| Planning ahead |
The rationale of getting an insurance plan is to be prepared for mishaps. Along these lines, consumer needs have since dictated insurance policies to evolve and function not only as health coverage, but also as an investment tool.
Given a scenario of longer life expectancy among Singaporeans, where another 15 to 25 years are still considered prime even after retirement, it becomes logical to think of financial planning far beyond the retirement age.
In the book ‘How Much is Enough?’, Mr Arun Abey, co-author and executive chairman of ipac Securities and head of strategy at AXA Asia Pacific Holdings Australia, examines people’s notions regarding money, time, happiness and what it takes to make the right choices.
In what he termed as “hedonic arbitrage”, Mr Arun said the consumer is constantly struggling between what he wants now and what he might need later. In the wake of rising inflation and healthcare costs for instance, consumers would have to consider between having a new Prada bag now and the possibility of needing a hip replacement sometime in the future.
“By planning ahead, investing wisely and having adequate insurance to protect against the unexpected, you’re on the way to taking care of your financial health. But are you also on the way to greater well-being?” Mr Arun asked.
Though financial security and independence is important to most successful people, “the real challenge” Mr Arun said, “is to find the balance between these and other important values such as authenticity, competence, and belonging.” Taking chargeSingaporeans have actually topped a recent survey conducted by AXA, called the Retirement Scope, which showed that many are indeed taking personal responsibility for their retirement income.
The study showed Singaporeans are optimistic about retirement, though they also show lower risk appetite in terms of investing for retirement. About 74 percent of working adults in Singapore plan to continue with some form of paid employment even during retirement, according to the AXA survey.
It would appear that many Singaporeans do prefer to strike a balance between fulfillment and financial security, just as Mr Arun said.
The need to educate working adults and retirees to invest and take advantage of growing companies becomes important – lest, people fall into the trap of not having enough funds when the need arises.
“First, you will have to pay attention to quality (companies) as it is all based on valuation. Once the portfolio is properly diversified, all we have to do is be patient,” he advised, and added that inflationary pressure has made it imperative to allocate funds in equities. Finding alternativesInsurance products have evolved with changing needs and there are plans that participate in equities, take care of insurance needs, and at the same time offer the benefits of flexibility.
Some single-premium investmentlinked policies have no mortality charge – that is, 100 percent of premium is invested. Some plans are structured like the “balloon payments” of automobile leases where the bulk of the premiums are paid until, say, age 55 and the policyholder continues to enjoy both investment gains and insurance benefits thereafter.
“The biggest dilemma is that Singaporeans are not aware of choices available in the marketplace,” Mr Arun said.
Another point of concern is the “decumulation” stage. Financial planners are quick to highlight the accumulation of wealth while one is still economically active. Everyone seems to have forgotten that at a certain point in time, there is a need for draw down. With the elderly living longer, this draw down stage will be longer with each generation.
Two opposing forces will act against each other during this draw down stage: the rate of return achieved from investments and the rate of inflation that will diminish the value of the returns.
Consumers must be certain that the financial planners they have engaged are proficient enough to address the dual issues of a longer post retirement period and the negating effects of inflationary pressures.
Short of over-simplification, it is safe to say that when inflation is expected to rise (from about 2 to 2.5 percent now to a forecasted 5 percent for year 2008), any investments that involve a fixed payout over time (eg. bonds, annuities) will lose out to inflation-pegged funds (eg. equities).
The discipline involved in maintaining an investment plan over such long periods is daunting. It does seem that selfactualisation and financial health are mutually exclusive.
In the book, Mr Arun and his co-author showed the three pillars of the Bridge of Wellbeing. Its main thrusts are for people to:
To make the right choice requires “a framework which enables you (the consumer) to understand the role of money in your (the consumer’s) life, and make choices to support the life you (the consumer) want,” advised Mr Arun. Copyright © SMARTINVESTOR
Smart Investor is available at leading magazine outlets |
tycho