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Retirement adequacy for a senior needing long term care.

Sunday, November 23, 2014

This was a recent email exchange with a reader:


I've been following your blog for quite a while, but this is my first time writing to you. Hope you could 'talk' to yourself about my sis case below and let me hear it so I will know how to help her.

My sis is almost 60 years old, single and stays alone. Recently, she fell very sick and was admitted to hospital for a few weeks. Now she is at home on medical leave.  We got a maid to look after her.  Don't think she will be fit enough to go back and work.

She doesn't earn much as an admin staff, but still managed to save quite a bit through many years of working and saving -  about $150,000 in Cash and $100,000 in CPF.  And she has also paid up fully for her HDB flat, so no debts except for some insurance premiums which she is still paying, her medical expenses and expenses to employ the maid @$720 per mth.  She knows that her saving will not last her very long. She has asked me to invest her money so that she could collect some dividends and help pay for her daily expenses since she will have no income in future.  I am not a savvy investor.  Most of the times I bought stock based on reading your blog and some other financial blogs.  I have no qualms to invest using my own money but how to invest for her?

Two years ago, I brought her to open a POEMS account and put in some of her money, all ready to 'chiong' and invest but till todate, I still do not dare to invest for her as I can't afford to lose her hard earned money.  Recently she asked me to buy Cityspring Trust at 50 cents but I hesitated and missed the boat.

What were you do if you are in my shoes?  How can I help my sis? Safest is to put in FD but the interest rate is so low.

Hope to hear from you. Thank you.



My reply:

Hi P,

If I were in your shoes, I would be very cautious too. Losing some of my money is one thing but losing my sister's money would be something else. I actually gave my sister a capital guaranteed privilege at one time. If the investments should lose money, I would bear the losses. Bad idea, I know.

Anyway, back to your case. What would I do?

If your sister needs $720 a month or $8,640 a year. Obviously, relying on her savings of $150,000, it would take only 17.36 years to be depleted. This is not considering any interest income earned during that time, of course. Add other expenses, maybe $800 a month, and her savings will take half the time to deplete. 9 years, perhaps? So, there seems like a need to invest for income.

However, we must not forget that she is eligible for CPF Life payouts in another 5 years from now at age 65. If she has $100,000 in her CPF retirement account (RA), she could be drawing $800 or so (this is a rough estimate and you should call CPF to check the exact amount) every month for the rest of her life and this would be enough to pay for her medical expenses and the maid.

In my opinion, there isn't any need to take on risk by investing your sister's money in the stock market now. Of course, I am not asking you not to invest on her behalf in the stock market. You could keep an eye on the stock market and buy some good dividend paying stocks for her when Mr. Market goes into a depression. In the meantime, your sister has enough financial resources to take care of her needs.

I will publish our email exchange in my blog to see if others have ideas which they might be willing to share with us. :)

Best wishes,

If you have any ideas you would like to share, please leave a comment. Thank you.

Related posts:
1. What happens at 55 and CPF Life?
2. The PM on retirement adequacy.
3. Free e-book: Retiring before 60 is not a dream.

Mortgage a fully paid home and invest the money?

I have always been rather reluctant to borrow. Some might laugh at me for not taking advantage of "good debt" but I believe all of us have different levels of tolerance for debt. It is almost like a religion. It is very personal.

Indecent? Lewd? Maybe, to some.

Here is an email exchange with a reader on the issue:

Hi AK,

Love your thought process and your discipline and I was hoping you can give me your opinion.

Recently I have been toying with the idea of putting my name on my parent's property (1%) which will allow me to take a loan of up to 2 million based on my current income at a current interest rate of 1.4%.

The proceeds of the mortgage is purely for investment purposes.  One reason for doing this, is that I am thinking of leaving my current job, meaning that the option for a "cheap loan" (i am not referring to the interest rate but rather a mortgage backed loan) for none property related investments. Apart from the risk of making poor investments and losing all your money while still owing the bank money blah blah, what are the risks that you see?

As background, I have 750k in various asset classes ranging from cash to shares to foreign property and no outstanding loan. Looking to retire in the next 5 years!

Happy if you want to share this as a post but don't put my name!


AK's reply:

Hi H,

Depending on your personal consumption level and the productiveness of your assets, $750K worth of assets could possibly provide a rather comfortable retirement income. So, I would question if there is actually a need to mortgage a fully paid up property to fund more investments.

This was something offered by my banker as well a few years ago. However, being very conservative when it comes to using debt, I chose not to do it. On hindsight, I could have made more money if I did it but I wonder if the feeling of unease which I am sure I would have had would be worth it. It is rather personal.

The question on the possible risks apart from the ones that you are already aware of is very wide. I definitely cannot see all the risks but if we are of the opinion that interest rates cannot possibly go lower, then, we must expect finance cost to rise. We might want to question whether the expected returns on our investments will be able to rise in tandem.

Also, we want to bear in mind that rising interest rates are not good for real estate owners, usually. The much higher asset prices today is mostly due to the abnormally low interest rate environment in recent years.

We could see real estate prices declining as interest rates rise. It would probably affect the valuation of your mortgage property and this, as you can imagine, could create an issue. Of course, depending on the property's characteristics, it could be affected more or less. It is hard to say for sure.

I will share our email exchange in my blog to see if others have thoughts to share. I will make sure not to include your name. ;)

Best wishes,

We welcome other perspectives on the matter as well. So, please feel free to leave a comment.

Related posts:
1. Good debt is always good?
2. To rent or to buy: Rule of 15.
3. Gear up and receive more passive income?

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