Saturday, May 26, 2007

Enhanced Income Fund

Dear Mr Tan,

Other than NTUC Income's Flexi-cash, do you invest in any other money market funds, like DBS Enhanced Income fund? How would you compare the two?



Here is an analysis done by an expert.

The DBS Enhanced Income Fund has half of its investments are outside of Singapore. This makes it partly a currency speculation fund -- and you are betting on a weakening Singapore dollar. It is riskier than a straight money market fund.

It is also actively managed, and has a rather high expense ratio of 0.46 per cent. On top of that it charges an initial sales charge of 0.2 per cent.

Because of the foreign investments, you must also pay currency conversion costs -- (which are a hidden expense that is deducted directly from the fund's yield and not included in the expense ratio).

$1,000 is sufficient for a retiree

Dear Mr Tan,

Your concise advice on annuity in the FAQ are gems distilled from your experience. I agree that $1000 - $1500 a month is enough for most of us during our retirement, if we had planned ahead, and dispense with the non-necessities and excesses.

If only writers are able to emulate your style of writing. I certainly gain from that.

No overlap in coverage

Hi Mr Tan,

After reading your blog I am convinced we should buy term insurance and invest the difference.

At present, I have on insurance policy. I am a SAFRA member. I know that NTUC income underwrites affordable policies for SAFRA members as follows:

* SAFRA Essential Term
* SAFRA Living Care policies.

I am thinking of getting a 100k converage under the Essential Term and another 100k coverage under the Living Care policy.

What do you think of this combination? Would there be a overlap in coverage?



There is no overlap. It is useful to have cover under both policies. In the event of death, your dependents can claim $200,000 under both policies. For a critical illness, you can claim foro $100,000.

You can buy both policies, if you find the premium to be affordable. If it is expensive, you can insure $50,000 under each policy.

Appeal from a motor cyclist

Dear Mr Tan,

I encountered a ridiculous driver, who horned at me, just because I am in front of his car.

What has happened to road safety in Singapore today? It is sad to read of the father and daughter on motorcycle, died in accident last Saturday. Is there attitude problem in driving or has more drivers been having poor judgment on the road?

1. Motorist today has poor lane discipline; many do not keep a safe distance between cars.

2. There are many who imagine they are grand prix driver tailing even a car that is moving on at 90km/h.

3. In merging lane condition, such motorist must be ahead.

4. Motorist when tailing behind motorcyclist, will not bother about the speedometer, until they overtook motor cyclist.

5. Motorist who cannot even allow motor cylist riding on lane 4 (extreme left lane) of highway and attempt to over take by the left, squeezing between road shoulder and lane 4 of motorcylist.

In wet weather condition, motor cyclist is even more exposed. Please be patience and bear a thought for motorcyclist. Give motorcyclist space to manoeuvre. Treat the motorcyclist as your friend or relative.

Insurance will pay for the mistake of a driver,but it will never bring back the life of the victim and the loss to their family. Drive with loving kindness, bearing a thought for the family of each other.

Thomas Phua
Visit my blog.

Fixed deposit with a finance company

Dear Mr Tan,

I wish to deposit $80,000 in a fixed deposit with a bank that pays the highest interest rate.

I also that the finance companies generally pay higher interest rates than the local banks. If you are a senior citizen 55 yrs old and above, you even qualify for a higher rate.

Should I put my money with the finance company?



A finance company is financially less secure than a bank. That is why they have to pay a higher interest rate. But, I think that the risk of failure is quite small, in Singapore.

If you are willing to take the risk, then it should be all right. Perhaps, you should put half of your money in a finance company and the other half in a bank.

Always, spread your risk.

Bond and money market fund

Dear Mr Tan,

What is the difference between a bond fund and a money market fund? It seems that both funds pay a rate of return that is linked to the interest rate?



The bond fund is invested in bonds, using from 2 to 15 years of duration. The yield on these investments is locked up for the period. If the yield on newly purchased bonds drops, the value of the bond fund will increase (as the yield of the fund has been locked in). Similarly, if the yield on bonds increase, the value of the bond fund will drop.

Hence, a bond fund is sensitive to changes in the yield on bonds, and will move in the opposite direction. A change of 1% in the yields on bonds can cause a change of 3% to 10% in the price of the bond fund.

A money market fund is invested in short term investments with a maturity of 1 to 12 months. It will also be impacted by changes in the yields of these investments, but as the locked in period is short, the impact of these changes is small.

