Savings Planning – Who should consider a “Lifetime Savings Plan” (LSP)?
“If you cannot save money, the…”
How will you complete the sentence above?
This question was asked of me some years ago in a training class on wealth management that I attended as part of my preparation to be a financial planner. The question opened my mind to how important savings is when it comes to financial success. The answers from the class that day ranges from sad to tragic but the answer provided by the trainer puts everything into perspective.
“If you cannot save money, the seeds of greatness are not in you”.
Ultimately, savings is a conscious choice and some people make the choice while others don’t. More importantly, savings does not come naturally for many people. For many, they do need to be educated on how to save, how much to save, what to save into and perhaps most critical of all, being able to save from a planned manner rather than to do it haphazardly.
The End of Fixed Term Savings = The Beginning of Flexible Term Savings
Financial planning used to be a more predictable process. We can plan with a good degree of confidence that our lives may be something along the lines of starting work in our early 20s and working for a good 25 to 30 years before retirement. Our jobs are relatively safe and income growth is generally expected especially if we have got a good education as our foundation.
Because of such expectations, savings plans were set up with fixed term maturity (e.g. 20 years or 25 years) as we can anticipate the timing for when we have use for the money. Such expectations have changed over time and some may end up having unexpected need for money earlier (e.g. starting a business or retrenchment), while others want to continue to save due to longer working lifespans.
To address this growing need of providing flexibility and extending the lifespan of savings plans, many insurance companies have designed a new type of endowment instrument. I call these type of endowment products “Lifetime Savings Plan”.
What is Lifetime Savings Plan (LSP)?
A Lifetime Savings Plan is a plan which allows you to set aside money to save for a pre-determined period of time, for instance, over 5, 10, or 15 years. Even after fully paying the premiums, the plan continues to compound the yearly guaranteed and non-guaranteed returns for life (or up to age 120 depending on the product specifications). One additional feature is that you may transfer the life assured of the plan to your child or spouse and the plan will continue for his/her lifetime. Along the way, should you require funds, you may choose to partially withdraw funds or fully surrender the plan for a lump sum benefit.
LSPs meets the needs and addresses the concerns that I’ve noticed many of my clients have – that they may not be able to commit to a fixed savings commitment for a long period of time (e.g. 25 years) yet they would like to have the savings term be flexible so that it can cater to their changing needs in the future.
Who Should Consider A Lifetime Savings Plan (LSP)
In my opinion, a LSP is best used in financial planning as a complement to other plans that you already have by playing the role of a “flexible supplement”. I do believe LSPs will find it’s way into many people’s financial plans as the need for flexibility continues to grow.
Here are 5 types of people who should consider adding a LSP into their savings portfolio:
1. People Who Are Starting to plan for a family and would like to save for their future generations
Nowadays, there is an increase in the number of people who wish to save for an even longer time horizon, making this plan suitable as it does not have a maturity date and you can choose to keep it for as long as you like. Also, as this plan has the option to be transferred to your children, it makes a good gift for the next generation. This is because the plan can continue accumulating your savings, allowing for better financial planning for the future.
2. People who do not have a specific goal and time horizon for their wealth accumulation but would like to get started
As we see the younger generation expressing that they currently do not have any short term financial goals and just wish to save up their cash, this plan is perfect as they will not have to worry about setting a maturity date. With the option of partially withdrawing their funds, this plan is also ideal in a situation when you require some emergency cash in the future.
3. People who prefer Guaranteed Returns
As an endowment product, it does offer guaranteed returns (i.e. returns on top of the capital invested) after a certain number of years. Typically for Lifetime Savings Plans, the guaranteed benefits will gradually increase over time so the flexibility to let the plan continue for as long as you do not need the funds becomes a feature to enhance returns. You get financially rewarded for your patience!
4. People who like flexibility
It is very difficult if not impossible to predict what will happen 20 or 30 years later. What is certain is that our financial needs will continue to grow due to inflation so having a plan like the LSP will provide the flexibility to plug the financial gaps that were unexpected or perhaps, insufficiently provided for.
For example, it is not possible to know at birth if your child will go to study at the polytechnic or university, the type of course, the duration and if he or she is able to qualify for a scholarship. As such, how do you plan even if you are serious about ensuring that your child gets the best education? This is where the flexibility of a LSP will allow you to save without any of these concerns.
5. People who like to save systematically
At its core, the success of a savings program lies in the system of savings. It is better to save systematically into an average return savings plan than to save irregularly into a high return savings vehicle. This is because the success of a savings plan lies not just in the returns you can get, but in the amounts you can save, how long you can save and critically, not withdrawing from the savings prematurely.
An endowment plan creates the system to help people save in a disciplined and systematic manner which will increase the odds of success which I defined as having money when you need it.
Savings – The Financial Antidote for a Spender
There are 4 types of emotional attitude when it comes to how people feel about money. In short, they are:
- Builder – You feel that money is tool for growth
- Giver – You feel that the purpose of money is to be used to take care of the people around you
- Saver – You feel that money is a form of security
- Spender – You feel that money is a means to your happiness
I’ll like to end with a confession – I am a “spender” profile when it comes to money management and it is not natural for me to emotionally appreciate the importance of savings. For spenders like myself, having a savings plan is not always about trying to achieve a better rate of return or preparing for an important financial commitment in the future. Having a savings plan can be as simple as having the act of saving money regularly for me to feel less guilty when I am buying things that makes me happy.
Whatever the reason – whether it’s based on stone-cold hard facts, excel driven analysis or just “following the heart”, having a savings plan is the foundation to a successful financial plan and in my opinion, the flexibility provided by a LSP can play the important role of being the corner stone of the savings foundation.
Lifetime Savings Plans are increasingly being offered by many insurers and besides the savings elements, these plans come with different features that enhances the savings benefits of the plan. If you are exploring the possibility of adding a LSP to your financial plan, you can download this “Guide to Lifetime Savings Plan” where I will explain the 8 features found in LSPs to help you get started.
There is a wise saying that in life, you can “behave” your way out of every problem by taking positive action. I would like to add to this by respectfully suggesting that in financial planning, you can “save” your way out of every problem by taking positive action as well.
Savings can be fun and I wish for you to have a fun-filled savings journey!
Article by Stephanie Choong
The writer is a Senior Financial Services Consultant of GEN Financial Advisory