With 2020 behind us and a brand new year ahead, there is no better time than now to set your financial goals for the new year and beyond.
One obvious thing which 2020 — with all its twists and turns — taught us is the importance of having contingency plans, especially in the area of personal finance.
As a wealth manager who has helped clients and their families manage and plan their personal and family finances, I would highlight two areas for setting your financial life goals: Estate or legacy planning and retirement planning.
Estate planning
Plan for incapacity. While many focus on their young and elderly dependents when they think of estate planning, I would suggest that incapacity planning for oneself should take a higher priority. Mental incapacity planning involves setting up arrangements or structures such as trusts to prepare for any unfortunate event of mental incapacitation. When dementia or Alzheimer’s strikes, your pre-designated decision makers will kick in and take over the management of your finances.
This type of planning involves drawing up a Lasting Power of Attorney (LPA) while you are still healthy. You may also appoint a corporate trustee as your professional LPA done to ensure the proper usage of funds for your living needs when you are mentally and physically incapacitated.
When you have a trust that is triggered only in the event of your incapacity, your trustee can access your financial resources for your benefit.
Think of it this way: If you have to be in intensive care or a long-term care facility, who will pay for your bills and manage your assets?
When you fund your trust, the trustee can do that. Without such a trustee, your family would have to turn to the courts to appoint
a professional to oversee your assets. This is a lengthy process and could cost you more than $5,000.
For many business owners and investors, delays or an inability to enter into legal contracts may disrupt your business or investments.
Providing for dependents when you are no longer around
This is another important area of estate planning is leaving at least enough for your loved ones when you pass on.
To do so, estimate the amount each dependent would need in his or her lifetime. Ensure that your estate — which is made up of the assets you leave behind — is sufficient to provide for each dependent. Include non-day-to-day expenses such as educational expenses for your young dependents and potentially large medical bills for all of your dependents. Remember also caregiving expenses and ageing-related expenditure for your older dependents, such as home-nursing or nursing-home costs.
If you have family members with special needs, you should also supplement your SNTC Trust (which you may have had set up with the Special Needs Trust Company) with a suitable private trust.
I have found that insurance solutions are probably one of the most cost-effective ways to provide the estate amount that your dependents would need to carry on with their lives with as little lifestyle disruption as possible. Life insurance creates an immediate estate when you, as the insured, pass on.
Depending on the type of insurance and coverage structure, this can result in a deceased’s estate valuing a few times more than his net worth while he is alive.
Discuss these protection options with an experienced and reliable Certified Financial Planner who provides you with access to different insurers.
Write a will or set up a testamentary or living trust
Suppose you have not written a will or have written one without including at least a substitute Executor and a substitute group of beneficiaries. It is time then, to write your will or rewrite one that includes these substitutes. An estate with a valid will but without an executor is deemed a “Letter of Administration” case. The court would need to select an administrator to handle your estate. This process delays estate distribution and involves legal fees that easily amount to a few thousand dollars.
If you have young or elderly dependents, staggered rather than lump sum distributions of inheritance is advisable. Use testamentary trusts or living trusts, depending on the circumstances. Discuss the suitability of these in your estate plan with a qualified estate planning financial advisor who has practical and professional experience with both wills and trusts.
Doing this would safeguard your young vulnerable dependents from financial predators and investment scams, or their own reckless spending. Instalment distributions can help them avoid spending the whole sum immediately and as a result develop irresponsible money habits during their less-mature life phase.
A special note to business owners: Put in place a succession plan and structures for your business to carry on without you. Alternatively, prepare arrangements for you to exit your business in the event of your disability or passing. Involve experienced, qualified professionals such as financial advisers who specialise in estate planning and trust managers in the process.
Many well-known business families fail to do so and pay the price. These include Singapore’s one-time iconic Teochew restaurant Swatow and Hong Kong’s famous roast goose specialist Yung Kee Restaurant.
These families have seen their family wealth decimated either by distressed sale of business assets or by bitter feuds among family members.
Retirement or financial independence planning
This will help manage unexpected large expenses such as medical expenses. However, a crucial element in retirement planning is the anticipation of potentially large expenses such as medical expenses so that your retirement plans do not get derailed.
In Singapore, a practical solution is to get yourself covered by a private hospitalisation and surgery shield plan. Part of the premium for such a plan can be paid with your CPF Medisave.
Another area in which CPF Medisave can facilitate your retirement planning is long-term care protection.
Disability — defined as a person’s inability to perform activities of daily living such as mobility and feeding — is typically related to ageing. Its resulting incapacity and need for personalised care and medical attention result in higher expenses in one’s retirement years.
As such, it is prudent to put in place financial solutions such as ElderShield or CareShield Life before you retire.
You should also create a “back-up” financial resource in case of chronic illness. The use of optimally-priced critical-illness insurance plans to cover chronic illnesses such as stroke, cancer and heart attacks is important. Such plans will help prevent your retirement resources from being prematurely depleted by loss of income, loss of business and/or hefty medical bills when critical illness hits.
Having said that, critical-illness insurance plans in the market are not all equal. Before you buy one, make sure to discuss your needs with a financial adviser who can offer you choices of coverage from various insurance companies.
Different insurers have their unique strengths in their types of protection. A financial adviser who has access to a comprehensive suite of products will be able to advise you the best-of-category solutions for your needs.
Set up guaranteed retirement cash flow plans
Calculate your “retirement number” by working out your average monthly expenses and removing expenses that will not likely occur during your golden years.
The latter include children’s pre-tertiary education expenses as your children may have grown up and become financially independent by the time you retire.
You should also supplement your CPF Life cash flows. Work out recurring expenses you expect to have during each month of retirement.
These would include daily meals, utility bills, mobile phone bills and transport expenses.
Such expenses form the foundational layer of your expenditure that should ideally be covered by guaranteed monthly cash flow plans on top of your monthly payouts from CPF Life.
Since monthly cash flow from CPF Life is about $1,400 per month, supplementary retirement cash flow plans are needed to supplement the monthly payouts from CPF Life.
With these strategies for your financial goal-setting for the new year, you and your family will be future ready.
At the very least, you will enter the new year with greater peace of mind.
Irene Yee, a Certified Financial Planner, is an award-winning estate planning financial advisory consultant with Phillip Securities (a member of PhillipCapital).