My friend likes your blog

Hi Mr Tan

I introduced my friend to read your blog. He likes it. He finds your tips to be useful. He asked me to convey this message to you.



Thank you for introducing my blog to your friend. Please ask him to tell his friends as well.

Structured products that have matured

Did you invest in any structured or capital protected products that have now matured? What is the return that you have earned during the past years?

Please send to me, the following details:

* name of product
* when you first invested in it?
* what are the payouts that you have received?
* what is the maturity amount, and date that you received it?
* what are the key features of the product?

I will compute the yield on this product, and to see if you have obtained a fair rate of return.

I will share the experience of these products, so that consumers can be better educated, and learn how to invest in products that give them a fair rate of return.

Swing Fund

A customer invested $25,000 in the Swing Fund (managed by a local bank) in early 2002. After waiting for 5 years, the customer received a return of $25,528. The gain is $528 (i.e 2.1% for 5 years, or 0.4% per year).

The formula used to compute this return is:

(a) 5% for 5 years or
(b) 45% of the smallest absolute performance of 1 stock out of 15 selected stocks.

Among the 15 selected stocks, at least 1 of them showed an absolute loss for the 5 years. So, formula (b) produced nothing.

The investor gets 5% for 5 years under formula (a), but after deducting the sales charge, the net return is only 2.1% for 5 years.

During these 5 years, the return from the 15 stocks is probably 30% or more. The customer gets 2.1%. Where does the difference go?

What is the logic of formula (b)? I cannot understand its logic. It seems to me (and I stand corrected), that it is designed to take advantage of the naive customers.

I cannot understand how the regulators can allow the financial institutions to market this type of complicated product to unsavvy customers. We need stronger protection for consumers.

Friday, May 25, 2007

Switch to Balanced Fund

Dear Mr Tan,

I invested in the Enhanced Fund using money from my CPF. I invested a total of $35,000 and the value is now $54,000.

May I have your advice? Should I continue with this fund or realise the profit and switch to a more conservative fund? I am in my late 40s, and I need it for my retirement.



I suggest that you switch to the Balanced Fund. It is invested 50% in equities and 50% in bonds, and is less volatile.

But, if you decide to keep the investment to keep the investment in the Enhanced Fund, it is also all right.

Air fare to Kuala Lumpur

The return air fare to Kuala Lumpur is SGD 420. I find this to be too expensive, compared to the air fare for other destinations in the region, eg Bangkok, Bali.

I hope that the fare between Singapore and Kuala Lumpur will come down soon, to reflect what is happening in other routes.


I found from the Zuji website that Japan airlines offer a return air ticket for SGD 180 (excluding taxes). However, they only offer 1 flight daily. If I fly by this airline, I have to take the night flight and stay 1 night in Kuala Lumpur.

Protect unit trust investors

Hi Mr. Tan,

Your blog provides informative advice for financial planning. The contents are relevant in the Singapore context. I check out your blog daily as part of my online routine.

I invested some money in unit trusts through 2 local online distributors, i.e. and By investing through these distributors, I only pay sales charge ranging from 2.25% and 2.5%. It is much lower than the fund sales charge by our local banks.

If, one day, the online distributor cease business operations. what will happen to my unit trust? Is there any regulations that protect the unit trust investors like the Deposit Insurance Scheme that protects bank depositors?



Your money are kept with the unit trust manager and trustee. They are quite well protected and safe. They are not kept with the distributors.

The deposit insurance scheme is only for bank deposits. There is no similar arrangement for unit trusts.

Thursday, May 24, 2007

Life annuity gives financial security

Hi Mr Tan,

Recently, I asked the agent to give me a life annuity. I get a return of about 5 percent only. My capital disappears when I die. I find this to be not attractive. Is there anything better?



The return of 5 percent is actually quite good, considering that you can earn only 2% from bank deposit. The additional payout of 3% comes from your capital.

You actual return will be more than 5 percent. NTUC Income gives you an annual bonus that depends on the yield of their annuity fund. Under normal circumstances, the bonus will be about 1% to 3% and will be at a compounding rate. Your return will increase over the years.

You also get the guarantee that the payment will continue to be paid for as long as you live. You do not have to worry that your capital will run out earlier, if you live a long life. This is the best form of financial security.

Find out more from this FAQ.

Pay My Uni

Dear Mr Tan,

I saw the advertisement by NTUC on "Pay My Uni". Is this a good policy to save for my child's cost of university education?



