There are two schools of thought in managing the economy. Some economists believing in managing demand and let supply follow demand. Other economists believe in managing the supply and let demand follow supply.
There is a similar choice in financial planning. Many financial planners believe in getting the client to establish the goals, from which the financial plan can be developed. I find this approach to be not suitable, as the client is likely to set goals that are too high, and will setting aside savings that they cannot afford, based on their earning capacity.
I prefer to work on the earning capacity and allocate the proportion to be used for current expenses and the remainder for the future, which includes the purchase of a residential property for own occupation. Based on my analysis, a typical allocation is 50% for current expenses, 25% for property and 25% for retirement. This benchmark allocation should apply to most working families.
If a family has special needs, they may modify the allocation to suit their own situation, but the starting point should be to consider the financial plan based on this benchmark. For example, a high income earnings may be able to set aside a larger allocation for the future, while a low income earner may have to set aside a bigger allocation for current expenses.
The allocation for the future includes the combined contribution (of employer and employee) to the Central Provident Fund. The current combined contribution is 34.5% for most workers. To achieve the benchmark of 50%, the worker has to set aside 15.5% in a personal savings plan. This concept is explained in my book on financial planning.
Tan Kin Lian
Financial planning is not just setting goals and work towards them.As you have said the goals may not be realistic and therefore unacheivable. It is about taking the big picture of all the goals and prioritise them to relate to the clients' circumstances and constrains. The advisers'job is to help the clients manage the expectation too because every financial decision is NOT independent but relative to others.
ReplyDeleteThe role of the adviser is to coordinate all the goals.
Regarding the CPF contribution as part of future retirement, I think most people will have to minus away the portion used to pay mortgages. Unlike what the govt says, having an expensive HDB flat should not make you feel "wealthy". Similarly, the CPF portion going into Medisave should be taken out, as this is purely set aside for medical expenses including H&S plans.
ReplyDeleteFor 36yr old, if he uses all his monthly OA (21%) to service the mortgage, then effectively out of the 34.5% CPF contribution, only the 6% into his SA counts as future retirement funding.
Thus in order to reach the optimal 50% target, he will have to save 44% of his salary in cash every month. I personally only know 2 couples who can do this, and mainly becoz they have no kids and thrifty. They are also middle managers in civil service and hence belong to a rare group of people who do not need to take risk for their retirement funds. Just dump into savings deposits, FDs and money market funds.
Regarding financial planning:-
In S'pore, "financial planning" means creating "needs" for customers in order to entice them to buy high commission koyoks. And financial needs analysis is mainly to find out how much $$$ can squeeze out from the "victims". Those working in banks and insurance companies will know.
Ex-Con
Hi Ex-con
ReplyDeleteThe 50% saving for the future include CPF savings. This is used for housing (25%) and for retirement (25%).
Most people will use the CPF for housing, but they should limit it to 25% of their earnings, so that the remaining, plus the additional non-CPF savings, can be kept for retirement.
Insurance agents do some kind of financial planning , their own planning.
ReplyDeleteEg. a goal to attain MDRT at year end or to qualify for incentive trip to Beijing. The next step is to calculate how much commission to earn from each policy and then how many and then what products give highest commission. Next to identify the victims and then
the presentation on how to con their customers the fastest way.
This is financial planning as known to insurance agents.
All mdrt agents are scammers with only one thing in mind, to con their own customers with high commission products to qualify for mdrt. Check what they sold and I guarantee that they are all useless wholelife and endwoment products.
ReplyDeleteAnon December 18, 2009 1:43 PM is right. Financial planning is planning for their own pockets and not their customers.
Just wonder why people still trust them ? They are well known scammers.
Why people still trust the insurance agents?
ReplyDelete1. they have not come to this blog
2. they are ignorant and gullible
3. some think they know but they really don't know.
4. some pretend to know
5. some are smart aleks
6. some don't know that they don't know
7. they are fools waiting to be fleeced
If consumers are not like the above the insurance agents would have disappeared long time ago.
Even very educated ones fit the above.
No wonder the rich get richer and the poor get poorer.....zero sum game.