By: Derek Lim
My parents are your typical neighborhood folks. My Dad is a cabbie and my Mom a receptionist both in their early 50s. As their son, I don't have much complains except that they do not save. My folks don't earn a lot and are those who will spend whatever they earn. I won't consider them as lavish spenders but rather someone who doesn't keep track on what they spend. They know that they won't be able to afford expensive items but will duly spend on a cheaper alternative. E.g. instead of trips to far away countries like the States or Europe, they will take multiple short trips to M'sia or within Asia.
Though they have some insurance and a partially paid for flat, it is definitely not enough, but yet it gives them a false impression that they can rely on this for their retirement. Though they don't have much liabilities except for the usual utility, phone bills etc but yet their savings are pratically zero. I have spoken to them many times the importance of saving and to have some form of retirement fund but always fall into deaf years. I have work out the numbers for them and explain to them if they could just save $200-$400 a month for the next 10-15 yrs, they will at least have some cushion for their retirement.
I don't earn much and as the only child in the family, I explained the financial strain on me when I have to support both of them and my own family in future. Their reply: "Just send us to the old folks home." I know that they don't want to be a burden to me but that's no way I will do that. Time is running out and I will have to take action soon. I'm thinking of ceasing my monthly house-hold contribution and putting it in their retirement fund.
Old habits die hard. Is anyone facing the same problem as me or do you have a suggestion on how I can make my parents save?
Hi Derek,
Sorry to hear about your financial situation and your parents’ inability to save. In my case, my father used to earn quite a bit (he is retired now) but the problem was that as income increases, spending also increases in tandem (this is known as Parkinson’s Law). Thus, I believe they did not manage to build up sizeable savings despite having a higher than average income. In fact, it’s sad to say that my parents are still servicing a housing loan though they are in their 60’s and their savings are not substantial either (they bought property at the peak of the bubble back in the 90’s).
Actually, at your parent’s and my parent’s age, saving and compounding will not have much effect anymore as they are already pretty old. Perhaps they can consider putting their monies in high-yield investments such as REITS, infrastructure trusts (MIIF or HWT) or shipping trusts ? In that way, whatever savings they have can at least help them to generate a decent return above inflation and ensure a steady cash flow.
My suggestion is for you to (subtly) suggest to them that you can help to “take care” of their money by investing in a safe fund. Give them very regular updates on how their money is doing in order to further build trust. Of course, the major hurdle is in getting them to pass you their money to invest/compound. I recommend safer investments such as bonds and low-risk diversified funds and index funds.
For yourself, since you are younger, you can try investing in good quality blue chip equities which also pay dividend. Also, remember the 3 “I” – Income, Investment and Insurance. Make sure you have the last one because you need to protect yourself and your parents from any unforseen events. After all, you are their sole breadwinner should your dad and mum retire.
Hope this helps !
Regards,
Musicwhiz
Hi Derek,
First, make sure they are covered against hospitalisation.
Second, make sure you are well covered against H&S, death, CI and Disability
Third, help them manage their existing funds.
Try to divide their funds into 3 baskets. One for immediate(1-3yrs), one for short term (3-7yrs), one for longer term (>7 yrs).
1st basket – Put in banks with the highest interest rate or money market funds
2nd basket – Put in slightly higher risk portfolio of 30E-70B portfolio or into single premium endowment funds with around 3.5% p.a over 5-7yrs.
3rd basket – Put in balanced portfolio of maybe 50E-50B portfolio with some exposure into emerging economies and sectors.
Forth, if they are still working, get them to save regularly into a balanced fund with the aim of accumulating more funds for their 3rd basket.
Sounds complicating and tedious? But this is the job of their financial planner who think of solutions for them.
Adrian Khiat
http://akhiat.blogspot.com
Hi MW,
Thanks for the tip and encouragement.
I doubt my parents will ever give me a monthly portion of their income for me to put into their retirement fund. However, I have inform my mom that I’m no longer giving them their monthly household expenses. This money will be use as their retirement fund. I’m looking at 4 methods in planning for their retirement.
1) Insurance – at least the basic health coverage for life.
2) Cash – At least 6 mths of their normal expenses. I would want it to be a year but any more will mean less funds for their investment.
3) REITs and Trusts – UTs are out because though they are a safer instrument, like MW has mention, the time frame is too short for compounding to create a substantial impact.
4) Annuity and CPF – CPF life is an interesting option to consider. However, my Dad has no CPF and my parents does not like the idea of having their CPF lock up again.
The other problem is that I’m not resolute enough. Once the planning is done, I must execute it.
Cheers!
Derek
Hi Adrian,
Thanks for your suggestion but I don’t think I have enough money to divide into 3 baskets because my parents will not be contributing at all. Pardon me for my lack of knowledge but what kind of endowment plan will give me 3.75% p.a. over 5-7yrs because all the endowment policies I have come across so far hardly break even even when it hit the maturity date.
I totally agree that H&S is the most important insurance coverage for my parents and given my limited budget I’m looking at replacing their current AIA health shield to a cheaper one (probably NTUC).
Cheers!
Derek
I meant about 3.5% p.a, not 3.75%. Endowment returns are not fully guaranteed and depends on the performance of the Life Insurance Fund of the company. You may check out TM Asialife Nest Egg(100) and NTUC Income Growth Plan. These rate are for 7 years. Very low risk and some people find it suitable for them.
For 5 years, generally the returns expected are merely 3% to 3.1%p.a
Hi Adrian,
Thanks for the correction. I will look into those 2 policies that you have mentioned.