Wealth Planning: How to Grow More Money Through Mindful Investing?
Do you feel like you're running on a financial treadmill, constantly moving but finding it challenging to get ahead? In a world of modest salary increments, planning for escalating expenses at different life stages can become daunting. Naturally, we will value and cling to our hard-earned dollars. However, while there's comfort in stability, avoiding all financial risks may paradoxically introduce risk in your wealth planning strategy.
Why is Investing Important?
When it comes to wealth planning, tucking money away into a savings account may be the first thought that comes to mind. While this approach is essential to keep you prepared for unforeseen circumstances and short-term objectives, this is only part of the equation.
1. Wealth Creation
For starters, relying solely on savings often assumes you'll have a steady income. However, employment can become increasingly uncertain with age due to potential retrenchment or job market changes. Additionally, this reliance on continued work might even stretch into your retirement years, limiting your time for leisure activities or other joys in life.
2. Keeping Up with Inflation
Besides meeting your goals, maintaining your present lifestyle also involves keeping up with inflation, which can diminish your purchasing power over time. In fact, just in June of 2023, Singapore's core inflation rate was 4.2% year-on-year.
Meanwhile, Singapore’s compound average inflation rate over a three-decade span from 1992 to 2022 stands at 1.65%. This means that something that cost S$1.00 in 1992 would cost S$1.63 in 2022. When you apply this to big-ticket items, such as college tuition fees, healthcare expenses, and house renovations, the impact is considerable.
At this juncture, you may wonder: how about simply storing my money in a high-interest savings account? Though appealing, high-interest savings accounts typically offer limited relief, and you may need to jump through several hoops to earn more interest. For instance, consider the context of a young working adult in Singapore with the following profile:
- Minimum account balance: S$10,000
- Median monthly income: S$3,850 before deduction of employee CPF contributions and personal income tax, aligned with the figures reported by the Ministry of Manpower^
- Monthly spend: Spends at least S$500 via cards or digital banking
- Regular bill payments: At least three eligible bill payments
- In this scenario, the likely interest rates are as follows:
| Savings Account | Interest Rate (p.a.) |
| Bank of China SmartSaver | About 3.90% |
| CIMB FastSaver | 3.50% |
| DBS Multiplier | About 1.80% |
| Hong Leong iSavings | About 3.35% |
| Maybank Save Up | About 1.25% |
| OCBC 360 | About 2.00% |
| RHB High Yield Savings Plus Account | 1.50% |
| SCB JumpStart | 2.00% |
| SCB Bonus$aver | About 4.13% |
| UOB One | 3.85% |
*As of August 2023
As shown above, even the higher interest rates may barely keep pace with inflation.
On the other hand, investing puts your money to work to meet your life goals, be it purchasing a BTO flat in Singapore, funding the best wedding banquet, or meeting healthcare needs. For instance, getting investment-linked plans (ILP) like Income’s AstraLink and Invest Flex allows you to invest in a range of selected funds to grow your wealth actively while enjoying coverage.
Through such investments, you can potentially reach your goals quicker and in a way that savings alone might not. But more importantly, investing doesn't always have to involve high stakes, particularly when you select investment vehicles mindfully.
Types of Lower-Risk Investments in Singapore
When it comes to investments with lower risk, here are some of the popular options in Singapore.
1. Fixed Deposits
Fixed deposit accounts involve depositing a set amount of money with a bank for a defined period, earning interest at a predetermined rate. Its advantages include:
- Guaranteed returns: The original deposit is given alongside the interest, known upfront
- Effortless: Unlike other investment vehicles like stocks, constant monitoring is not needed
On the other hand, you will have to manage the following trade-offs:
- Lower returns: Some investments, especially those with comparatively higher risks, may often offer elevated returns
- Less liquidity: Withdrawing before the agreed period may also result in a penalty fee, making fixed deposits less flexible than other options in Singapore
2. Singapore Savings Bond
Singapore Savings Bonds (SSBs) are government-issued bonds. With a AAA credit rating, they are considered low risk, with the Singapore government reliably paying back the money and biannual interests until maturity at 10 years or until the bond is sold. In addition, other advantages of this investment include:
- Low barrier to entry: Minimum investment amount is as low as S$500.