You can talk to the insurance adviser and see what product is recommended to you. I prefer the investment linked plan from NTUC Income, as it has the flexibility and can give you a better return. You can read more about it in this FAQ.

Success of Indexed Funds

Extracted from John Bogle's book.

Index funds have been successful. The total amount invested in classic stock indexed funds grew from USD 16 million in 1976 to USD 445 million (28 times) in 1986 to USD 68 billion (153 times) in 1996 to USD 369 billion (5.4 times) in 2006. It now represents 7 percent of total investments in mutual funds.

The classic funds are those that represent borad stockmarket, such as the S&P 500, Dow Jones Wilshire 5000 and the Morgan Stanley EAFE (Europe, Australia, Far East).

Money Market Fund

The money market fund of NTUC Income shows a price of 1.065 as at 22 May 07. The price on 1 June 06 was 1.031. The appreciation for 11 months 21 days was 3.3%.

Although the interest rate had softened in recent weeks, the unit price of the money market fund continued to show the same rate of appreciation, ie about 0.3% every month.

I sold some shares recently. I have just re-invested the proceeds into the money market fund.

Insurance claim on World Trade Center, New York

The World Trade Center was destroyed by terrorists on September 11, 2001. There was a dispute between the owners and the insurers on the amount of the claim.

Under the insurance contract, there was a limit of USD 1 billion in claim arising from one event. The two buildings were destroyed by two aircrafts which into them a few minutes apart. The total loss was more than the limit of USD 1 billion.

The insurers argued that these two losses were part of 1 event, and is subject to the limit of USD 1 billion. As the insurer was protected by reinsurance, the decision was taken by the insurer and the lead reinsurers collectively.

I read recently that the claim was settled out of court for USD 2 billion. This means that the insurers (and reinsurers) have agreed to recognise them as two separate events. This is good news for the owners. However, the decision was delayed by more 6 years.

Lesson: As this is a very large claim, there is need to spend time to sort out the legal issues. In normal cases, where the claim is of modest amount, the issues could be settled more quickly.

Singapore Transport Guide

I carry a copy of the Singapore Transport Guide in my bag. It is like a street directory, but is less bulky. It shows all the bus stops and the bus services that uses the stop. It is a useful reference for taking the bus.

NTUC Income distributes this copy to its policyholders a few years ago. If you want to buy a copy, it is available in the bookshops. It is printed by SCIP Enterprise.

High charges can take away 70% of the total return

Assume an average return on stocks of 8% p.a. over a period of 50 years. If the money is invested in a fund that takes away an average of 2.5% p.a. the net return is 5.5%.

$10,000 invested at 8% p.a. for 50 years will accumulate to $469,000. Invested at 5.5% p.a. it will accumulate to $145,400. The difference is $323,600.

The charges of 2.5% p.a. takes away 70% of the total return!

Lesson: invest in a low charge fund

Difficult to beat the market average

Source: Economist magazine, as quoted in John Bogle's book

For the most part, fund managers have offered extremely poor value for money. Their records of outperformance are almost always followed by stretches of underperformance. Over long periods of time, hardly any fund managers have beaten the market average.

They encourage investors, rather than spread their risks wisely or seek the best match for their future liabilities, to put their money into the most modish assets going, often just when they become overvalued.

And all the while, they cahrge their clients big fees for the privilege of losing their money.

Lesson: invest in an indexed fund that promises a market return but with significantly lower fees.

Wednesday, May 23, 2007

Distribution by a mutual fund

Dear Mr Tan,

Is it better to invest in a fund that pays an annual dividend, or a fund that accumulates the dividend?



It does not make any difference. If the fund earns a total return of 12% (comprising of income and capital gains), the unit price will increase by 12%. If it pays a dividend of 5%, the unit price will drop by 5%. The total return will still be 12%.

In the USA, the income tax authority makes it mandatory for the fund to distribute the dividend and the capital gain separately, so that the investor can report them for payment of income tax and capital gains tax.

This requirement does not apply in Singapore.

Tips on Investments

Quotes from "The Little Book of Common Sense Investing" by Jack Bogle.

Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees - Warren Buffett.

A low-cost index fund is the most sensible equity investment for the great majority of investors. My mentor, Ben Graham, took this position many years ago, and everything I have seen since convinces me of its truth - Warren Buffett.

Investing is all about common sense. Owning a diversified portfolio of stocks and holding them for the long term is a winner's game. Trying to beat the stockmarket is theoretically a zero sum game (for every winner, there must be a loser), and after the substantial cost of investing are deducted, it becomes a loser's game.

