital after your commitment period
This strategy is more suitable for people who have no issues saving money but just do not like the psychological aspect of locking up money for a long time. There are plans which only requires a commitment period of 5 years and thereafter gives a payout for life. In the event that you need the money anytime after 5 years, the capital is secured as well. I like it that it is short enough we can foresee our cashflow over this period, and flexible enough that we can liquidate our funds after the lock in period if we encounter a better mouse trap along the way. In the meantime, we get a payout that can reasonably help to pay for some of our fixed expenses. For such plans, the monthly commitment is $600 and upwards. Of course, as this sort of solution is also a form of endowment, there's a lock in period which is the duration of the savings period. Any premature withdrawals would result in losses.
Why is this strategy worth considering?
Like I mentioned earlier, there are a lot of people who hoard cash in the bank. How do I know this? Priority lounges in Singapore banks are typically full. Trying to get a seat in these lounges on weekends can be as challenging as getting a seat in the food court during mealtimes. In my view, if the insecurity comes from locking up money for the long term, then a 5 year duration isn't too uncomfortable. After which the funds are free when the need calls for it. When not in use, at least they earn a return that meets inflation and help to pay for existing expenses. The truth is, most of us just need the psychological assurance that we can access our funds should an earthquake happen. We may potentially not use the funds until our retirement. Should these monies be earning a low fixed deposit or bank deposit rate? I feel it can be put to better use in a secured manner.
Summary
If you haven't gotten started on retirement planning, chances are you are delaying because something is holding you back or you totally have disregarded its importance. In any case, retirement is a definite event and as of now, inflation appears to be definite too. It's important to get started and one way is to take small baby steps.
3 Strategies to consider:
1. Regular investing through Regular Subscription/Investment Plans.
2. Regular savings by putting it in an anticipated endowment plan (plan that gives cashback)
3. Save in a limited pay endowment that breakseven as soon as the premium term is up and let the funds roll
What did you do to get started on your retirement journey? Drop me a message to share your story with me. Here's one savings strategy that I personally like.
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Disclaimer: The content created are based on my personal opinions and may not be representative to everyone or any organisation. If you have any doubts or queries pertaining to insurance or investment, please seek professional advice from a trusted adviser in an official setting. You may also reach out to me if you do not have a present adviser using the message box under 'Let's Talk'.
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