- No lock-in period and penalties: This reduces your overall opportunity cost. Above all, you only need to provide a one-month notice period to redeem without penalties.
- Regular interest payouts: Every six months.
However, some of the less favourable aspects are:
- Lower returns: Its interest rates surpass fixed deposits but trail behind investment vehicles like REITs or unit trusts.
- Limited gains: Maximum investment is capped at S$200,000, limiting large investors and your potential gains.
3. Treasury Bills
Treasury bills (T-bills) are short-term Singapore Government Securities (SGS) maturing in six months to a year. These are sold at a discount from their face value and pay a fixed interest rate. With an AAA credit rating and the backing of the Singapore government, T-bills are also lower-risk options. Some of its other advantages include:
- Low barrier to entry: Minimum investment is low at S$1,000.
- Easily traded: Can be bought or sold in the secondary market, enabling you to seize potentially better market opportunities.
- Flexibility: Investments can be made with cash, CPF Investment Scheme, or supplementary retirement scheme (SRS) funds.
Likewise, this form of investment also comes with downsides:
- Paid full at maturity: No coupon interest payments leading up to maturity.
- Potential interest rate risks: Because the interest rates are set through a uniform-price auction, the rate you receive is not guaranteed. If you sell your T-bills before maturity, you may face losses, as bond prices can vary according to the prevailing market interest rate.
4. CPF Ordinary Account and Special Account
Under Singapore’s CPF Investment Scheme, you can invest the Ordinary and Special Account savings. How this works is that if you invest in your Special Account savings over the initial S$40,000, those funds will not shift into your Retirement Account. Since S$40,000 is insufficient to meet the Full Retirement Sum (FRS), the CPF Board will draw the required amounts from your Ordinary Account, benefiting you in several ways:
- Higher overall returns: You effectively increase the interest earned on your overall CPF savings
- Flexibility: Liquidated CPF investments return to your Special Account and are available for withdrawal while still earning a 4% annual interest, turning your Special Account into a personal high-interest savings account
That said, you risk being misled into purchasing a costly or high-risk financial product without fully understanding its associated risks or expenses.
5. Endowment Plans
An endowment plan is a form of insurance with a cash value. What it does is help you grow savings over a designated time frame, such as five, 10, or 25 years. It’s a disciplined savings method requiring consistent premium payments, which are then channelled into the insurer's participating funds to cultivate a cash value over time.
If you invest in a non-participating endowment plan, you will receive a guaranteed sum upon maturity. In contrast, a participating plan offers this plus a non-guaranteed sum linked to the fund's performance. Here's how this plan can benefit you:
- Guaranteed value: An endowment plan's guaranteed cash value makes it attractive, especially if you're working toward specific financial milestones.
- Flexible duration: You can pick a term that fits your financial objectives, such as saving for a down payment on a property in Singapore.
- Hands-off approach: Premiums and coverage are fixed at the policy's inception, enabling easy management.
Conversely, here are some potential drawbacks of this plan to factor in:
- Inflexibility: The predetermined premiums and coverage may become limiting if your life circumstances change and you need more protection, such as after starting a family.
- Potential growth: Young investors may prioritise growth to offset inflation risks. However, endowment plans may not adequately counteract the rising cost of goods over time, positioning them better as supplements rather than primary investments.
Given the above, an investment-linked plan (ILP) can be an option to explore to diversify your portfolio as you aim for higher potential returns with managed risks.
What is an ILP?
ILPs, such as Income’s AstraLink and Invest Flex, combine investment and insurance coverage into a hybrid product. With ILPs, the premiums you pay are utilised to buy investment units in selected funds, and a part of this is sold to cover insurance and other expenses, such as fund management fees. But what is the difference between an endowment plan and an ILP, and how do you know which to invest in?
What is the Difference Between an Endowment and an ILP?
