1. Azure School
Financial Planning
Lesson 2

2. Reading materials
• Read chapters 7 to 10 of the book, Practical
Guide on Financial Planning, written by Mr.
Tan Kin Lian

3. Invest your savings
• You should aim to get a yield that is at least
2% higher than inflation rate.
• If inflation is 3%, aim for a yield of 5%
• The best investment is in blue chip shares, i.e.
large, well-established companies
• The yield on blue chip shares over the past 20
years was 9.2% per annum.

4. Invest in an index fund
• A good way is to invest in an index fund, such as
the Straits Times Index Exchange Traded Fund (STI
ETF) traded on the Singapore Exchange
• This fund is invested in the top 30 leading
companies in Singapore, i.e. blue chip shares
• It gives an average dividend of 2.5% and provides
capital appreciation over the long term
• An index fund provides diversification of risk, as
you are investing in many shares.

5. Invest for the long term
• You will be investing for the long term, i.e. for
the rest of your life
• The investment horizon is likely to be 30 to 60
years.
• You do not need to worry about market
volatility when investing for the long term.
• You will be getting the average yield for the
good and bad years

6. Dollar cost averaging
• During your working years, you are saving and
investing a small sum each month
• After you retire, you are withdrawing a small
sum each month
• You do not need to worry about the market
price, as the amount of investment or
withdrawal is small.
• You will be getting the benefit of dollar cost
averaging.

7. Investing on your own
• If you are knowledgeable in investing, you can
invest on your own, instead of investing in the
index fund.
• You should focus on shares of companies that
you know, preferable the blue chip shares.
• It is better to nvest 80% of your savings in the
index fund an the remaining 20% of your
savings in selected investments that you are
familiar with.

8. Structured Products
• Structured products are created and sold by
the banks and are well marketed.
• These are usually too complicated for retail
investors
• Some are risky and have caused large losses
for the investors. Others have given a poor
return to the investors.
• If you do not understand these product, it is
best to avoid them

9. Return on asset classes
• The average yield on different asset classes over
the past 20 years (up to 2006) were:
– Singapore equities 9.2% p.a.
– Global equities 7.7%
– Global bonds 5.5%
• Generally, equities give a better yield compared
to bonds. This is the experience in many
countries and over a long period of time.
• For the long term investor, it is better to invest in
equities, especially blue chip shares.

10. Low interest environment
• The yield on investment had been quite
attractive over the past 20 years
• However, we have been experiencing a low
interest rate environment in recent years.
• For the future, we can expect the investment
yield to be lower. This is the view held by
many investment experts.
• Nevertheless, the yield on equities is still likely
to be higher than bonds

11. Your CPF savings
• You get the following interest rate on your savings
in the CPF:
– Ordinary account 2.5% per annum
– Special account 4.0% per annum
• The interest rates are subject to review by the
CPF every quarter. It has been kept at this level
for many years
• You are allowed to invest the savings in some
approved investments. If you do not intend to
buy a home soon, you can the ordinary account
in the index fund to earn a higher yield.

12. Supplementary Retirement Scheme
• You are allowed to invest your savings under the
Supplementary Retirement Scheme (SRS).
• Your SRS contribution can be deducted from your
taxable income and reduce the tax payable
• You are allowed to withdraw your SRS savings at
any time after age 62
• Half of the amount withdrawn has to be declared
as taxable income; however the rate of tax for a
retiree is likely to be low

13. • If you are a tax payer, you can use the SRS to
reduce your tax bill.
• If you are in the higher income bracket or over
50 years, you should consider the SRS as a tax
saving scheme.
• You should get financial advice of the
potential tax savings, as it affects different
people in different ways.

14. Unemployment
• If you are unemployed, you can draw down
on your emergency fund or your savings fund.
• You may need 3 to 12 months to find an
alternative employment, and may have to
accept a reduction in earnings.
• It is best to prepare for this contingency, as it
is likely to affect many people in the global
world.

15. Education
• Your savings fund can be used to pay for the
education cost of your children or for your own
education.
• There is no need to set up a separate fund for
each person. It is best to draw down from your
own savings fund.
• Be prudent in using your savings fund for
education.
• Many people spent too much money on
education which does not have a payback.

16. Medical Expenses
• You can use your savings fund to meet the large
medical expenses of your family or your parents.
• The small medical expenses come out of your
current earnings.
• Make the best use of the government subsidized
wards to reduce the medical expense.
• Before going for expensive private treatment,
check the cost and avoid spending money on
futile treatment, i.e. do not lead to a cure.

17. Retirement
• At least 50% of your savings fund should be
kept for your retirement.
• When you use your savings fund for
unemployment, education or medical
expense, you do not need to repay back the
money used.
• Make sure you keep sufficient savings for your
retirement, i.e. 6 years of your income.

18. Investing after retirement
• After your retire, you can continue to keep
your savings invested in the index fund.
• You can draw out the dividends for your
retirement needs.
• If the dividends are not sufficient, you can sell
of some units of the index fund to supplement
the dividends.

19. A life annuity
• You have the option to sell off the investments
in the savings fund and use the proceeds to
buy a life annuity from an insurance company.
• In most cases, you are better off to continue
investing on your own, rather than buy an
annuity.
• You will enjoy more flexibility and a higher
yield from the index fund.

20. CPF Life
• You will be required to invest your special
account in CPF Life, which is a life annuity
managed by CPF.
• You have the choice of the basic or standard
option. Find out the amount payable under each
option and decide on which is more suited to
your needs.
• The payout from CPF Life is quite attractive, and
is better than a life annuity sold by an insurance
company.

21. Life expectancy
• The life expectancy at age 65 (based on 2008
data) is
– Males 17.4 years
– Females 20.8 years
• Most people can expect to live for 15 years or
longer on retirement at age 65
• The life expectancy continue to increase as the
years go by.

22. Term Insurance
• Term insurance is a low cost way to provide
financial security for your family.
• This policy will pay the sum assured in the event
of premature death. There is no payback at the
end of the term.
• You can buy insurance for 5 to 10 years of your
income. Choose a term of 25 years or less, to
enjoy a lower premium.
• You can get $300,000 of insurance for an annual
premium of $500.

23. Medical expenses
• Do not worry too much about medical expenses.
• If you are working, the medical expenses may be
covered by your employer
• You can buy the basic Medishield offered by CPF
to cover the unexpected large bills.
• After your retire, you can pay the medical bills
from your own savings.
• There is no need to pay a higher premium for a
Private Shield.

24. End of lesson 2
• Read the chapters of the book again in more
detail.
• When you are ready, you can do the Quiz.