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She started looking at financial products only when she is about to retire

S is a senior executive in a large corporation. She is in her 50s and looking to retire in the next couple of years. She has no dependent. She only started to look at financial products to help her in her retirement planning this year.

She is not in a bad financial position. She owns two properties. She stays in one, which is a government housing and near her parents. She rents out the more expensive private property for close to $10,000 per month. Both the properties are fully paid up so she has been enjoying good passive income from the rent alone.

As she is still working, she is accumulating cash and wants to look at financial products to help her maximize her return. In our conversation, she has been looking mostly at short term instruments

a. 6 months T bills which are paying about 3.5% to 4% interest

b. Short term (1- 3 months) currency pairing instruments that is giving her 4% pa

c. Leverage (borrowing in Japanese Yen and Swiss francs with lower interest rates) and buying Singapore REITs and Bond Funds in Singapore dollars offering better yields.

She also dabbles in some stocks but she mentioned that she doesn’t keep any of them for more than 1 month. Essentially, she is a trader.

She aspires to travel to different countries once she retires. She intends to stay in each country for 1 to 3 months and move on to the next country.

While she can fund her retirement and travels, our conversation revolves around how we can make her financial instruments provide more predictable and stable returns for her over the longer term. She needs instruments that can give her stable income over the next 20-30 years and be a hedge as well to the rental income that she is receiving.

In Trio-Retirement Plan, we discussed about the three “O”s. We did not go into specifics on her desired expenses and how much the rental and investment income can cover her cost during her retirement. However, we discussed about suitable investments for her RESERVES “O” and INVESTMENT “O”.

So far, she has only been looking at short term investment instruments like T-bills and currency pairing structured deposits. Those instruments are suitable for her RESERVES “O”. She has to spend more effort to look at instruments in the INVESTMENT “O” to provide her with sustainable and long term retirement income.

For her income portfolio in INVESTMENT “O”, we discussed the following instruments

a. Blue chip REITS – giving about 5.5% to 6.5% pa now. She was looking at some smaller players and since she is new to financial products, I was encouraging her to look at more stable companies with stronger sponsors.

b. Bond funds hedged to Singapore dollars – providing about 6% pa. She was looking at PIMCO bond fund which I think that it is an excellent product for her.

c. Equity funds – she was looking at some larger Blackrock funds which I think she is in the right direction.

For her growth portfolio in INVESTMENT “O”, I was encouraging her to look at holding stocks for a longer period instead of trading them frequently. She is technology savvy and I thought she should be keeping stocks in the space of Artificial Intelligence (AI), Blockchain and Electric Vehicles (EV) for the longer term. I was also encouraging her to look at various ETFs that can help diversify her risk from one particular company.

As she gets more into the financial space, I am sure she can explore more products that can fit her financial plan. Trio-Retirement Plan helps her frame different products with different characteristics and timeframes into different “O”s or buckets.

TRI-O RETIREMENT PLAN is a simple way to help you get started on your retirement planning. Learn the FUNDAMENTALS and HOW TO GET STARTED. There is also a spreadsheet to help you CALCULATE your monthly savings and your project monthly income at retirement. You can check out our BLOGS on topics pertaining to retirement planning. Feel free to CONTACT US if you have any questions or comments.

He has the Midas touch in Real Estate

R just turned 50. He still has 2 school going kids and it would be at least 10 years before they do not need to depend on him financially. His wife took on a less hectic job and as a result took a pay cut from her previous role. We met as R needed some career advice.

R is slightly frustrated at his job. The global company that he is in has the habit of bringing in someone from the head office to be the Country Head. R is technically the second man in his company’s operation in Singapore. Things go well when the relationship with the Country Head is good. However, the company rotates the Country Head often. Right now, R is not getting along with the current Country Head.

R feels trapped. He still has an outstanding mortgage of $1.5 mil on his existing property and his kids expenses are high. Cost of living in Singapore is high and his family lifestyle leans on the extravagance as he can afford it with his salary. Despite being unhappy, he still has the option of riding out on his current role until another Country Head gets assigned as the company needed his expertise and he evaluated that his likelihood of being retrenched is low as his company is still doing reasonably well.

