Saturday, August 11, 2007

Invest my retirement savings

Dear Mr Tan

I have recently retired from work and taken out my money from the CPF.

I have a large sum of money kept in the bank earning a miserable interst rate of 2%. Is is safe for me to invest in a unit trust or investment fund to earn a higher return? What is a good time to invest in the stockmarket after it has corrected?


You can read this FAQ.

My preference is:

* invest $200,000 in a life annuity
* invest the balance in a large, well diversified fund

As the global stockmarkets are still in turmoil, it is better to keep your money in the money market fund (to earn 1.5% to 2%). When the stockmarket has corrected to a lower level, you can invest in the combined fund.

You should talk to an insurance adviser.

Buy a modest amount of critical illness cover

Dear Mr Tan,

I really enjoyed your blog. You are very knowlegeable not only in terms of insurance but also investments. Contrary to what other people say, I think you are one of those expert investors.

I would like to ask your opinion about the i-term insurance. I attempted to buy one but was distracted/dissuaded by the NTUC advisers.

The reason given was there was a difference in the definition of terminal illness as described in the I-term insurance and critical illness in other insurance products.

The insurance payout is for terminal/"sure death" illness in I-term insurance. But the definition for "critical illness" is less "serious illness".

Is this true?


The critical illness policy provides a wider definition. If you contract a critical illness, the sum assured is payable immediately. The premium for critical illness is more than 10 times of i-term (and 20 times of decreasing term).

My personal preference is:

* buy decreasing term insurance to provide the death and permanent disability insurance (restricted cover).

* invest the difference in a low cost, well diversified investment fund.

* buy a medical insurnace plan (like Medishield) to cover the cost of treatment of critical illness. If this is insufficient, it can be supplemented by my savings (which will be quite large after 10 or 20 years)

* (optional) - buy critical illness cover for $50,000.

I hope that this tip is helpful to you. Read this FAQ to get a comparison of premium rates.

Friday, August 10, 2007

Subprime mortgages cause global stockmarkets to fall

Dear Mr Tan

Why are the subprime mortgages in America causing problems to the global stockmarkets? Surely, the economy in Asia is growing strongly. Why should it be affected by the mortgages in America?


The subprime mortgages were issued in America. A batch of mortgages are put into a portfolio, called an "asset backed security". This portfolio is divided into different tranches. The most secure tranches were rated AAA. The BBB tranche is high risk. The least secure are the equity tranche.

The investment bankers take the BBB tranches of many portfolios and put them into a new portfolio, called a CDO (collateralised debt obligation). The CDO is again issued into several tranches, from AAA to equity tranche.

The AAA tranche of the CDO actually comprise of many BBB tranches of the ABS (which are high risk). These CDOs are sold to funds in Europe and Asia.

When the American property market falls in value, many of the subprime morgages defaulted. This affects the BBB traches of the ABS and nearly all of the tranches of the CDOs. The AAA and AA tranches of the CDOs have falled in value, by a lot.

Many banks invested in these CDOs. When they fall in value, the banks have to book the losses. This caused their stock prices to fall. This is affecting the stockmarkets around the world.

Some of the money raised by the structured products sold in Singapore were also invested in the CDOs. They have also fallen in value.

There is nothing much that the investor can do about these structured products. If they withdraw now, they will suffer large losses. They can only wait for the maturity date, and hope that the market would have recovered.

If you read some of the structured products, they said that the investor may lose part or all of the principal. It can happen. Let's hope that it does not.

Thursday, August 09, 2007

Regular premium unit trust

A financial adviser told me that he sells regular premium unit trust with a front end load of 3%. There is no no additional charge that takes away 6 to 18 months of the savings (unlike a regular premuim investment-linked plan from a life insurance company).

If the monthly saving is $100, the charge is only $3. The adviser earns a commission of only $3.

Due to the low commission, he is not able to spend time to visit the client. He speaks to them over the telephone and sends the form by mail. He receives the completed form by mail.

He advises his client to invest their Central Provident Fund savings, from the ordinary and special account, into unit trust.

It is advisable to invest in a unit trust, if the annual expense ratio is less than 1.5%. It is better, if the fund has an expense ratio of 1% or less.

Dr Money has some low cost funds listed in his href="">website. I shall ask him to cover some of the low cost unit trust.

When you buy a ILP, ask about the additional charge. Alternatively, you can ask if 100% of the regular premium is "allocated" for investment. If the allocation is less than 100%, the difference is the additional charge (which may be deducted over many years).

Pooling of Risk under a Life Annuity

A life annuity allows all the participants to pool their risk and guarantee the an attractive payment for the lifetime of the annuitant.