Common sense tells us, and history confirms, that the simplest and most effective investment strategy is to buy and hold all of the nation's publicly held businesses at very low cost. The classic index fund that owns this market portolio is the only investment that guarantees you with your fair share of stock market returns - John Bogle.

Indexed funds for small investors

A few people have asked me to get Vanguard to set up their indexed funds in Singapore. They like to have access to low cost funds.

There is already a way for investors to access an indexed fund. It is called the STI ETF.

However, some small investors may find it difficult to open a account with a stockbroker or with the Central Depository.

I will study a way to set up a mutual fund that allows small investors to invest in:

* indexed fund, eg STI ETF
* government bonds

This service can be handled through the internet or contact center, and can be at a very low cost (say 0.1% per annum).

Using SingPass

I logged into the portal of the People's Association using my SingPass. I was surprised that the SingPass works well. I used to have problems previously.

Singpass is a password issued by an government agency to identify each Singaporean. You can use it for several government agencies, such as the Central Provident Fund.

I shall use Singpass regularly from now.

Invest in the money market

Dear Mr Tan

Please explain the difference between this fund & share. I have to buy @ bid price which is very much like buying share from the market. I do not understand how the yield of 3% is calculated. Some good shares give a better dividend yield.



The money market fund is invested in money market investments, such as short term bonds and certificates of deposits. These investments currently yield about 3% per annum.

When you invest in the money market, you buy units at its unit price (or net asset value). The unit price changes everyday according to the value of its underlying investments.

If you measure change in the unit price over a few weeks, you will probably find that the annualised yield is about 3% per annum. This yield may change according to the underlying investments.

The manager of the fund will take a small charge (usually less than 0.5% per annum) from the fund. This charge has already been deducted to give you the net yield as reflected in the unit price.

I understand that the money market fund managed by NTUC Income has the following features:

* annual charge of 0.25% per annum (already deducted from the net yield)
* no transaction cost or sales charge when you buy or sell the units.
* a policy fee payable on the flexi-cash policy (invest in the money market fund)
* currently, a net yield of about 3% per annum.

To be sure, you should call NTUC Income and talk to their consultant, or visit their website.

Insurance planning for the family

Dear Mr. Tan,

I have been visiting your blog and your website to get some ideas on insurance tips.

I am from a middle income family. Both my husband and I work. Our combined income is about $7,000 per month. I have two young children.

I plan to buy term policy for my husband and myself, and perhaps some investment linked plans for my children. Is the investment linked plans suitable to save for their education funds?

Why do people opt for decreasing term if the sum assured reduces every year? It does not sound reasonable to opt for decreasing term just because the premium is slightly lower?


I prefer the investment linked plan to save for the child's education fund. You can read this FAQ.

I recommend the decreasing term assurance as the premium cost half of the normal term. As your savings build up each year, your need for insurance cover reduces correspondingly.

However, if you wish to keep to a level term, so that the total amount of the term and savings increases over the years, it is also a good idea. It is all right to pay twice the premium for a level term, as the premium is quite low anyway.

Adequate insurance

Hi Mr Tan,

Under Financial Plannign for young, it is stated "If you have dependents, you should have life insurance for 5 to 10 years of your earnings. If you earn $30,000 a year, you should have life insurance for $150,000 or more."

Why is the life insurance amount tied to earning instead of spending? For e.g. if one earns $30,000 a year but spends only $15,000 a year, does he need to have $150,000 or more insurance? What is the assumption make here? Assuming that most people spent all their income?



You are right. The amount of life insurance should be tied to spending. But, for most people, the spending is quite closely related to the earnings.

Some people, however, think that it is the loss of earnings that should be insured. So, both formulas are about right.

Tuesday, May 22, 2007

How To Get A Good Research Job

Dr. Lee Kum Tatt spent his life promoting and doing various types of research. He tells us that the joys he got from his work far outweigh the price he had to pay. Read the articles on this subject in his blog.

FAQ: Save for your child's education

1. How much should I save for my child's education?

It depends on the amount that you can afford to set aside, and your plan for your child's education. Most parents set aside $100 a month for a child, but some save as much as $500 a month.

2. Will the saving be adequate to pay for the total cost of the university education?

If your child can be admitted to a local university, the cost is affordable and is largely subsidised by the government. The quality is among the best, by international standards.