Fortunately, R has the Midas touch in real estate. He bought his first property for $500,000 more than 20 years ago and sold it for $1.5 mil. He bought his next property for $1.5 mil and sold it for $3 mil. He bought his current property that he is staying in for $3.5 mil and right now he can sell it for $5.5 mil. He has no other investments besides the property and some reserve cash.

From a personal finance standpoint, he has 3 options

A. Ride out the current career situation and hopefully, his relationship with the next Country Manager will be better. At his age, he has to bear some risk if he does a career switch and the new role may or may not sustain the salary package that he is enjoying now. He will also keep his current property and hope that it will continue to appreciate for the next 10 years until his kids are independent and he is ready to retire.

B. Cash out on his current property at $5.5 mil, pay off the $1.5 mil loan and buy 2 properties at $2 mil each – one for staying and the other for rental income. Assuming the rental rate is at 3.5%, he will enjoy a monthly rental of $5,800. If property prices continue to escalate, he can enjoy some capital gain on both his properties when he retires in 10 years time, which is similar to Option A. In Option A, he will not be enjoying any rental income as he is unlikely to want to share the house he is staying in with tenants. On his job front, he can try to ride out his current situation but if the situation gets more sour, he has the option of switching to another job with no worry of an outstanding mortgage. On top of that, he is also enjoying a passive rental income of $5,800 per month.

C. Cash out on his current property at $5.5 mil, pay off the loan, buy a $2 mil property for staying and invest $2 mil in a mix of equity, bonds and REITS. Assuming he can get a blended return of 5% pa in his investment, he will enjoy a passive income of $8,300 per month. His property and investments can potentially enjoy capital appreciation. He is also diversifying his asset base. On his job front, he will feel more secure as he has a higher passive income than Option B.

So R is not in a bad position at all. In fact, I would say that his financial position is more fortunate than many others. I believe he has played out the different options in his head but just needed someone to talk it through with him. He felt a lot better after our conversation although I felt I have not contributed any new ideas to him.

What would be your advice to R?

Retirement Planning is a Defensive Play

I read Investment Moat’s article “9 Strong Points to Why I say, the Dividend Income Retirement Mindset is Not a Good Retirement Risk Management Model” with a lot of interest.

Investment Moat is right that having sufficient monthly income over many years (20 to 40 years) during retirement is a topic that bothers retirees like me a lot. The prospect of running out of money during retirement is a scary thought. He mentioned the use of Safe Withdrawal Rate method which is empirically proven. I will share some of my thoughts on the Safe Withdrawal Rate method.

Tri-O Retirement Plan is built on the premise of dividend income. In our Investment “O”, there is an income portfolio and growth portfolio. The income portfolio (which should make up 80% – 90% of the total Investment “O”) is supposed to provide dividend income to cover our monthly expenses. The growth portfolio (which is about 10% to 20% of the total Investment “O”) can help mitigate inflation by focusing on more risky and higher growth instruments.

Tri-O Retirement Plan mitigates the dividend income risks mentioned by Investment Moat’s articles with the following strategies.

a. Diversification

The income portfolio of Investment “O” should consists of multiple instruments. For eg, in my income portfolio, I have

i. Dividend Stocks, Equity Income funds and ETFs

ii. Individual Bonds, Bond Funds and Bond ETFs

iii. Individual REITS, REITS Funds and REITS ETFs

iv. Multi asset income funds

The above instruments are also diversified across geographies (Global, US, Europe and Asia) and during the accumulation phase, some of them are also bought across time (using Regular Saving Plans).

The above list may look like too many instruments and may become hard to manage. Fortunately, with today’s technology and online platforms, they can be pretty much on “auto pilot” mode.

Diversification helps in soothing out the ups and downs of different instruments. For eg, a bond fund which I have held for more than 15 years is showing decline in the monthly dividend in the last few years. Some of the REITs that I have held for more than 15 years have been steadily increasing their DPUs (distribution per unit). Some of the REITs suspended their dividend payment during the Covid period. The multi-asset income funds have been constant in their payout for the last 5 years that I have held them.

