Isn’t it confusing when a seemingly distinct phrase gets expanded into a blanket expression over time? The term ‘Regular Savings Plan’ has now become a ubiquitous terminology that’s loosely splashed around and used rather lightly these days.
Covid-19 is an incontestable tragedy to many industries, and a phenomenon that has incited a momentous paradigm shift in the way the world operates. However, the structural change it exacted has inadvertently unearthed that mortgage and insurance monthly commitments warrant measures. Authorities recognize these can be heavy financial commitments with repercussions for non-delivery of such commitments.
To me, Regular Savings Plans should not financially penalize a person for their inability to commit. However, lack of commitment is not without its own set of consequences and trade offs.
COVID19 revealed that you should take into consideration, your future earnings volatility and its impact on sustaining the financial commitments of these regular savings plans. First understand that there are a few categories of such plans. Each with its own nuanced characteristics.
As a reader, the next natural question would likely be along the lines of: ‘How do I easily distinguish between them?’, or ‘What would be the best way to discern which plan is best suited for my needs?’
Explanation of table:
- The Singaporean budget constrained holds a special place in my hearts so I prepared this table as such in a manner with assumptions inbuilt for this special group.
- A to F represent the categories oft touted as a ‘Savings Plan’.
- I to VII represent considerations. Generally tax considerations are not impactful across the categories for elaboration. That still leaves 6 x 6 = 36 boxes for explanation. The considerations are lifted from the 7 considerations write up.
- Generally, people mind 4 main things; risk, returns, liquidity and features. The trade offs usually revolve and involve combinations of 2 or more of them.
- Color code green shows what people generally like, low risk, high potential returns, high liquidity and lots of benefit features.
- Color code orange depicts the unique and middle ground with some subjectivity as to pros and cons specifically nuanced to individuals.
- Color code red shows what generally people dislike, high risk, low returns, lock in and basically no benefits.
Taking a deep breath:
- A-I: Generally acceptable long term returns for equities is 9%. However, there can be quite a variance for explanations not suitable for this article. Be mindful of the potential versus stability trade-off.
- B-I: Since ILP benefit illustrations display higher projections of 8%, I take cue from there. Should I split regular investing for UT (unit trusts) from Shares? I would think that is splitting hairs not quite meaningful for the article. That said, I acknowledge some shares can be less volatile than some UT and some UT/ILP can provide more returns than shares. The delineation is not perfect and there can be a fair amount of overlaps. You can read more about how to set return expectations by clicking the link.
- C-I: Recent launches of short term endowment plans (3-5yr tenure types) see their guaranteed returns around 2.1%p.a regions. Longer tenured endowments also see their guaranteed yields around such although total returns yields may be an additional 1-2%p.a.
- D-I: CPF Special Account rates generally applicable to many will be 4% as of this point in time.
- E-I: Using DBS Multiplier Account as a proxy taking the changes to come, it is possible to use 1.3% as a proxy.
- F-I: Using Phillip Money Market Fund as a proxy. The 1 year return is about 1%.
Risks. The term itself can describe volatility of price/outcomes.
- A-II: Am saving 1 for derivatives so 2 is for listed securities. And again, I do not wish to split hairs between ETFs (Exchange Traded Funds) and UTs either.
- B-II: Insurance companies go through rigorous selection processes for the type of funds chosen to be on their platforms. For that, 3 is assigned. But the nature of capital markets is such, and ILP funds will not be immune. So 3 is not much of a departure from 2, but is nonetheless an improvement.
- C-II: The participating funds of insurance companies are also subjected to regulations by the Monetary Authority of Singapore (MAS). For that, the capital risk is much improved. However, if terminal bonuses make up a big chunk of the total returns yield, it’s a bitter pill to swallow if your participating endowment policy matures in a bad year (ie GFC).
- D-II: Nothing is perfect in this world so I am not giving a 10. Our CPF monies are invested by our Sovereign Wealth Fund. Very Special Bonds with guaranteed rates are only exclusive to specific exclusive investors, to give Singaporeans the stability of CPF returns. Note that CPF can have policy change risk. But if that happens, all Singaporeans will be affected.
- E-II: Singapore Deposit Insurance Corporation (SDIC) provides protection when a Deposit Insurance Scheme member bank or finance company fails. Hence, capital risk is low.
- F-II: When a scenario like the GFC where there was a liquidity crunch, money market funds will not be spared. Hence 7* rating for capital risk, otherwise normally right now things are nice and dandy.
