Mr. Tan (age 29) and his wife (age 26) have been married for a year already. They hope to have their first child when Mrs Tan turns 28. The family annual income is $70,000. They have $20,000 in savings presently, with another $15,000 tied up in stocks. They do not invest in unit trusts or bonds.

They hope to see their children (possibly two kids) through local university, and have a monthly expenditure of $3,000 when they retire. Currently, they pay for their housing installments using CPF. Their flat has a market value of $240,000. They do not have any other loans. Their monthly expenditure (including allowances for parents) is around $3,000. Both have insurance coverage of $200,000 each. They hope to own a car when their first child is born.

What kind of investment and saving plan should they implement to meet their goals?

Based on the information provided, there is a need for us to make some "reasonable" assumptions. These are as follows:

Assumptions

• The Tan family plan to have 2 children, the first child in 2 years time and the second child in 3 years time.

• The current flat was acquired for $200,000. Loan of $160,000 (80% of worth of property) is backed by $160,000 mortgage loan protection plan. Assume that all available CPF is being used to service the mortgage.

• They plan to buy a second-hand car in two years for about $50,000. This will require a cash downpayment of $15,000. A car loan of $35,000 can be taken over 4 years at 2.8%. The loan repayment will amount to $9,800 per annum. Estimated expenses of maintaining a car is about $3,600 per annum. Thus, the estimated cost of car ownership is about $13,400 per annum.

• Assume that the two kids are going to the local university on a 4-year course when they are 19 . Provision of $5,500 each (course fees) and additional annual living expenses of $5,500 for each child is needed per annum. Thus, the present value of the tertiary education cost for the 2 children amounts to $88,000.

• Mrs. Tan earns $30,000 out of the $70,000 family annual income

• Mr. Tan plans to retire at 55.

• Recurring cash savings of about $9,300 per annum. ($70,000 - $36,000 for couples' expenses - $7,200 for projected kids' expenses - $3,500 taxes - $14,000 CPF). We have excluded vehicle costs.

• We have assumed that their personal insurance coverage is essentially term policies with critical illness coverage included.

Inflation rate over the next 26 years will average 2.5% per annum.

Recommendations of a NI Financial Planner

1. We recommend that the existing stock portfolio be liquidated and assets re-allocated. Being too focused on the Singapore equity market which is only 0.3% of the world stock markets) is risky as there is a critical lack of diversification.

2. The family would need to set aside 6 months of expenses as emergency reserve. So they need to set aside $18,000 from the $20,000 cash and $15,000 share liquidation. They will the have $17,000 left for other investments.

3. We do not recommend owning a car in the immediate future as the family only has $9,300 of recurring savings versus the additional recurring vehicle costs of $13,400 per annum. It is far cheaper to take a taxi or rent a car if one needs it continuously for a period.

4. Their investment risk profiling indicates an ability to tolerate a fair amount of risk. This is consistent with their relative youth and their very long goal horizons. Therefore they could afford to take on a more aggressive investment profile as time is on their side. The aggressive portfolio at New Independent consists of 15% bonds and 85% equities with an expected real return of 7.9% going forward.

   Based on a draw down rate of about 4%, the retirement portfolio will need about $900,000 in real dollars for the Tans to retire with a real monthly income of $3,000 in 26 years time. Recent advances in biotechnology open up the possibility of living to the age of 100. Biotechnology will have a significant impact on the financing of retirement needs. We therefore use 100 years as the life expectancy age.

   Based on the expected real return of 7.9% and growth in recurring savings at 3% per annum, the Tans would need to save and invest $6,600 annually over the next 26 years to meet their real retirement expenses of $36,000 per annum. We have taken into account the provision for their children's' university requirements of $88,000 in real terms. Saving $6 600 per annum is not a problem given the estimated savings of $9,300 per annum.

5. The Tans therefore will have surplus savings of $2,700 per annum. This is still insufficient to afford a car. They can afford it if net annual income goes up by $11,000. This is possible through career advances.

6. There is an insurance coverage shortfall of about $250,000 each. To top up the shortfall, the Tans will need a term policy with annual premiums of about $500 or about $40 per month each standard underwriting assumed). For complete insurance coverage, we recommend that they meet one of our financial planners and go through our New Independent Insurance Needs Analysis NIINA), our proprietary tool for mapping our clients' risk protection needs.