In our article Picking our own stocks, we covered that diversification could mute our potential returns versus picking our own stocks. Higher risk means higher returns. Diversification may be a necessary risk mitigation strategy for the normal investors like us who may not have the Midas touch of Warren Buffett or skills of a professional investor.

b. Headroom or additional coverage

Yes, dividend income does fluctuate and it may be important to provide some headroom in our planning. For eg, I designed the headroom for the dividend income versus my expenses to be 10%. In months that I have excess dividend income, the excess is either transferred to RESERVES “O” or plough back into investing into the income portfolio.

In the Investment Moat’s article and related comments, it was mentioned that there are retirees with 2x to 3x coverage. That is indeed admirable if it is achievable. These retirees can definitely enjoy a risk free retirement.

c. RESERVES “O” and/or cutting down Expenses

In Tri-O Retirement Plan, RESERVES “O” continue to play a role in the decumulation phase. When there is a financial crisis, the dividend income may go below the monthly expenses required and dipping into the RESERVES “O” may be required. Of course, before going there, we may need to trim off the good to haves in our expenses. For eg, we may have to forgo the annual or bi annual vacations that were part of the expenses during these period. During better times, excess dividend income from the headroom can be ploughed back to help replenish RESERVES “O”.

d. Growth Portfolio to take care of inflation

The decumulation phase of Retirement can take place over many years and over time, even if the dividend income remains constant, the purchasing power will be eroded by inflation. Therefore Tri-O Retirement Plan advocates that we should still have a growth portfolio comprising of growth instruments in our INVESTMENT “O”. Some of these growth instruments can be sold over time to purchase more instruments in the income portfolio to help increase dividend income to counter inflation.

Tri-O Retirement Plan is built with middle income employees in mind who may not be investment professionals. The Safe Withdrawal Rate Method, which is empirically proven to work as mentioned by Investment Moat, involves building a portfolio of stocks and selling 3% to 4% every year to fund the retirement expenses. For this method to work, we need to make sure that we build a good portfolio of stocks, manage and refresh the portfolio when necessary and have the emotional fortitude to choose what and when to sell every year to fund the retirement. This may or may not be a simple undertaking for most of us. The portfolio is supposed to perform well over many years.

No one can look too far down the crystal ball when we retire and we can only plan as much as we can. The bottom line is we need to embark on retirement planning whilst we are still economically active. In the event that the retirement income is still insufficient after we retire, we can continue to do some gig work to keep ourselves economically and socially active. This can help boost our retirement income.

I am a lousy trader

“Buy low and sell high”

It definitely sounds easy but it is far from easy for me. There is a glamourous ring to being a stock trader in our financial city. Stock traders can afford big houses, nice cars and expensive wines. They only work during trading hours and once past trading hours, they are having fun at the bars doing “networking”. No need to bring work home or stay past office hours.

My few attempts on doing personal trading had never end up great. When I thought the stock could never go any lower after I bought, it fell another 20% the next day. My attempts at currency trading were worse. Every time I felt that it was a sure win, the position went the other way. I was so confident with my “skills” that I asked whoever who wants to make money for sure to bet against me. If I buy long and you sell short, you are 100% guaranteed to make money.

How then can I get involved with the stock market or plan to retire early in investing in stocks?

Fortunately, investment is not trading. We can adopt some discipline so that we can win in the long term.

In Picking our own stocks, we covered buying stocks in industries or companies that we have some inherent knowledge professionally or we interact with in our daily lives to provide us the investment instincts. We can hold these stocks for the long term (instead of trading) and continue to add onto our holdings by buying more during market dips.

For eg, I bought a renewal energy ETF and stock more than 15 years when there were many articles on how renewal and solar energy will be prevalent. The ETF and stock did not do well for many years. It is only in the recent years that I managed to get some good returns. Fortunately, I didn’t buy the ETF and stock for trading purposes. I would have lost money simply by holding on to the ETF and stock.

If we do not want to pick our own stocks, we can depend on mutual funds or ETFs that help us diversify across a basket of stocks. We can use Regular Saving Plan (RSP) to help us diversify the purchase over time (so we do not end up buying only when they hit all time high). We covered this in how to start investing.

So busy professionals can plan to retire early by investing in the stock market. Perhaps we will not get the big houses and nice cars, but this is a slow and steady way to work towards having a steady retirement income.

