Just some quick thoughts after reading Nigel's post on 'Buy Term and Invest The Rest', its pretty interesting. Do take note that this is not a 'die-die-must-follow' method as compared to the normal conventional strategy of buying Whole Life to protect oneself till he dies, and whatever remaining money for investments into endowment policies, money market funds, and of course, unit trusts.

Like what Nigel said, a Term insurance usually insures one til 65 years old, then after the person is not insured anymore. A whole life insurance insures one until usually 99 years old. The differences between the 2 is: ( correct me if I'm wrong)

1. Premium paid for term is significantly lower than that of whole life
2. Term is mainly for protection needs, whole life gives protection and a bit of savings ( has cash value)
3. Term if surrender, will get no money back. Whole life have... think after a few years

So why the emergence of such a strategy?? To me, the rationale behind this is:

Let me give you a very simple analogy, usually for a whole life, to be insured for $100k, monthly premium needed will be around $120-$160. For a term insurance to be insured for the SAME $100k, the premium per month will be around $30-40. On a minimal basis, if I were to compare in this way, and I bought a term, I will have a surplus of $90 (120-30) left t0 invest.

So the surplus can be used to invest in other financial instruments such as futures, options, stocks and shares, or relatively lower risk investments such as unit trusts, bonds and treasury bills. And can reap higher returns than that for a whole life insurance.

A few of you may be confused.... A TERM insurance ONLY offers personal protection. Thus I only pay for the mortality charges, which makes the premium so cheap!!

For a WHOLE LIFE, besides paying for mortality charges, there is also a SAVINGS element in it. So, part of the premium I pay goes to something called a LIFE FUND which invests in stocks and bonds, and so on so forth. But we don't know how much goes into equities, how much goes into bonds. So people tend to INFER that most of the money goes into bonds, as it is more safer.... ( I will post this in detail in my next post)

Hence, for a person who is in their early 20s, people like me, we can afford to stay invested for many many years, like 30 years? So our investments can afford to be more aggresive in nature ( I will speak more about this in the coming post on the reasons why), hence can reap higher returns.

Hence, that's why certain financial advisers will advocate "buy term invest the rest".

Clear?

I was browsing through my friends' blogs and was quite astounded by a post which Nigel wrote at this blog. A brief introduction about him, knew him in my sem 1 at econs class, was a groupmate, I saw him as a person with ambition.

So what happened was that he was blogging about his thoughts and opinions about financial planning (he's a hot-from-the-oven Prudential Adviser), and I find his views are very true to the society, especially in Singapore.

A very novel he made was: What you see a vampire and a financial adviser, which one will you run away from? Vampire or adviser? Of course, financial adviser la, because they will suck off all your $$!! Really had a good laugh out of it. But how true is it?

Well I can firmly say that ITS TRUE!!!............ from the mindset of the public. People (including me) always think that an agent/adviser always aims to push us any product that reaps the highest and longest commission, 3C us (convince, confuse, con), then force us to sign, then don't care about us and go find another victim to scam!! Pardon me for being too frank about it. If not, why are about 80% of Singaporeans are UNDER-INSURED!!

These are some of the following reasons:
1. No money/Don't have enough $$
2. Assume/thought I am well-insured
3. Parents got buy insurance for me, so no need lor
4. Wait la, got time then think about it

I believe at least some of these reasons, my readers you will thought of it before in one way or another. And I know insurance or insuring for death is something not many of us would like to think of....

Read Nigel's Blog to know more about it.

Some thoughts on retirement planning.... 1st question you may have: "Andy, you are 21 yrs old, isn't it a tad bit too early to plan for retirement? Its like so many years away!!" Okay, I'm intending to retire at a 'ripe old' age of 43, that will make about 22 years more to plan for it. Still far? I personally don't think so. Lets do some maths, assuming I live till 95, after retirement I will spend another 52 years chasing my dreams. In addition, I want at least $5k/month after I retire($60k/year in 2007 dollars). Plug in a conservative 2% inflation... to retire at 40, I will need........ $4.82 million SGD. Now assuming that interest is negligible, divided by 19 years, I need to save $18270.67/month!! Now, as an NUS student, is that possible??

If I invested in unit trusts, stocks and shares and other financial instruments, I assume I reaped a conservative 12% per annum, I need to save $2243/month, what a big difference it makes!! And I can firmly say that, $2000 a month is darn right achievable. I don't think I need to say how much 1 more year of procrestination of retirement planning will do to your funds in the end.

That's not all, what about wedding expenses, car, housing, family and all other expenses?? The $ sign is all-present around. Just some information from my Gym buddy, Kwek. He just wedded, and the expense are as shown:
1. Wedding dinner ($650/table * 60tables): $39,000
2. Photography, car rental, other expenses: $10,000
3. New 5-room flat (Tampines) : $35,000
4. Renovation, furnitures : $15,000
Total : $99,000

Hence, there are 2 main advantages to start planning early.
1. The effect of compounding will work wonders for one over a super long timeframe
2. Compounding effect will be undermine if the money invested is put in low yield instruments like endowments, time deposits. The idea of starting early gives one time to let your money work harder than you through higher yield instruments.