Though both an endowment plan and ILP come with a cash value component, their structure, risk level, and returns differ substantially. Here is a breakdown of their differences:
| Investment-linked Plan | Endowment Plan | |
| Purpose | Combines investment and insurance | Mainly used for savings, although there is potential for investment returns |
| Pay Out | Not guaranteed as it fluctuates based on the chosen fund’s performance | Includes guaranteed and non-guaranteed bonuses |
| Coverage | Some plans offer the option of varying your insurance portion based on the premiums you would like to pay | Generally less flexible as the premiums and coverage are usually fixed |
| Flexibility |
ILPs are more flexible. This is because ILP premiums are used to buy investment units in sub-funds. A portion of these investment units are then sold to cover your insurance cost. This arrangement enables an ILP to grant policyholders a certain amount of flexibility in terms of:
This gives you added protection when unexpected life challenges arise |
|
| Risk | Higher than endowment plans but remain managed | Lower risk |
| Duration | Flexibility to keep the plan active beyond the premium payment period | The plan ends when it reaches maturity |
How Does Choosing ILP Mindfully Help with Wealth Planning?
To summarise, an endowment plan usually carries a relatively lower risk than an ILP. However, ILPs provide flexibility, enabling investors to select funds that align with their risk appetite, including conservative options that allow better mitigation of investment risks.
In the case of young investors, the longer investment horizon may also offer chances for riding out market fluctuations over time. It’s worth noting that while ILPs are less demanding than higher-risk options like stocks, they do require a more active approach than endowment plans and other conservative investment vehicles.
Invest Early in Your Future with Income Insurance
With ILPs such as AstraLink and Invest Flex, you can gain further confidence from having the support of experienced investment professionals who monitor your portfolio on your behalf. This enhanced risk management makes an ILP a worthy consideration even for investors who may not have extensive financial knowledge. Additionally, protection coverage provided by ILPs enable you to invest in your future while staying financially protected.
With a protection coverage based on the applicable sum assured multiple1 of your choice with a Minimum Protection Value (MPV) of 300% of the sum assured (before the anniversary immediately after the insured reaches the age of 70), AstraLink offers a higher protection coverage while only requiring you to set aside as low as S$100/month. Additionally, you can also opt to increase coverage at different life events2 with Guaranteed Insurability Option.
Meanwhile, Invest Flex provides for higher wealth accumulation with an investment bonus of up to 60.0% of your regular premiums paid for the 1st policy year and provides 0.5% annual loyalty bonus3 starting from the 10th policy anniversary or the end of the Minimum Investment Period (MIP), whichever is later. Additionally, you can maximise your investment with up to 105% of your regular premiums paid to purchase units.
Whether you're looking to preserve wealth or seeking strategies on how to grow your savings in Singapore, understanding your options is the first step. Get in touch with our financial advisors today, and let us help you find the best plans to address your needs.
^ Median Gross Monthly Income from Work of Full-time Employed Residents aged 25-29, 2022
1 Sum assured multiple means the factor we use to work out your sum assured for your basic policy, or for a specific rider that you attach to your basic policy, based on your regular premium when we issue the policy. The sum assured multiple cannot be changed unless the retirement option is exercised. The Minimum Protection Value (MPV) is applicable before the anniversary immediately after the insured reaches the age of 70.
2 Each time the insured experiences a life event, you may choose to take up the Guaranteed insurability option, subject to the policy’s terms and conditions. Please refer to the policy conditions for further details on the life events and the applicable terms and conditions.
3 The loyalty bonus will be provided on the next working day from the 10th policy anniversary. The loyalty bonus is a percentage of the policy value based on the anniversary. It will be used to invest in the funds the policyholder has chosen. The policy must meet all the following conditions to receive the loyalty bonus:
a) The policy must not have ended when the loyalty bonus is provided.
b) The policyholder did not make any withdrawal, except withdrawal under life events withdrawal benefit, for the past 12 months before the date for the loyalty bonus payment.
This article is meant purely for informational purposes and should not be relied upon as financial advice. The precise terms, conditions and exclusions of any Income Insurance products mentioned are specified in their respective policy contracts. For customised advice to suit your specific needs, consult an Income Insurance advisor. This advertisement has not been reviewed by the Monetary Authority of Singapore.
These policies are protected under the Policy Owners’ Protection Scheme which is administered by the Singapore Deposit Insurance Corporation (SDIC). Coverage for your policy is automatic and no further action is required from you. For more information on the types of benefits that are covered under the scheme as well as the limits of coverage, where applicable, please contact Income Insurance or visit the GIA/LIA or SDIC websites (www.gia.org.sg or www.lia.org.sg or www.sdic.org. sg).
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