If your child wish to or have to go overseas , there are many universities to choose from. They offer a wide range of degrees at various budget. You can find one that meets your budget and your child's interest.

Your child may be able to qualify for a scholarship. Many students can find part time work to pay for their education. Some universities offer a student loan.

You should set aside some savings for your child's education. If it cannot meet the full cost of the education, it can at least meet part of the cost. This will be helpful to your child.

3. How should I invest the savings?

You have the following choices:

* buy an endowment plan (also called an "education" plan)
* buy an investment linked plan, supplemented with decreasing term insurance

4. Should I buy an endowment plan?

Under this plan, you have to pay a fixed monthly premium for a specified number of years. The plan pays the sum assured plus bonuses, on the maturity date or on the premature death of the parent.

In today's environment, the endowment plan may give a yield of about 4% per annum (for illustration only). For a monthly saving of $150 over 18 years, the maturity sum is projected to be $52,000. This projected sum comprise of a guaranteed portion (about 80%). The remainder depends on the bonuses, which is not guaranteed.

5. Should I buy an investment linked plan?

Under this plan, you can set aside about 3% of your savings to buy a decreasing term assurance and invest the remaining 97% in an investment linked fund. This is likely to give you a higher yield.

After deducting for the cost of the decreasing term insurance and the cost of investment, the investment-linked plan (invested in a balanced fund, with moderately low risk) is likely to give 10% to 15% more than the endowment plan. This could mean $5,000 to $8,000 more for a monthly saving of $150 over 18 years.

The investment-linked plan can give a better return, as its charges are generally lower than an endowment plan.

This plan also give the flexibility to the parent as follows:

* change the monthly savings
* change the maturity date and period of savings
* withdraw the investment partially, and in stages
* stop saving for a temporary period, and make up at a later date

These changes can be done without any penalty.

6. What is the duration of the saving plan?

If you buy an endowment plan, you have to fixed the duration in advance. Most parents will take a plan to mature at a specified age for the child (say 18 years).

If you buy an investment-linked plan, you do not have to specify the duration in advance. You have the flexibility to continue the plan for as long as needed. You can also make an earlier withdrawal, partially or in full, without any penalty.

7. How much should I insure under the investment-linked plan?

You can decide on the amount of insurance. If you intend to save $150 a month over 18 years, you can insure for $32,400 (i.e. total saving for the period) under a decreasing term insurance plan. The amount payable in the event of premature death of the parent will decreasing gradually with each year. As the accumulated saving increase yearly, the total sum will most likely be higher than the payout under the endowment plan.

As the premium is so low, it is better for you to insure for a higher sum, say $50,000.

8. Can I get a higher return under the investment-linked plan?

You can invest in a global equity fund and earn a higher return over the saving period. You should choose a large, well diversified, low cost fund.

Although the fund has higher volatility (i.e. the value of the investments can fluctuate significantly at any point of time), you have the option to time your withdrawal to earn a better return.

By taking some risk, you can a higher return, say up to 20% more. This can give up to $10,000 more, for a monthly saving of $150.

9. Why does the endowment plan give a lower return?

An endowment plan give a lower return compared to an investment-linked plan for the following reasons:

* a higher amount of commission is paid to the agent
* the insurance company takes a larger share of profits
* after buying the policy, the policyholder is locked into the contract for many years

An investment-linked plan gives a better return, as the plan is transparent and flexible. The insurance company has to offer competitive terms all the time.

Structured deposit in foreign currency

Dear Sir,

I saw your blog on structured deposit. I had observed our local banks' structured deposits are out there to make a lot of money, in particular one bank which I really dislike.

I have help my parents to invest wrongly in one of the structured products with formula involving CMS (interest rate swap).

However, I had satisfactory experience with foreign banks. Their rates are competitive and the structured products are better. I had one with a formula with CMS, but almost 3 yrs till today, I still get 6 percent coupon payment, but suffered forex loss (mainly I did not hedge the investment).

I obtained almost 10 percent on my investment with a foreign bank. Luckily, I sold off recently before it plunged a few percent (due to credit rating).

I am thinking if you are writing a investment related book ? I had a good working experience with my friends in United States and we had published a book under John Wiley. I wish to thank you for working on your blog. I like to read your articles very much.



If you invest in a foreign currency product, you can get a higher return (as interest rates on foreign currency deposits are higher than Singapore dollar deposits). You stand the risk of foreign currency loss.

