Covid-19: The Stress Test for Your Financial Plans

Covid-19’s impact on the global economy has seen people suffering at different degrees. Some have taken pay cuts. Others have lost their jobs. Some have seen their bets in the financial markets flop due to the plummeting of the stock markets. Others, more unfortunately, have experienced a wake up call in terms of healthcare costs that they had previously not considered.

Amidst all this negativity however, Covid-19 has actually given us a chance to evaluate how our retirement plans may play out and whether they can stand the test of the unknown.

In particular, Covid-19 has allowed us to better visualize how a loss of income or pay cut may impact our everyday lives, similar to that of retirement.

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For those of us who were unfortunate enough to have experienced a loss of income, a pay cut, or even a Covid-19 infection, there will be a fear of how prepared we are for the future especially in respect of healthcare cost due to their unexpected nature.

Covid-19 parallels the concerns of retirement in these aspects through pay cuts, loss of employment and healthcare cost. Upon retirement, we stop working and thus, stop having an income. Likewise, as we age, we undoubtedly face a higher chance of illnesses and infection because we will not be as strong as we used to be.

The costs of retirement planning

Based on the average life expectancy here in Singapore, we’re actually looking to provide for about 20 years when it comes to retirement. Retirement automatically translates to a stop in our regular income. So how are we going to provide for the cost of retirement?

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Now what are the possible costs we’re looking at when we actually retire?

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Healthcare Coverage and monthly expenses. These are just the basic costs when looking at retirement.

Healthcare (hospitalization) costs here refer to the hospitalization coverage that we pay for as long as we want coverage. However, as we grow older, the premiums actually increase by quite a lot.

At age 65 (as of 2020) we could be looking at premiums of nearly $3000+/year! (Assuming private hospital coverage)

This yearly premiums come from what is commonly known as your hospitalization insurance. As a brief summary, hospitalization coverage are made up of the main plan (Integrated Shield Plan) and secondly your rider (which covers co-insurance and deductibles).

While your own personal Medisave can offset the integrated shield plan, the rider is fully payable by cash and it actually makes up the bulk of the cost.

Monthly expenses are required for our basic survival. Notably, it was reported in 2019 on the Straits Times that Singaporeans need about $1,400/month for basic necessities.

This brings our BASIC retirement amounts to more than $1,600/month.

Note that this does not include anything fancy. This means no holidays, no luxurious meals, and other things that we all dream about for retirement. If we extrapolate that to 20-30 years in future, it could go up to $3,800/month assuming a 3% inflation rate.

Can Investments alone secure my retirement?

After the financial crisis in 2008, we have actually been rewarded in investments very well. Those who have continued to invest in the money market have seen their wealth grow.

However, in 2020, Covid-19 struck in full force and many are seeing their investments take a hit similar to that of the financial crisis back in 2008.

We know it will take time for our investments recover from this heart attack. But, what if we’re close to our retirement and we don’t have that much time to wait?

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Covid-19 has therefore given us again, a stress test on how well our long terms plan can stand against unforeseen market changes that we just cannot predict.

Even if those fresh in the workforce can take on all risks now, when we’re closer to our retirement, what truly matters becomes the stability of an income that will tide you through your BASIC survival expenses.

Enter the “PAYcheque and PLAYcheque” concept.

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A simple way to conceptualize this is that there are two kinds of expenses, basic and lifestyle.

Basic: as mentioned above (PAYcheque)

Lifestyle: hobbies, travelling, luxuries in life that we want to attain etc. (PLAYcheque)

The differentiation between these costs lies in whether it’s a need or a want. So in prepping our finances for these two types of costs, we have to ensure our money works in the same way in providing for our needs and wants accordingly.

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The PLAYcheque

A PLAYcheque here would refer to investments that come with a higher risk. This could help boost your retirement lifestyle and maybe even fund those fancy holidays. But the money you invest with should be money that does not form the foundation of your retirement.

Can we possibly get a retirement income from investment dividends? Of course we can, but the very nature of investments presents a risk where dividends could be decreased or withheld in economic crises.

However as mentioned above, when it comes to retirement, what matters is the stability and guaranteed nature of an income. This cannot be left to chance and volatile market forces.

The PAYcheque

When we get close to retirement, that stable PAYcheque is going to be the one that as mentioned, tides us through our basic necessities without having to worry about market movements or in this case, a global pandemic.

The PAYcheque actually gives you that foundation to rely on instead of having to hope and pray for our PLAYcheques to rise fast enough to tide us through difficult times. In short, this PAYcheque is going to form that iron rice bowl.

What are examples of PAYcheques?

An Annuity is actually a perfect example of a PAYcheque and why it is regarded as a retirement product.

“An annuity is a financial product from insurance companies that provides the insured with a regular income stream”

How does it work?

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Crisis-proof your retirement income

As mentioned above, this is not to say that we shouldn’t invest. If given the chance, we should make our money work harder and more efficiently.

But, while we try to gain as much wealth as we can through investments, we need to make sure that should things not go the way we intended, we still have a foundation strong enough to rely on. We don’t want to have to self-impose our own financial circuit breaker during our retirement because we aren’t prepared right?

Should you want to find out more about how to build your very own PAYcheque, download the guide here!

Article by Leon Lee
Email: leon.lee@gen.com.sg

The writer is a financial adviser representative representing GEN Financial Advisory Pte Ltd

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GEN FINANCIAL ADVISORY

Leon Lee
Financial Services Consultant

RNF No. LLM300038680
Bachelor’s Degree in Economics

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2020-06-29T10:08:31+08:00