Financial advice for families: how to invest and insure now

As modern parents setting out to create a good financial plan, we need to wrap our heads around the cost of raising a child in Singapore, maintaining our life goals for our families and how to build wealth along the way. But, of course, it doesn’t end there and our financial strategy needs to evolve with our circumstances and where we are in life. In this latest installment in our series of financial advice for families, Lena Teoh, CIO of Prudential Singapore, shares the three stages of life where investment and insurance can change everything.

Evolving with the times

When parents ask me what they need to know about investing and financial planning, and how to prepare for different life stages, I suggest starting with two golden rules:

  • Rule 1: Set realistic plans. Review them regularly.
  • Rule 2: Go over Rule 1. Unlimited times allowed.

The only certainty in life is that there are uncertainties. The truth is, life is anything but stagnant.

Sure, each of us goes through the different stages of life, but do remember that every individual has unique financial and insurance needs – and so financial or insurance plans need to be flexible and customisable to provide the right fit. Every life stage from staying on top of the expense of raising kids, to retirement and estate planning brings distinct priorities that will require different investing or protection approaches. Simply put, when it comes to investments, it is about diversification and asset allocation to balance risks and rewards; when it comes to your family, health, property and income, it is about insurance.

There are many ways to approach this, but we find the following three-phase approach to be simple and helpful when considering how to invest in Singapore, building a portfolio and choosing specific investments and protection coverage.

1. Wealth accumulation phase

This is the earliest stage the financial life cycle, when the focus is on accumulating assets and how to build your wealth. There is a long time horizon and often more risk can be accepted because you have the time to potentially make up any losses you may experience early on.

Accumulation by definition doesn’t happen overnight; it is a gradual and continual increase over time. In this phase, there can often be short, medium and long-term needs that must be considered and the appropriate amount if investment risk is taken. For a short-term investment such as saving to buy a house, you probably want to take on less risk and have more liquidity in your investments. Regardless of the time horizons, you will have to decide what your needs are and how comfortable you are with risk when you consider how to start investing.

Everyone lives his or her life differently, and everyone has complicated emotions about money, so investment and insurance decisions are highly personal and unique to each person. But there are some basic rules that can be applied at this stage for most individuals:

  • To provide liquidity for emergencies, you may want to have a cash reserve in a money market fund or traditional savings account no matter what your life stage.
  • Also, if you can tolerate even a little risk, you may want to have some portion of your portfolio in stocks or funds to help protect your savings from being devalued due to inflation.

Investment Linked Plans (ILPs), savings and endowments, protection and medical insurance plans could also be considered at this stage.

2. Wealth protection phase

This phase is typically when wealth accumulates more rapidly. In this phase, many of life's large purchases and immediate cash needs are already addressed and income is often significantly outpacing expenses, allowing for more rapid building of wealth.

For many, this shift towards wealth protection becomes more pronounced the older you become – though some growth-oriented investments could remain in your portfolios. This is often because during retirement, a financial advisor will likely seek an asset allocation plan that will generate a regular income stream, without impeding on potential for growth. Of course, it also must be an allocation plan that makes the individual as comfortable as possible too.

While in this phase, you will want to regularly evaluate your financial plan to ensure that it aligns with your retirement goals. You may find that you may need to reduce the amount of risk exposure in your investments. Be proactive. Your retirement portfolio is evolving, so do what you can to help ensure its evolution is for the better while assessing your risk tolerance and preserving what you have worked so hard for. Depending on your budget and funds that are available, you may also consider adding par policies (a policy that allows you to participate or share in the profits of the insurance company's common pool of funds) and retirement plans, or even adding on to your medical insurance plans to cover for critical illnesses or disability income.

The time horizon to the next stage (wealth distribution phase) is getting shorter now. This is also a great time for you to even start considering estate planning, making a will in Singapore and inheritance. You can live well and make an impact through your legacy with estate planning strategies designed to help preserve assets. Collaborate with your professional financial consultant to develop a coordinated strategy that outlines to whom, where and how you want your assets to be distributed. Consider the causes you care about most and create a charitable giving strategy that also provides tax advantages.


3. Wealth distribution phase

This phase is signified when earned income has ended and investment income from accumulated wealth is now the primary source for living expenses. This stage is typically called retirement. Longer life expectancies can lead to longer time horizons in this phase.

Some would say this is the phase where one could now enjoy the wealth they have created. Risk tolerance tends to be significantly lower as asset fluctuations are less desirable. However, some risk is often required for potential growth to combat the prospects of the long time horizons in this phase.

Your wealth planning prepares you for all of life’s stages, including the decisions you make about passing along your assets to heirs for their inheritance. A well-constructed estate plan can help ensure that your affairs will be handled in the manner you prefer, by the person of your choice. Estate planning techniques have dramatically changed over the past decade to meet the requirements of more complex laws. No longer is it simply a matter of distributing your assets by making a will. Direct transfers to beneficiaries, trusts, insurance policies, enduring powers of attorney and living wills are all instruments to help provide a more orderly distribution of your estate to your heirs, orderly and timely.

Understanding which phase you fit into can greatly help with understanding why certain investments or insurance products are necessary and how they fit into your overall financial and insurance plans.Knowing what phase you are in can make the uneasy feelings about investments or insurance planning more understandable, and why they may be necessary.

Having a financial plan can put you in control so you stay on track regardless of what life throws at you – saving and investing in the types of financial vehicles that are specially designed for your objectives. Working with a financial advisor can help you build a foundation so that life doesn’t take you, or at least your finances, by surprise. What makes a good financial advisor? They will advise you when there are changes in the markets, tax legislation or the economy, and can help you adjust accordingly – guiding you through the ups and downs to stay on track towards your goals.

Information is accurate as of 8 September 2020.