I want you to imagine a world. In this world, we’d all be paid a good salary that not only allows us to live comfortably on, but also provides enough excess cash that we can set aside for our future retirement needs. What’s that you say? In this world the sky is purple and pigs can be seen flying through the air? Well, naturally. This world is nothing more than a dream.
But guess what? People still act like this dream will happen. There are so many retirement myths that Singaporeans believe and often get misled by. The decision between insurance versus investment and which to spend on if you have a limited budget, is an interesting question we get asked about quite often.
The parachute and the safety net
Let’s put it this way: If the idea of jumping out of a plane sounds like fun for you, then clearly you’re not “kiasee” or scared to die. Yet skydivers are probably some of the most “kiasu” people on the planet. After all, why jump with one parachute when you can jump out of the plane with two?
In the same way, when it comes to planning for your retirement, it’s a good idea to be “kiasu”. Planning for retirement is like skydiving. If you don’t have a working parachute when you jump out of the plane, you better hope there’s a gigantic safety net waiting for you when you land. If you don’t have either, then expect a coroner to pick the pieces of your body off the ground with tweezers.
In the financial world, the parachute is your insurance policy and the safety net are your investments.
Why should you spend money on Insurance?
There are many types of insurance products out there, and I’m not just talking about travel insurance, car insurance or home insurance. Even within the umbrella term of “life insurance”, there’s term life, whole life and investment-linked policies. There are different types of life insurance every Singaporean should understand, and its important to know what’s what.
The point of insurance is to be your parachute. It’s supposed to give you peace of mind. No matter what happens to you, your financial situation and that of your loved ones will not be affected.
What do I mean? Say you’ve bought a house with your spouse. It’s a huge financial commitment and it normally relies on your monthly income to pay off the home loan. Now if something serious happens to you – like death or permanent disability – a good insurance policy should provide your spouse with enough money so that they don’t need to worry about paying off the home loan.
Or say you’re planning to give your children a good overseas education by putting money aside from your monthly income. Apply for a life insurance policy that will give you a lump sum payout in the event of your death.
The best part about life insurance? The earlier you apply for it, the lower your premiums usually are. Which means having peace of mind won’t put too much strain on your wallet. This is especially true with term life insurance, where the premiums can go as low as $80 or less a month.
The only “disadvantage” of term life insurance? If you outlive the policy, you don’t get any money. Your survival and relative good health is your only reward, although there are term policies that allow you to convert into a whole life policy should you still be in the pink of health at the end of the term.
Which is why you should also consider investing.
Why should you spend money on Investments?
If insurance is a parachute that gives you peace of mind as you skydive through life, then investments are your safety net which allows you to land comfortably.
No matter how old you are, it’s never too early to start investing. Compounding interest is one of 6 financial literary terms you need to understand right now. Basically, it proves that TIME is MONEY.
This graph is a powerful visual tool to remind you that someone who invests earlier will have a huge headstart over someone who starts later, even if they invest more and for a longer period of time.
As you can probably tell, investments come in all shapes and sizes. Find one that suits your personality, where the risks and rewards are within your preferences. Just remember, you’re trying to grow your nest egg for retirement, not trying to make a fast buck, so maybe investing in that gold buyback scheme may not be a great idea.
So is it a choice between insurance and investments? Why not both?
The short and simple answer is: You should do both.
It doesn’t make sense to get only an insurance policy, and then outlive it. Congratulations on surviving into retirement, but now you find that you’ve got very little savings to retire on.
It also doesn’t make sense to plan for your investments, and then, due to death or serious illness, you haven’t got the opportunity to grow and enjoy the fruits of your nest egg.
So it makes sense to do both. The main complication is setting aside enough money.
Being able to set aside money for insurance premiums as well as investments would be difficult for those who eat out often, or have expensive hobbies and lifestyles. Ultimately, you’ve got to sit yourself down, maybe even with a trained financial planner, and figure out how much you should be setting aside for insurance and investments now, so that you’ll be able to retire comfortably.
What are your thoughts on planning for retirement? Is it a choice between insurance and investment? We’d love to hear from you.