If you hedge this risk, the return will be reduced to almost the same as a Singapore dollar deposit After deducting the charges on the structured product, you will be worse off.

You can only get a higher return by making the right timing on the foreign exchange, but this is uncertain.

Do what is best for the customers

Mr Tan

You build a big and successful business for NTUC Income. In growing the business, did you adopt the same approach as other CEOs in facing the real challenges, and seizing the opporunities?



The business environment, challenges and opportunities are similar. But,I adopted an approach that was quite different from most other CEOs.

My starting point is: what are the real needs of our customers? how can we best serve these needs?

By putting customers first, I was able to build a large business and still make it profitable. We marketed products that were always the best for the customers at that time.

We did not have rely on "hype" to market the products. We keep the products simple and educate the customers truthfully on the features of the product.

We could still run a profitable business, by keeping our expenses low and avoiding wasteful expenditure.

In most other businesses, the CEO's primary focus is to meet the sales and profit targets - at all cost.

These CEOs might be forced, under competitive pressure, to adopt unethical practices. They may market products that make profit for the shareholders, but are not to the benefit of the customers. For example, some structured products introduced recently fall into this category. Some even manipulated the accounts.

I hope that CEOs of all businesses can adopt the approach of, "do what is best for the customers".

Increase value for all stakeholders

Many companies have a focus, "to increase shareholder value". They aim to maximise the profit, so that the share price goes up exponentially. This is the best way to increase the sharehbolder value.

I hope that more companies will recognise that the importance of all stakeholders:

* customers
* employees
* shareholders
* the community

The focus should be to increase the total value to all stakehholders, and to distribute the rewards fairly.

This can be achieved by:

* give good value to the customers
* pay good wages to employes
* pay good dividends to shareholders
* contribute to the community

How is this possible?

* by improving efficiency
* by cutting down on wasteful activities
* by offering good products that are valuable to customers
* by operating honestly and ethically

ETFs sold by Vanguard Mutual Group

Vanguard offer 4 bond ETFs and 27 stock ETFs. The stock ETFs cover different segments, such as large cap, mid cap, small cap, speciality, sector and international.

An ETF (exchange traded fund) is a fund comprising of many investments. You can trade the units of the ETF in a stock exchange at a specific price. The trade will be done, if there is another person willing to trade with you at that price.

A mutual fund is also a fund comprising of many investments. You will buy and sell based on the net asset value computed by the fund manager at the end of the day.

The Vanguard ETFs are large, well diversified, low cost funds.

The expense ratio for most of these ETFs are around 0.11% (yes, one tenth of 1%). The lowest is 0.07% and the highest is 0.28%. (By contrast, the actively managed funds in Singapore have an expense ratio of 1.5% to 3.5%.)

Some of the ETFs have more than 3,000 holdings. This is clearly a well diversified fund. Most of them have more than 200 holdings (which is quite well diversified).

Here are Vanguard's key advantages:

* indexing expertise, with 30 years of experience
* low expense ratio
* trusted name: competitive performance, low cost and high ethical standards.

I found that I can buy and sell the Vanguard ETFs through POEMS (offered by Philips).

Leaving the assets to the family

Hi Mr Tan,

I hope that you are enjoying your visit to America. I like your tips on investment and insurance, especially for a young person. What are your ideas about leaving the assets to the family, for a person who has enough for his or her own needs?



For a person who is very well off, I suggest the following approach:

1. Set aside sufficient funds to take care of your own future needs, e.g. cost of living and medical care. Buy a life annuity to provide a monthly income.

2. Set aside an additional lump sum to be used for emergencies. Invest in a fund to earn an good rate of return. Make sure that it can be withdrawn without penalty.

3. Transfer some of the assets to your children and grandchildren now. It will be more useful to them now, rather than many years later. If you do not wish to make a lump sum transfer, you can buy a fixed term annuity to transfer this sum over 5, 10 or 15 years.

4. Be generous. Donate to the community and to charity.

Monday, May 21, 2007

Recognised by my voice

I went to Grassroot club with a friend.

Someone approached me, "Are you Mr Tan, formerly from NTUC Income?" He was not sure about my appearance (as I was dressed casually and wore glasses). But he recognised my voice.

He had attended my talks before. He said, "You speak slowly, carefully and clearly. I find it easy to understand you."

Ths is the first time that I was recognised by my voice.

Why is CPF inadequate?

Hi Mr Tan

We used to have a high saving rate to the CPF. Why is the saving inadequate for people to retire?