- A-IV & A-V: Basically purely investment in nature, they tend to rely on Dollar Cost Averaging (DCA) approach towards the markets. You can choose to pause the averaging process tactically at times, or maybe you are financially strapped for a particular point in time (ie job loss due to COVID19). It is flexible.
It is also important at this juncture to point out that the investments are highly marketable and convertible to cash by selling/redeeming. Marketability is not to be confused with liquidity because marketability has the potential for capital loss whereas stringent liquidity definitions will require minimal or negligible capital loss.
- B-IV & B-V, C-IV & C-V: Termination of products within encouragement periods (some refer to breakeven point) by insurance companies result in capital losses if you mind capital savings. There are avenues to sell off your existing policies, which improves marketability, but its nowhere near the marketability of listed securities.
- D-IV & D-V: Current CPF LIFE can start as late as age70, assuming your CFPSA all eventually goes into the RA and all RA goes into CPF LIFE. Leaving the monies in CPFSA though locked-in will not suffer capital losses. You just cannot take monies out on a whim.
- E-IV & E-V, F-IV & F-V: The term cash equivalents can be used on them. Hence, these are not subjected to lock-ins and liquidity is high. Yes here is where you can take monies out on a whim.
Legal/Estate. Unique Offerings.
- A-VI & A-VII: On your passing, the securities are still fluctuating with the market during the probate process. There is a chance for upside or downside for your beneficiaries till they get hold of those assets. How long is the probate process depends on whether you have a will done up and other factors.
Market volatility cuts both ways good and bad. Hence I did not color it either way. I was going to say that some investors look forward to ‘makan sessions’ at AGMs but with the COVID19 situation and moving forward, these have to take a back seat for now.
- B-VI & B-VII: I firmly believe every financial product ever developed has a purpose, its just a matter of whether the purpose is fitting for the individual. Upon passing, the assets cease to fluctuate with the market and the estate gets instant liquidity through the payout as a sum assured benefit. I think it is a good thing for those whose prioritize and value estate planning.
I got to acknowledge that some Accredited Investor Funds are only available on certain insurer ILP platforms. Such USP (Unique Selling Point) deserves mention for those who might find it meaningful.
- C-VI & C-VII: There is no financial product in the world that creates instant estate liquidity upon death like insurance does. Sum assured payouts are great and likely greater than the total amount of premiums paid. This is a clear green point.
Insurance riders enhance the coverages of the basic plans but be mindful that they do not acquire a cash value. If you are saving for Children’s Tertiary Education, the Comprehensive Payor Benefit Rider is a USP from the rest because, unlike others, the funding objective gets insured as the insurance company continues to fund the policy. All others face funding contribution freeze.
- D-VI & D-VII: CPF monies are distributed upon a person’s passing in accordance to the CPF nomination which is outside the probate process and is unique so the orange coloring. If you have not done your CPF nomination, please do so. It is free.
CPF LIFE is efficient in scale and there is currently no Financial Advisor (firm) offering better terms in taking on the annuity premium from individuals. For those who are anti-establishments, please take your frustrations to the ballot box.
- E-VI & EA-VII: Savings accounts in banks follow the probate process upon death. Other than debts to the respective banks, the monies are unencumbered. High liquidity to be emphasized again.
- F-VI & F-VII: Cash management accounts also follow the probate process upon death but monies can be deployed for investments faster in the platforms by which they reside. Monies in there tend to be tactical cash from exiting investments at times, but the speed of redeployment back into securities deserves mention.
A call to open-mindedness, attention to personal preferences and facing the consequences of choice.
- You can mix and match to obtain the specific blend of characteristics for your ‘Savings plan’. You just need open-mindedness and your financial advisor representative should match your open-mindedness.
- Weighting desires have been deliberately left blank because I recognize everyone is uniquely different and will rank their priorities differently. I am a proponent of the Facilitating Decision Making (FDM) process and you might consider applying the process for yourself.
- As COVID19 impacting financial lives reveals, careful considerations from onset can reduce buyer remorse and reduce financial penalties when financial crunch arise.
- Facing the consequences of choice, bear in mind that lunch money is lunch money, retirement monies is retirement monies. There is value in regular consistent funding through encouragement periods and beyond. Budget cannibalism is real and we have to live with the consequences of our choices come what may. Make that choice a good one.
I strongly suggest taking time to understand the basic characteristics of what each category of ‘Regular Savings Plan’ would entail for you because the trade-offs and ramifications can be worlds apart. If you’re still unclear and uncertain of which plan (or a blend of plans) to consider adopting which would add the most value to your unique lifestyle needs, don’t sweat it too much.