Picking our own stocks

Diversification is one of the key strategies in investment. We can diversify the risk of owning a single stock by purchasing mutual fund or ETF. We can also diversify the risk of investing in the wrong time (buying high) by using Regular Saving Plans (RSP). We covered this topic in our main site (read INVESTMENT “O”). In our article “How to start investing”, we also proposed some large mutual funds with decent dividend yield to consider for new investors.

While funds reduces the risk of owning single stocks, it could also potentially mute the returns that we can get from picking our own stocks. In our Tri-O Retirement Plan, we are not against the strategy of picking our own stocks. For new investors, we recommend buying funds using RSP. For mature investors, we can do a hybrid strategy. In the income or growth portfolio of INVESTMENT “O”, we can set aside some money to invest in stocks that we pick. On the other extreme, if one is really confident of his/her own stock picking skills, one can also go solely on its own investment decisions without buying funds.

In Thomas J. Stanley and William D. Danko’s book The Millionaire Next Door, one of the successful traits they observed that millionaires have is that they invest in only industries that they are familiar with. Usually these are industries that the millionaires are involved in professionally as well. Although this may be an anti thesis to the diversification strategy (to diversify beyond one stock and industry), it is a strategy that have proven to work.

Personally, I adopt a hybrid strategy. Besides buying funds and ETFs in the growth and income portfolios of INVESTMENT “O”, I pick some of my own stocks. In the income portfolio, I selected some local REITS which provides good dividend income. These are office, retail and industrial REITS. Although I am not a real estate professional, I have visited the malls, office buildings and factories own by these REITs. Visiting these properties give me a sense of how well the real estate is doing. Are the buildings crowded with good footfalls or are there many vacant units within the building? These indicators give me the necessary instinct to pick the REITs to buy.

Being a IT professional for more than 30 years, I have also built a sense of which technology trends are sustainable and which ones will fizzle off. Some of the good bets in my growth portfolio are Apple and Google stocks with the advent of smart phones and Amazon, Microsoft and Google with the cloud computing era. Some of these good investment have provided me with a 10-fold return.

So how do we diversify over time to make sure that we do not buy on the high when we pick individual stocks? I am a long term investor and a lousy market timer. By keeping some buffer money in the growth and income portfolio in INVESTMENT “O”, I usually buy more of the same stocks when there were dips during the different crises (dot com bust, global financial crisis, Covid pandemic). These allows me to safely increase the holding of these shares at a reasonable price.

Is everything nice and wonderful? Of course not, I have picked the wrong stocks that have gone bust and have bought stocks when their prices were at their all time high. Fortunately, by being a long term investor and choosing to focus in industries that I am familiar with, the overall stock portfolio is providing a decent return.

Therefore, the hybrid strategy works for me. Investing in funds and ETF using RSP provides the necessary diversification and keep me continuously invested. Having a portfolio of individual stocks help provide higher returns in the longer term.

One Large Property vs Two Smaller Properties

You are turning mid forties. Income is getting better as you approach almost twenty years of working. You manage to pay up the remaining loan on your mortgage. Finally, you fully own your first home. The kids are getting bigger and you are thinking that you may need to get a bigger space to live in. Should you trade up your current property to get a larger property or should you buy another smaller property and use it to generate rental income?

Came across two families recently with the scenario above. Both families decided that they should trade up and buy a larger property. The larger property costed more than twice the price they sold their first property for. Basically, they were getting into debt again, after taking almost 20 years to clear the mortgage of their older property. They figured why not since they were making better money at work.

Unfortunately, soon, these two families got into some trouble. With higher salary came higher responsibilities and more stress at work. At their forties, they were constantly pressured by younger colleagues who were more productive and paid less than them. If the economy were to go south, they knew that they would be the first to be lay off as they cost more to the company. Their health started to suffer with higher stress levels yet they felt trapped. They couldn’t resign and take a break or change their career with the prospect of a pay cut as they had monthly mortgage to take care of. The floating rate that the mortgage was based on was also increasing, which meant the monthly mortgage payment was also going up. It is certainly not a good position to be in.