The CPF system encountered the following shortcomings during the past years:

* too much savings were invested in expensive property
* interest rate on CPF was quite low, at 2.5% p.a.
* the contribution to CPF were cut on a few occasions to reduce business cost
* when CPF was liberalised, many members made bad investments in financial products with high charges

These shortcomings have been recognised in recent years, and are now being addressed.

I wish to give some tips for young people on how to invest their CPF savings and also set aside an 10% to 15% of the earnings as additional savings for the future. Read my tips in this FAQ.

Singaporeans have to work 10 years longer

Dear Mr Tan,

Yes, I think what you say is correct. It seems there is no choice but for people to keep working in order to fund those extra years of life. It is part of the "new reality" that we should learn to accept.

It is not really anyone's fault. It simply results from our longer lifespans.

Another point is that it doesn't necessarily have to be a negative thing. Since many people are still energetic and vibrant in those 10 years -- from age 55 to 65 -- they will probably want something useful to do. (Work gives them that chance.)

In fact, many rich people keep working eventhough they don't have to.

Work gives a sense of accomplishment that is very fulfilling. It adds meaning to life that you don't get if you retire to watch TV all day.


Have enough money to retire gracefully

In his letter published in Today, the writer said, "It is sad that a worker in Singapore, after working for 35 years does not have CPF money or savings to lead a retired life, even though he has lived frugally all his life".

Another person posted this strong view in my blog:

"Why should older workers be working? They should be at home looking after their grand-kids. What kind of Singapore have we created where the dreams of the lower class have been smashed?"

We have to recognise an important fact. Life expectancy have improved by about 15 years, during the past forty years. People should now be working at least 10 years longer, before they retire.

In the past, people think of retiring at 55 years. Today, we have to think about retiring at 65 years. We need to work longer to fund a longer period of life after retirement.

High expense ratio of structured products

Dear Mr Tan

I enjoy your posting on your meeting with Mr Bogle of Vanguard. You said that structured products are being sold in Singapore with high expense ratios (which are not disclosed). The end investors get a yield of 1% p.a. or lower after investing for 3 to 5 years.

Can you give some examples?



I suggest that you read the following FAQs in my website:

Avoid Structured Products

Structured Investment Products

Consumer Protection - Financial Products

21 May 2007

Today Paper

Paul Chan Poh Hoi wrote in Today paper, "I see a paradox in the spirit of the Consumer Protection and Fair Trading Act".

Under this Act, several professional bodies, such as the medical association, are asked to dump their fee guidelines and let the fees be decided by market forces.

Mr Chan thinks that fee guidelines "may not necessarily be a bad thing". Without fee guidelines, consumers may be overcharged for the services, especially if the fees are not transparent. "Unwary consumers may be put at a disadvantageous position."

I agree with the views expressed by Paul Chan.

I can quote a similar situation with financial products. Under the "let the buyer's beware", a financial institution is allowed to sell almost any product, so long as they provide certain information about their product.

In many cases, the disclosed information is inadequate for consumers to make a right choice.

Some of these products require the investor to bet on how many investment counters or indices will reach certain levels over a number of years, for which they may make a loss or have a large proportion of the gain taken away. Even an actuary (like me) cannot assess the probability and the fairness of the transaction.

There are also unspecified charges that are taken away from the investment fund to pay the various parties that design, market and manage the product. The structuring do not create any value to the investors collectively. The charges eat into the total return from the investments.

I hope that the regulators can take a more effective approach towards consumer protection.

Tan Kin Lian

Read more about the structured products.

Critical illness coverage - expensive

A policyholder was sold a critical illness coverage at age 55. She paid $17,000 in premium for 6 years and received a total of $9,000 when the policy was terminated. The cost of the insurance was $8,000 for 6 years for a coverage of about $45,000.

She decided to terminate the policy after finding out that the non-guaranteed benefit (i.e. bonus) had reduced by 75% from the initial projection.

She asked:

1. Should the agent recommend this coverage for me, when I was already 55 years old?
2. Did I make the right decision to terminate my policy after 6 years?



The agent was required to assess your needs and to offer a suitable plan for you. It depends on your needs, and the discussion that you had with your agent.

If I were in your position, I would probably have taken the same decision to terminate the policy. This plan is costly and the cost has increased due to the reduction in the bonus.

Make it easy to move to a new home

In many countries, it is common for a person to move to a new home, if he were to work in another town.

This concept is not yet popular in Singapore.

