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Jul 3, 2011
Planning for plenty

People who have a financial plan are much richer than those without: Survey
By Lorna Tan, Senior Correspondent

It is logical to assume that if you have a financial plan in place, you are likely to amass more assets than those who have not started planning. The question is how much more.

According to HSBC's latest survey, planners have retirement assets averaging $153,000 or nearly twice (191 per cent) the assets that non-planners have, which is $80,000.

In fact, those who both plan and seek financial advice benefit far more with over 2 1/2 times or 264 per cent ($180,000) the retirement assets of those who have not planned or sought financial advice ($68,000).

Conducted last December, HSBC's The Future of Retirement study polled more than 17,000 people in 17 countries. About 1,000 responded from Singapore.

Not surprisingly, the study showed that the benefits of having a financial plan include possessing a more positive outlook and feeling less stressed about the golden years.

Said HSBC Insurance chief executive Walter de Oude: 'What emerges strongly from the report are the very real benefits of financial planning and the predominant need for Singaporeans to have financial security in retirement.'

One of the top concerns of respondents from Singapore was the cost of ill health. This is not surprising as the cost of treatment and hospitalisation is trending up, noted Mr Victor Wong, director of wealth management at Financial Alliance.

For those who can afford it, his advice is that Singaporeans consider owning a hospitalisation and surgical Shield plan, complemented by a rider that takes care of the deductible and co-insurance portions of a hospitalisation bill.

'A lot of people postpone getting such a plan because they are currently insured by their company, and think they will have time to enrol into one later. But they might develop some medical conditions in the meantime which make them uninsurable by then,' he explained.

Broadly, 58 per cent of people here have financial plans while the balance of 42 per cent do not.

The survey categorised retail investors into four consumer types: non-planners who do not seek advice (28 per cent); non-planners who seek advice (14 per cent); planners who rely on themselves (19 per cent); and planners who seek professional help (39 per cent). Out of the four, the latter group is best off financially, with the largest retirement assets.

The main reasons cited by those individuals without a financial plan in place were that they lacked sufficient funds to do so (62 per cent) or they did not know how to go about making a plan (23 per cent), said HSBC.

It is worrying that people in their 30s form a significant group among those without a financial plan and who do not believe in it. This group, who will benefit most from planning early for retirement, is potentially missing out on the opportunities that having a financial plan in place can bring.

The survey found that the majority of Singaporeans expected their Central Provident Fund (CPF) monies to be below $150,000 when they retire. In reality, this is much lower as CPF members aged 50 and above have a balance of only $62,000 on average.

At the same time, Singaporeans estimate that they will need an average monthly retirement income of $3,000. But to achieve this, most would have to supplement their CPF savings with other savings and/or investments.

Assuming an inflation rate of 3 per cent, Mr Wong worked out that the desired monthly retirement sum of $3,000 is equivalent to $6,281 in 25 years' time.

If a 40-year-old male has set aside the CPF Minimum Sum to take advantage of the CPF Life scheme, he will get around $1,000 (today's dollar terms) or $2,093 monthly in 25 years' time. To address the shortfall of $4,188, Mr Wong suggested a combination of regular savings via insurance products and a portfolio of unit trusts.

For instance, the 40-year-old male can put aside $500 in monthly premiums for an NTUC Income endowment, Regular Premium Sail, for 20 years till he turns 60. At age 65, he can potentially receive $1,086 monthly (based on 3.75 per cent projection) for the next 20 years. The remaining shortfall of $3,102 can be bridged by having a regular savings plan that channels the savings into a balanced portfolio generating 6 per cent per annum.

Assuming $1,000 goes into this plan monthly, it will accumulate to about $693,000 when he reaches 65. This translates to a monthly cashflow of $2,887, based on the assumption that the $693,000 continues to earn 3 per cent per annum, offsetting the 3 per cent inflation rate.

Another retirement income insurance plan that can be used to supplement CPF savings is HSBC's retirement income plan SecureIncome55, which provides a monthly retirement income for 20 years from age 65, said Mr de Oude.

In this case, a 40-year-old who saves $1,400 a month on SecureIncome for 10 years will receive $1,600 every month from the age of 65 to 85.

When it comes to seeking professional financial advice, Singaporeans have different preferences. Almost half or 49 per cent of Singapore respondents prefer to take advice from an insurance firm while 30 per cent use a financial adviser who is not tied to an insurer. About 12 per cent prefer to approach a bank, while the rest would approach fund managers, accountants or lawyers.

On the question of whom they look to for help, many said they would rely on their own financial calculations (51 per cent) and on informal advice provided by family and friends when making financial decisions (49 per cent).

Another upcoming trend is the rise of social media as a means of gathering financial information. About four in 10 respondents here use online financial websites, and a further 25 per cent use informal online sources such as chatrooms and message boards when making financial decisions.

The use of the Internet is much more prevalent among younger age groups and is also preferred more by men than women.
It's not very difficult to find the report:

What I thought would be more newsworthy is the finding that for people in Singapore thinking that they will do better than their parents' generation in retirement the 'net score' is 17%, which is worse than Mexico, South Korea, Hong Kong & Malaysia. This is pretty odd when we have the highest proportion of HNWI in the world. And the top 2 reasons are (i) jobs and careers are not secure, and (ii) my generation is not saving enough. (ii) is odd because of one of the world's highest savings rates because of the CPF mechanism.

Anyway the way HSBC came up with their tagline 'the power of planning' is critically flawed. Worse is the BT article that just regurgitates their examples and quotes and does not even challenge the findings. On the back of a Minister publicly pointing out mistakes in their analysis of property developer profit margins just 2 days ago, it's a sign of another low in our business journalism standards. I'm too lazy today to challenge BT's recommendations here on putting money in 'retirement income plans' that are generally much better for the vendor than the saver.

While there's value in financial planning if done by someone both honest & competent, HSBC here confuses the distinction between causation & correlation. The study does not answer the $200,000 question: do people get rich because they seek 'professional, insurance industry endorsed' financial advice, or do people seek financial advice after they've reached a certain level of income & wealth?

With 1,000 respondents, it is simple enough to break down the survey data into age, wealth, and income. The fact that HSBC chooses not to do it creates enough suspicion that the value of the 'financial planning' that they're trying to promote is highly limited / dubious.
Without the age group and annual income data of the respondents correlated to the data, the above article could actually mean either,

1) Those with higher annual income (higher chance of more savings => higher financial assets), or/and
2) Those who are older (higher chance of more savings => higher financial assets)

are more likely to engage a financial planner.