Mathematically, lets work out the problems faced by the two families. Assuming that this is in the context of Singapore where property prices are high and lets assume that the family sold their first property for $1 mil and bought the larger property at $2 mil. The family took a 20 year loan for $1 mil with an interest rate of 3.5% and the monthly payment works out to $5,800. The combined income for the family is $16,000 per month (median family income in Singapore is $10,000). With both the husband and wife working, they are comfortable with the monthly mortgage payment. If one of them does not work (assume that they are paid equally), the family will be hard pressed every month surviving with a $8,000 income and a $5,800 mortgage. Therefore, unless they are very certain that their jobs are stable (for the next 20 years) or they can continue to see their income rising, trading up to a larger property at their age presents a higher risk.

So what should the families do instead? If they could turn back the clock, one alternative is to continue staying in their first property and invest in a rental property. The rental can help them in their monthly cashflow to cover a part of their mortgage payment. The difference between this model and getting a larger property is that the property that one lives in does not help to generate any income. Over time, this rental income is substantial.

Mathematically, lets assume that they invest in a rental property and take the same 20 years loan for $1 mil with the interest rate of 3.5% and managed to rent out their property at $4,000 per month. Right now, their monthly cash flow for their rental property is -$1,800 ($4,000 – $5,800). If one of the couple chooses not to work or take a sabbatical, they will not be so hard pressed as they can still survive with $8,000 per month. Therefore, although the family is going into debt again, it may turn up to be a worthwhile investment if they are good property investors. We covered some of these discussion in another blog – Good Debt vs Bad Debt. Once the rental property is fully paid for, the rental can function as their retirement income.

Of course, there is one more alternative if the families chooses not to upgrade to a larger property or buy another rental property. They can choose to invest their monthly savings and not get into additional debt. They can buy income generating instruments like REITs (read REITs vs Physical Rental Property) or Mutual Funds (read How to start investing), build up their INVESTMENT “O” and start to enjoy some retirement income without getting introducing additional stress in their lives.

Buying a larger or more luxurious dwelling is emotional. There are definitely arguments on why this is more beneficial. However in keeping up with the Joneses, please do take note that getting a mortgage loan is a long term commitment. If the two families are forced to sell their larger properties and move to smaller properties due to cash flow issues, they may be forced to sell at a time when the property market is down. There are also inherent cost like renovation, agent commission and government stamp duties that may be hard to recover.

Good Debt vs Bad Debt

Academically, there is a simple way to determine good vs bad debt.

If we borrow $1,000 at 3% interest and invest it with a return of 6%, this is a good debt.

If we borrow $1,000 at 24% interest and have it sitting in the bank account making 2% interest or worse, spend it all on non essential items, this is bad debt.

In real life, it is more complex. Some get into debt because they get into cash flow issues and cannot afford essential items. Others do not want to get into debt because of their upbringing and attitude towards debt. And there are folks who just love being in debt.

For example, I was brought up with the notion that debt is bad. The only time I took a loan is for buying my homes. I also took the fastest possible time to pay it off despite enjoying very low rates. The day that I paid off my mortgage and became debt free was a happy day. I could sleep well. Instead of using the money to pay off the mortgage, I could have used it for investment, which pays off higher return. However, I wasn’t interested. I didn’t like the risk or the notion of being in debt.

Conversely, I had another friend who believed in debt. He made full use of every opportunity to go into debt and used the money to buy non essential items. He had this attitude that if he were to die tomorrow, he will die net positive. He wanted to enjoy things that he could otherwise not afford. Fortunately, he wised up later in life and did not get into financial ruins.

In the blog REIT vs Physical Rental Property, we gave the example on how cheap mortgage loans can amplify returns in physical rental properties. We know of many successful friends who have a knack for buying undervalued properties, have a great rental network and are able to retire with a sizeable amount of retirement fund making full use of good debt. In reality, it is of course more complex and there are risks involved. With the FEDS increasing rates recently and mortgage loans based on floating rates, some of them have to manage their cash flow tightly and have to continue to make sure that the rentals can cover the mortgage payments.

What is the right balance or an optimal debt model for retirement planning purposes?