With traffic congestion, it may be useful to encourage this concept. This may be more suitable for singles and families without children.

To make this possible, a few changes have to be introduced:

* reduce or remove the stamp duty for purchase of property
* make it easy for children to change schools, to be near the home.

I hope that these suggestions can be considered. It will lead to a better quality of life. It will also reduce traffic congestion.

Skype - Online

When I am on my computer, Skype is automatically loaded. Anyone who has my Skype address will know that I am "Online". They can send an instant message to me.

If I wish to make an appointment for a Skype meeting, I ask someone to log into Skype at a certain time. They can see that I am "online" and can contact me by Skype. We can use instant message or talk over Skype.

Skype is free, if used computer to computer. This is useful for international calls.

Appointment for a telephone call

In the past, many people arrangement to meet face to face.

I find it better to discuss over the telephone. We can send materials by e-mail and arrange a time to have a telephone call (like making an appointment for a meeting).

This is more productive. It is a new way of working.

Personal Email account

I sent an e-mail to my daughter in her company e-mail account.

The e-mail was delivered after a few days. It appears that the company's email server has some mechanism to block certain types of incoming mail that appear to be "personal" in nature.

I asked my daughter to open a Gmail account. This is for her personal mail (ie not connected with her business).

I suggest that each person should have a personal e-mail account with Gmail, Yahoo or hotmail. Use this for your personal e-mails.

Jobs for Seniors - Seah Leong Khai

In his letter published in Today paper, Seah Leong Khai said that the proposed law to get employers to rehire workers beyond age 62 may not make business sense from a business point of view.

If required by law, most companies will rehire them on a part-time or temporary basis, and on unimportant jobs "at lower rates of pay and benefits" to justify the lower productivity and at higher operating costs.

I agree with this point of view.

However, I wish to find ways to enhance the value of older workers. They bring the following benefits:

* experience
* maturity
* positive work attitude

They may be able to bring this value to their current employer or to a new employer (ie to make a change of job).


Dear Mr Tan

Why is the website for your grand-daughter called Pupsik?



Pupsik is a Russian word for "baby doll". Su Ling decided to use this name for the website for her daughter, Vera. Vera's father is Vitali, from Russia. Vera is half Russian.

Su Ling wanted to share her experience in raising Vera. She also gives tips on the products that she buys as a mother. She says that her blog will be interesting for young moms and dads.

Sunday, May 20, 2007

How to overcome myths

Dr Lee Kum Tatt tells me that Benjamin Franklin is one of his hero scientists who inspired him to do many of the things he did in his life.

He was deeply involved in the building of the science infrastructure Singapore needed in the early days of its development. He actively participated in the establishment of organizations to promote science and technology for national development. He launched the quality movement and R & D activities.

He encountered obstacles in the process but he managed to get many people to work with him.

You can read his blog and learn how he overcame myths that stood in his way.

Tan Kin Lian

19th May 2007

Personal accident insurance

Dear Dr Tan.

Firstly I would like to say good job on your blog, truly inspiring.

Term life in Malaysia, somehow seems to be quite expensive. For RM100,00 protection (living benefit), I need to pay about RM67 per month.

This seems to be much more expensive in comparison to other countries, i.e. USA and Singapore.

I decided to consider a personal accident plan, which looks the same as a term life, but covers accidental death only.

Do you have personal accident, like in Malaysia? What is your view about buying a personal accdient plan, compared to a term life?



Personal accident plans are sold in Singapore as well. The premium is less than $100 per annum, for a cover of $100,000. It covers death and permanent total disability caused by accidents.

In my view, a personal accident plan is suitable, especially for younger people.

As a Malaysian, you can buy a term life in Singapore, if you wish. You can also buy it from overseas.

Investment linked products in India

I met an actuary from India.

He told me that the regular premium investment linked products now sold in India have 95% allocation. This means that 95% of the premium is invested from the first month. Only 5% of the premium is used to pay commission to the agent.

Although there is a penalty on early termination, the amount of the penalty is small as the agent get a maximum commission of 30% in the first year.

I was surprised.

After being on the market for more than 15 years in Singapore, the investment linked products still have extremely high charges. More than 100% of the premium is taken away during the first two or three years. The exception is NTUC Income, where the charges are much lower than the market.

Consumers in Singapore are paying too much for their investment linked products. I hope that, when the consumers shop around for a better deal, the sales charges in Singapore can come down to a lower level.

Blog Archive