Wednesday, April 16, 2008

Entering our Senior's mind

I talked to a group of retirees in a coffeeshop recently when I meet up with one of my annuitant client. We discussed about having a fruitful retirement life and how we manage money during this period.
They are around 60 yrs old and in the early stage of their retirement life. They are enjoying themselves by having frequent coffee sessions with friends and lots of fun with their grandchildren. They spend time watching the stock market and going for holiday with their family once or twice a year.

Being a Financial Planner, I natually started probing into how they manage their finance.

From the conversation, I managed to draw some points and I started to get worried for them as we discussed further. So what are my points and worries?

1) They are worried about poor health and the high medical cost
* They reserved quite a sum of money just in case they need it for medical expenses
* They are not sure if they are having the right Medical Insurance. They are confused between a Hospital Expense Insurance and a Critical Illness Policy
Areas that I'm concerned
* By always reserving the large sum of money, they are foregoing the opportunity cost of investing
* By Procrastinating to understand their current plans will only make them disappointed when they realised that the plans they hold don't meet their needs.

2) They underestimate their lifespan
* I told them that Life Expectancy in Singapore is 78 for men and 83 for woman. They laughed at me and told me they don't think they will live that long.
Areas that I'm concerned
* This is dangerous as they are underestimating how long they may live and have a good chance of misusing their money at this stage and outlive their resources.

3) They estimate that their money will be enough
* They assume their money will be enough if they are able to see money in their bank
* They use instinct to estimate how much they need based on how long they think they may live
Areas that I'm concerned
* Their estimation might be wrong. Its dangerous to use instinct. Its wiser to use some scientific and mathematical way of calculation

4) Their Asset Maximization Plan is highly questionable
* On one end, they look for the safest investment such as Fixed Deposit and Capital Guaranteed Structured Products.
* They actually spend lots of time searching for one with highest interest and sign up without understanding of the underlying cost.
* On the other end, they punt their money into the stock market, 4Ds and Totos. They lost their money too easily for the thrill and the greed
Areas that I'm concerned
* They lack a proper investment blueprint. They do not understand the importance of diversification and stablised returns at this stage of their life.
* They rather go for super high risk or super low risk.

5) Their retirement expenditure are not as low as they thought
* Their spending pattern are actually not very far away from their pre-retirement lifestyle.
* They spend more money on holiday, frequent outing with grandchildren, car, food, health products, friends and 4D, Toto, etc
Areas that I'm concerned
* Some people planning for retirement will pluck a figure from the sky and tell us that will be enough. It may not be accurate. I will advise to use a replacement ratio method if my clients is young and expense method if they are near to retirement.
* Projection of 70% to 90% of pre-retirement lifestyle may be okay. Projection of less than 50% may be questionable.


Anonymous said...

Many old people are like that today becuase in their early days they have been played out by the insurance agents and they still don't know.
The agents never help them to plan but sold them rubbish to make money from them. NTuc agents sold them growth and captital plus which don't work hard for them. Now NTuc sell them revosave and make them pay regularly from their saving. Very no conscience, these unscrupulous agents.
You see this happening in the banks too where old people are still being robbed of their saving. Guaranteed products and structured preoducts are sold to them. Their money never grow but got stuck. many take out and lose. Why old people like that today becuase of insurance agents and the bank salespeople.

Khiat Han Hwee Adrian said...

I won't say that an agent is unscrupulous by recommending an Endowment policy like a growth plan. It gives fairly good ok returns if they are able to keep till maturity.

As for revosave plan for our Senior Citizens, I think it may not be very suitable considering that they cashflow are likely negative into their retirement years. It will be worse if they choose the cashback option.