Tri-O Retirement Plan proposes that the property that you stay in should be paid off as quickly as possible. In the decumulation phase, one should not continue to pay mortgage in the property that you live in. This is to keep expenses in check especially during retirement. To achieve it, one can choose to downgrade to a smaller property or move to a lower cost city or country. If a person uses physical rental properties for retirement income in INVESTMENT “O” , he/she will need to manage the cashflows and preferably have some cash buffer. Hence, it will be ok to continue to have good debt even after retirement.

Frugal friend can retire early

I am sure all of us have frugal friends. I have known X for more than 30 years. We were friends in school, army mates whilst we were serving our mandatory military service and were also colleagues in one of the firm that we worked in.

X is frugal. There is a difference between being frugal and stingy. X is not stingy. X will buy you treats as a friend and will contribute his fair share in outings. His frugal lifestyle stands out.

He buys nothing branded. He takes good care of his things and can wear free company t-shirts for a long time. He use army running shoes even after the service. They were good shoes. He sets his timer on his air conditioner so that it turns off in the middle of the night and he turns off his heater midway through his shower to save electricity. He is fit. During one of the company outings, he decided to save a few dollars taking the cab and decided to hike more than 5 km from one location to the next. He got to sightsee that way. He is one of the few friends I know who actually enjoyed airline food. He takes his family for holidays but he optimizes special internet offers to get the best offers on air tickets, hotels and entrance fees in order to get the same enjoyment for less. We can keep on going on his frugal ways.

Early in our career, we were comparing how much we could save from our salary. We had identical starting salaries. I thought I had a great achievement by saving 50% of my take home salary. He said he could save 75% of his salary. He spent little and wasted nothing. This was before we were married but this included looking after our parents.

Through his frugal ways, X bought two properties. One to stay in and the other for rental income. He paid cash for both his properties (bought at different time). He is definitely one of the few I know who didn’t take a mortgage loan. He also invested in a bunch of mutual funds.

We are all in our fifties and although X is still working, he is ready to retire anytime. He still likes what he does but he knows he no longer has to work for money. He still doesn’t have high expenses and his kids will be graduating from college soon. His only luxury is that he bought himself a nice set of wheels in recent time and paid cash for it without any loan. He knows he can always sell the car at any time if he doesn’t want to continue to pay for its upkeep. The car is to celebrate his financial independence.

Although I admire his frugality, I know it is not easy to be like him. It takes a lot of discipline. Frugality definitely help someone to retire earlier. This includes being able to invest the monthly savings early so that the investment grow over time. In this case, X used a combination of rental property and mutual funds.

Unlike X as a good example of frugality, I am sure all of us have friends who have “no concept” of saving as well. They can spend every single cent in their bank account every month and even get into the credit card trap. If they do not change their ways, they will definitely have a hard time having enough to retire on, let alone retiring early. Hopefully, this article or Tri-O Retirement Plan can help them to be more discipline.

REITS vs Physical Rental Property

Properties are popular investment vehicles for retirement planning. Lets discuss whether it makes sense to buy REITs or physical rental property.

What are REITs? REIT stands for Real Estate Investment Trust. It is a trust that invests directly in real estate and issues shares that trade on stock exchanges. The rental income from the real estate are distributed to the share holders as dividends.

Quantitatively, does it make sense to buy REITS or your own physical rental property?

We will start off with the assumption that you have $200,000. You can choose to buy $200,000 worth of REITs or use it as a down payment to purchase a $1 mil rental property (20% down payment, 80% loan). We assume that the REITs pays 6% dividend per year and appreciates 10% after 10 years ($220,000) . For physical Rental Property, we assume that it is a 30 years mortgage, mortgage loan is at 3.5%, the rental is at 4% per year and the property is worth $1,100,000 after 10 years.

Using this simple example above, the IRR (internal rate of return) for REIT is 6.3% and Rental property is 8.38%. Having a Rental Property makes sense.

However, getting a physical Rental Property is more complex. In the context of Singapore, there is stamp duty and legal fees during purchase and sales of physical property. Rental income are also taxable. The property may also need to be renovated before it can be rented out. Assuming we take an additional 10% ($100,000) to cover buyer stamp duty, legal fees and renovation, and assume the personal income tax is at 10%, the new calculations are as follows.

Now the mathematics does not look as good for physical Rental Property.

