The Lifecycle Financial Planning Approach

20160201113408-shutterstock-245078035

The lifecycle financial planning approach places all your financial activity into distinct time periods, or stages, with retirement acting as the final phase in the financial lifecycle.

This approach is powerful as it provides you a clear framework for evaluating different decisions. Here are the 5 standard financial life stages encompassed in the lifecycle approach. Keep in mind the stated age ranges are merely guideposts, some of you will pass through stages more quickly or more slowly depending on your circumstances.

1. Early Career
Ranging in age from 25 to 35 years old, early career phase adults are starting to build a foundation for a strong financial future. You may be planning to start a family, if you have not done so already. If you do not yet own a home, you might be saving for one. At this stage, keeping income in step with expenses is a struggle, but it’s important to lay the groundwork for retirement saving now.

2. Career Development
From ages 35 to 50, earnings rise, but so do financial demands. Keeping expenses in line with income is a challenge in this stage. Many families are concerned with covering college costs and paying for ongoing expenses while also increasing the pace of saving for retirement.

3. Peak Accumulation
In this stage, from the early 50s into the early 60s, you typically reach your maximum income level. It may be a time of relative freedom as your children have graduated from college. Without college tuition and with lower expenses, you can accelerate savings rates to position yourself for a more secure retirement.

4. Pre-Retirement
About 3 to 6 years before winding down professionally, you should start restructuring assets to reduce risk and increase income. By this point, mortgages are usually paid and children are independent. This is the time to evaluate retirement income options and the tax consequences of investments.

5. Retirement
The final financial lifecycle phase occurs for people in their mid-60s and beyond. Once you stop working, your focus shifts from wealth accumulation to income preservation. In this stage, the goal is to preserve your purchasing power and enjoy your desired lifestyle. Estate planning and legacy considerations also gain importance as you age.

As we transition through each life stage, we should adjust our focus each step of the way to ensure our financial plan remains appropriate for our risk tolerance, age and goals.

Advertisements

Money Advice that Don’t Grow Old

Personal finances2

Many recommendations I’ve made are as applicable today as they will be in future, and they bear repeating. Here are some of the best financial moves for you to consider:

1. Understanding and managing your thoughts, feelings, and beliefs about money is as important as understanding how money works. Our brains are programmed to make poor financial decisions. Exploring your money history and learning to identify your unconscious beliefs about money can change your financial behaviours forever. It is important to gain control of your finances and become comfortable using money as the valuable tool it is.

2. Building an emergency reserve to cover living expenses for three to months if you lose your job or experience a business slump is a necessity. If you are retired, having one to three years of cash available to cover living expenses can help you avoid taking money out of investments when their value has declined.

3. Retirement will happen, sooner than you think. Start early — as in the day after university graduation — and be consistent in investing at least 20 percent of your paycheck.

4. Learn to appreciate the word “budget”. Creating a way to track and manage income and expenses is an essential skill to thrive financially. Numerous free or inexpensive tools, like Mint.com and Expensify, can help.

5. Run from consumer debt. Personally, I use credit cards for almost every purchase for convenience and cash back rewards. However, it’s of vital importance to pay the card off every month, without fail.

6. A house is a home, not an investment. Don’t buy more home than you can afford, and don’t buy without a down payment.

7. No asset goes up forever. Price declines, even crashes, are part and parcel of investing. It’s essential to understand that the value of your portfolio will fluctuate. Be prepared to ride out downturns. Selling in a down market is a big mistake that will cost you dearly.

8. The fundamental strategy for managing market ups and downs is asset class diversification. This doesn’t mean having money in different banks, with different brokers, or with different fund managers. It’s about having a good balance of mutual/exchange-traded funds that invest in SG and International stocks, SG and International government bonds, real estate investment trusts, commodities and junk bonds.

9. There are no free investments. Pay attention to the fees associated with any investment, as well as how the advisor recommending any investment is compensated.

10. Pay yourself first. The most successful savers and investors I know simply take all their fixed expenses, taxes, and retirement plan contributions off their income earned, then spend the rest. This means learning to live on 30% to 50% of how much you earn. Certainly, it isn’t easy, but one of the most valuable money habits to cultivate is to save something for the future, instead of spending everything that comes in.

You may have likely heard of these pieces of advice before. There’s a reason for that: it works, and never goes out of style.

Which is Better Protection – Level Term Insurance or Mortgage Decreasing Term Insurance?

Recently, I have been asked by quite a number of my married couple friends during our gatherings, whether they could rely on the Home Protection Scheme (HPS), a Mortgage Decreasing Term Insurance which is administered by the CPF Board, to protect their financial interest in the event of unfortunate circumstances. It is good that we could use our CPF Ordinary Account to pay for the premiums for HPS. However, there are other aspects which we should consider and be concerned about. The table below compares between getting a level term insurance with your private insurer and relying on HPS for your protection needs.

  Level Term Insurance HPS (Mortgage Decreasing Term Insurance)
Types of Coverage Death, total permanent disability and critical illnesses. – Covers any form of debt/liabilities outstanding and provides income replacement. Death and total permanent disability only. In the event of a critical illness, you need to continue with the mortgage repayments.

 

– Covers only mortgage liability for residential property.

 

Transferability – Applies to all types of housing. 

– Coverage remains even if a new property is bought to replace the current one.

 

– Applies to public housing only  

– Coverage is specific to a property:

 

·       If you decide to sell your HDB flat in future and buy another one, the existing HPS policy will be terminated and a new policy has to be purchased.

·       At this time, you will definitely pay a higher premium because of an older age and run the risk of not being insured if any health condition develops.

 

Changes in mortgage repayment/ repayment pattern Sum assured remains constant throughout policy term. 

 

 

·       You need not have to worry about being underinsured if you take up a mortgage with floating interest rate.

 

 

 

·       If you default on loan repayments for a certain period, sum assured remains the same.

 

 

 

·       You can refinance your property without worrying that your sum assured has changed.

 

Coverage is pegged to sum assured, meaning your sum assured decreases as mortgage outstanding decreases. Mortgage interest rate is assumed to be constant over loan tenure.

 

·       In reality, floating interest rates for bank loans will result in a change in monthly repayment aomount. Hence, your outstanding loan may be a higher amount than your sum assured, leaving you underinsured.

 

·       If you default on loan repayments for a certain period, sum assured for HPS continues to decrease during the period, leaving you underinsured.

 

·       If you decide to refinance your property, your outstanding loan may be a higher amount than your sum assured, leaving you underinsured.

 

 

In addition, in the event of a claim, CPF Board will make it compulsory for the lump sum which you are insured under HPS to be fully paid towards clearing your outstanding mortgage.

As for making a level term insurance claim with a private insurer, the lump sum payout which you receive can be used at your own discretion instead of clearing your outstanding mortgage. This would be more flexible in the scenario where the monthly mortgage repayment can be met solely by the healthy/surviving spouse’s monthly CPF Ordinary Account contribution.

Therefore, getting yourself covered with a level term insurance through a private insurer would provide you with a greater peace of mind as compared to solely relying on HPS.