Someone argued in my blog against buying a life annuity. He advocates keeping the money in the CPF and drawing it out over 40 years. He does not expect any annuitant to live beyond age 100.

A minimum sum of $99,600 at age 55 will accumulate to slightly more than $130,000 at age 62, assuming interest at 4% per annum.

If you draw down this sum of $130,000 over 20 years (and you continue to earn 4% per annum), you can receive $813 a month. If you participate in a life annuity, you will be able to get this sum payable for a lifetime, as the average lifespan is 20 years. Those who die younger leave behind the balance of their capital in the pool to continue the payment to those who live behind 20 years.

If you wish to keep the money in your personal account, and you want to draw down the sum of $130,000 over 40 years, you can receive only $558 a month. This is a reduction of 32% (compared to $813). There is no pooling of risk. On death, there is a balance in the account that can go into the estate.

Which is better? $813 a month (with pooling of risk) or $559 a month (with no pooling of risk)?

Note: At present, no life insurance company is able to guarantee a payout of 4% per annum, as the return on government bonds is less than 3%. If the Central Provident Fund provides the life annuity and pays the guaranteed 4% per annum, they will be able to pay out $813 over a lifetime.

Buy a life annuity earlier

Dear Mr Tan,

I see from you "Financial Planning for Seniors" that I can get a higher payout, if I buy a life annuity at an older age.

Do you advise me to draw down on my other savings first, and buy the life annuity later, after my other savings have been depleted?


You can read section 9 of this FAQ to get some indicative figure about the amount of your life annuity, based on different entry ages. The annuity payout will increase each year, based on the bonus that is declared by the insurance company (in the case of a participating annuity).

The yield on the participating annuity is about 4% to 4.5% per annum, inclusive of bonus (which is not guaranteed). If you find this yield to be attractive, you can buy your life annuity earlier.

If you are able to earn a better return from other investments, you can wait and buy the annuity when you are older.

If you are not investment savvy or cannot take risk (e.g. if your saving is just adequate for your future needs), it is better to buy a life annuity earlier.

SMS Marketing

Are you involved in marketing? There is a new way of marketing that can get a quality lead for a low cost. It involves sending a SMS to targetted customers, based on their profile.

It will also give an attractive benefit to the targeted customers - which can be supported by lower marketing cost.

More details are shown in this FAQ.

Customer friendly Call Center

Do you find it frustrating to get through the call center of large organisaionts, e.g. banks, credit card, telephone companies, airlines, government agencies?

Most of them have a telephone system that require the customer to press many buttons and listen to many options, before the customer can talk to a person. Quite often, the customer pressed the wrong button and got lost.

I have experience in setting up a call center that operates differntly. It won the world best award for "innovation technology". Here are ten tips on how a customer friend call center should be organised.

It gives a better customer experience, and still keep down the cost of handling the customer enquiries.

Do you like a call center that is operated on the 10 tips?

Tuesday, August 07, 2007

Online purchase of insurance in USA

The population of USA is 300 million. 70% have internet access, or 210 million.

36% have looked for information on insurance during the past 24 months. 6% have bought insurance online.

The most popular life insurance products are:

* life insurance
* disability insurance
* long term care
* critical illness
* annuity

Withdraw from Combined Fund

Hi Mr Tan

I have taken up the combined fund from NTUC Income. I am now investing a part of my monthly earnings.

I want to know. If I need money to pay for my car or flat, can I withdraw from the combined fund? Are they any penalty?


You can withdraw from the combined fund based on its bid price. There is no penalty.

However, when you invest in the combined fund, you have to pay at the offer price, which is 3.5% higher. This cost is already deducted upfront.

If possible, try to avoid withdrawal and re-investment, as you have incurred unnecessary cost. It may be better for you to take a higher loan and to make a higher repayment (including a temporary cessation of your savings into the combined fund.

You can read this FAQ on Financial Planning for the Young.

Earn 4% on your CPF retirement account

Dear Mr Tan,

I have been approached by an insurance agent to buy a life annuity from NTUC, using my CPF minimum sum. I have just passed 55 years. What do you advise?


You can read paragraph 3 of this FAQ on Financial Planning for Seniors.

As CPF is paying interest at 4% per annum on your retirement account, it is quite attractive. You should keep your money there.

You have additional savings that can be used to buy the life annuity.

How to get a higher return

Dear Mr Tan

I have a large sum of money to invest. Bank deposit pays only 1.7%. If I lock up in a government bond for 5 or 10 years, I only get about 2.7% per annum. This is too low for me. Is it safe to invest in the stockmarket at this time?


I suggest that you read my FAQs. Choose one that is relevant to your situation.