Lets take a scenario that the property market is buoyant and property value increases 50% after 10 years. The new calculations are as follows.

Now the Rental Property looks more attractive.

Therefore, there is never really a clear cut answer to which is better. Physical property prices may go crazy in Singapore (which it did) and can appreciate more than 100%. Investing in physical Rental Property is also more complex. There is legwork involved in choosing the right property, finding a good tenant, making sure that the property is always rented out, fixing defects etc. We also come to know of property investors who have the MIDAS touch. Whatever they buy turns to gold.

If you prefer a more passive way of investing into property, REIT may be for you. Another advantage is that you can start small unlike physical rental properties. Most REITs can be purchased with hundreds or low thousand of dollars from the stock exchange.

The real difference between buying REITS or physical Rental Property is leverage – The ability to get relatively cheaper loans for physical Rental Property. One may argue that we can get loans to buy REITS as well but share financing usually come with higher interest rates.

What insurance should I buy?

Insurance is a key part of Trio Retirement Plan. While we work hard, save and invest wisely to build up our retirement income, we need to take care of all the “What if” scenarios so that it provides minimal disruption to the retirement plan.

Insurance premium is a necessary expense under the EXPENSE “O”. However, insurance premiums are not cheap and how should we prioritize? What kind of insurance we should buy first and how much should we cover ourselves for? Should we go for term or whole life insurance?

We will answer the above questions in the Singapore context. Different countries may have different healthcare plans. However, the general principles may be applicable for any countries.

The first insurance we should buy should be healthcare insurance. Healthcare cost can be a major expense if anyone in the family falls sick. In Singapore, there is a basic Medishield plan which is provided for all citizens. We should buy an Integrated Shield plan on top of the Medishield plan for additional coverage. We should choose a plan that we are comfortable in paying. If a family has a new born, the family should insure the new born as soon as possible. Everybody should buy this insurance as early in their life as possible and when one is healthy. If not, the insurers may not agree to provide coverage or choose to provide coverage with exclusions once there is some preexisting conditions.

The next insurance to purchase will be a critical illness plan. Critical illness plan pays a lump sum upon diagnosis of a critical illness. This is important to any one who has started working and especially those with dependents. When one falls sick, although the healthcare insurance takes care of the major bulk of healthcare cost, the critical illness plan can take care of any portion not covered by the healthcare insurance and provide a buffer if one has to stop working due to the illness.

There are term or whole life plan for critical illness. Term plans are more affordable than whole life plans and can usually cover a person up to 70 years old. With a fixed budget, prioritize the coverage value (the lump sum that will be paid out) over whole life coverage.

As an illustration, an middle income employee makes $60,000 per year. In the event of critical illness, he/she wants to make sure that he/she can cover 4 years of salary in case he/she cannot work. So the coverage value needs to be at least $240,000. He/she may find it more affordable to purchase a term critical illness plan than a whole life plan. The argument is also that he/she may not have dependents at the age of 70 and expenses will not be as high, compared when he/she are younger.

The third insurance to consider will be a life insurance, which is to cover for death or total permanent disability. This insurance is helpful if he/she has dependents and he/she needs to make sure that the dependents are financially taken care of in the event of his/her demise. Again, the coverage value is dependent on how much the dependents need until they are financially independent themselves. Term life plans are more affordable than whole life plans. There are quite a few insurers which offer term life plans up to a coverage of $1 mil with affordable premiums in Singapore.

The fourth insurance to consider is a personal accident plan. These are usually offered as a rider to term life plans and are quite affordable.

The fifth plan to consider is a disability or illness income plan. This plan gives a monthly payout if the insured cannot work due to disability or illness. The premiums are usually higher and one needs to look at the language of the insurance coverage closely as it may differ from one insurer to the next.

The above are the key insurances to consider and in the order of priority. There are other insurances like universal life insurance (which insurers sell as a legacy planning tool) and investment linked policies (ILP).

We have strong opinions against ILPs and we will cover this in another blog post. Trio Retirement Plan is clear. Insurance is meant to protect and we will like to draw a clear line between insurance and investments.

We will also contribute another blog post on whole life versus term insurance. We are neutral to either. Key consideration is affordability and coverage sufficiency.