If you are invested for the next 10 years or more, it is better to invest in a exchange traded fund (like the STI ETF), or in a low cost investment fund (like the combined fund from NTUC Income). There may be other suitable funds or investments. You can talk to an adviser.

If the stockmarket corrects further and reaches a lower level, it will be a good time for you to make a long term investment. You can read my FAQ about how to manage risk and get a better return.

Notify consumer about the high charges

Today Paper

I refer to the reply "the choice is yours, don't let us restrict you" from the assistant director of the Infocommun Development Authority of Singapore (Today, 7 August 1997).

In my earlier letter, I suggested that the telecom firms should be required to notify the customer when their monthly bill reach a certain limit. This is to ensure that the customer is aware of the charges that are being incurred.

The Authority's reply is that the service providers are required to publish their prices, terms and conditions of service, and that they are available on their websites.

I invite the Authority to carry out a survey and find out if new customers, especially the young, are aware about the high charges that they have to incur on some services, for example, IDD calls or roaming charges when they are overseas.

The Authority should also carry out a mystery shopping to find out what information is being given to a customer who subscribe to a mobilephone.

If a consumer to visit the websites of the telecom firms, he or she will be bewildered by the wide range of plans and the lack of essential, consumer friendly information.

Market liberalisation does not help the consumer, if they end up having to pay more, due to lack of awareness of the high charges for some services.

We need some minimal safeguard to protect the interest of the consumer. They have to be provided with clear and relevant information, especially on the charges. They should be notified in time about the high charges that are being accumulated on their bill, in case they were not aware about it.

Tan Kin Lian

Monday, August 06, 2007

Buy a fixed term annuity

Dear Mr Tan,

I wish to transfer a sum of money to each of my children (who are now adults). I wish to do it now, instead of many years later on my death. But, I do not want them to squander away the money. What is your advice?


You can buy a fixed term annuity to make an annual payment to the beneficiary over a certain number of years, say 10, 15 or 20 years. You should be able to get a yield of about 3% to 4% on this annuity.

More importantly, it meets your goal about giving the money to your children, without the risk that they will spend it away within a short time.

Financial Planning Tips

To find out my tips on your investments, you can visit this website.

There are tips on:

- for the young
- for seniors
- structured products
- life annuity

Financial Planning for Seniors (revised FAQ)

I have updated my FAQ on Financial Planning for Seniors. It contains tips on investment and insurance for seniors (i.e. age 45 and older). I hope that you find it to be useful.

Working closer to home

I met a teacher who lived in Pasir Ris and worked in Bukit Panjang. He has to take a long journey each day to get to his school.

There are many schools in Pasir Ris and Tampines, that is closer to his home. Surely, it is desirable for him to work closer to his home?

It will be difficult for the teacher to ask for the transfer. He has to get the approval of principals of his current school and the new school that is closer to his home.

If this exercise is managed on a national scale, by the Ministry of Education, it will be easier for all parties and beneficial in the long run.

There are many teachers and many schools all over Singapore. It will be beneficial if many teachers could be transferred to a suitable school near his or her home?

This exercise can also be applied to other government departments and large businesses that have operations all over the island.

If 20 percent of workers can be relocated to work closer to their homes (without any long term loss of productivity), there will less congestion on the roads and public transport, and a better quality of life.

I hope that this idea can be pursued.

Collapse of bridge in Minneapolis, USA

There are 70,000 bridges in the USA. One bridge in Minneapolis collapsed last week, killing a few people. Some are still missing.

Is this an isolated incident? A bad accident?

Apparently, it seems that the condition of many of the bridges are unsatisfactory. There is a wider problem.

Many years ago, it was considered to be the duty of the government to provide the public works and utilities. There was no issue about the costs (although the government do manage them quite prudently). These public expenditure were considered to be necessary and beneficial.

The priority changed during the past 20 years. The governments tried to adopt business principles, using cost-benefit analysis. Some of the expenditures were reduced, as they were felt to be unnecessary. Some activities, e.g public transport and hospitals, were privatised to be runned by profit-driven entrerprises.

The outcome was a deterioration in the quality of the infrastructure and public services in many countries. There was a focus on cutting costs and increasing profits, instead of the public interest.

I hope that there will be a change in thinking, and that governments will move away from the concept of adopting business principles for public service.

Waiting time for public buses

The Public Transport Council in Singapore has set a standard on the waiting time for public buses during peak periods.

In my view, they should focus on the following indicators:

* getting buses to keep to a schedule
* ensuring that the buses are not over-crowded

In other countries, most buses run on a time schedule. There may be only a few services in a day. The passengers know the expected arrival time and can plan their travelling according to this schedule. The buses are not full, so everyone has a seat.

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