Recently I encounter a situation doing financial planning for a retired couple. Certain facts have been changed to protect the identities of those involved but the main key points remain unchanged:

This retired couple is in their late sixities/early seventies. They have about 50% of their net asset in their existing residential private property. They have no debt. The remaining 50% of their net asset is in various safe instruments such as fixed deposits and money market funds. The couple is conservative in their investments as they have no desire to invest in anything that has potential of losing money. They have two children – one boy and girl, both married with their own children and family and homes.

One day, they decided to buy a HDB flat. The flat is bigger than existing home and much more convenient. However, they also do not intent to dispose the existing residential private property so soon as they would like to “wait” for the housing market to rebound and than sell at a better price. In the meantime, they figured that they could rent out the existing private property as they were attracted to the fact that their neighbor could rent theirs at an attractive rate recently.

Here was my role: I looked at their finances and my finding is that if they would to hold two properties simultaneously, their net asset would consist of 90% in property.  I advised them against holding two properties simultaneously due to the following reasons:

1. Having 90% of one’s net asset into the same asset class is not prudent but in fact dangerous.  There is no diversification and they would be subjected to the risk of a single asset class.
2. Investing the existing cash into a property asset class goes against their risk profile as they had never wanted to risk losing their money in risky investment.
3. The housing market has a lagging effect with equity market. Housing price has only started to drop, it is unlikely they will see a “good” price in their life time. Property has a very long cycle. Thus, it is not likely they will ever have a chance to sell their existing private property at a “good” price. Currently, the value of their property is estimated to be below purchased price.
4. From a pure investment point of view, purchasing the HDB flat is a poor decision. I checked the price trend of the similar units in that area and found that the price trend has been on an upward trend over the past 1 year. What this means is that the couple is likely buying the HDB flat right at its peak. However, the decision to purchase the flat is not an investment decision for them as there were other soft factors that were more important such as location, near to relatives, space, etc.
5. Over reliance on rental is unwise. Their neighbor managed to rent it out to an expat. However, with our economy contradicting (today MM say -10% GDP for this year is possible), the rental market will definitely take a hit when expats leave the country.
6. Their 10% in cash is too little to meet major illness needs. They did not do proper insurance planning in the past as their agents sold them whole life and personal accidents but did not do proper planning for hospitalization. I had previously helped them to upgrade their hospitalization & surgical insurance but one of them was rejected and another was upgraded with numerous exclusions. To put it in short, their existing H&S insurance will not be able to pay for major illness expense. I advised them that a major illness will immediately wipe out their cash position and thus force them to liquidate one property. In desperation to sell a property, they will get a very poor price. Besides, property liquidation cannot be done overnight. I know of someone who has been trying to sell her HDB for 3 months already and apparently there was no buyer. It seems buyers have disappeared from the market.

The retired couple now have the full facts of the matter and decided that they should dispose their private property as soon as possible rather than waiting for the price to appreciate. Upon disposing their private property, their cash position will go up to approximately 50% again and this should be sufficient to meet major medical expenses. They acknowledged that it is unlikely the price will appreciate in the distance future. In fact, the trend is only downwards, not up. Moreover, they now understood their children have no means to help them.

Here are my thoughts:

1. It is important for parents to communicate with their children. Do not assume that their children are willing or has the means to extend financial help. Some people say that Asia values require children to be obligated to help their parents.  However, what is the point of upholding “Asia value” if the children is forced into bankruptcy in the name of supporting their parents’ poor financial planning?
2. It is important to fully understand one’s risk appetite before embarking on large purchases. Due to the problem of mental accounting, many people make strange investment decision. For example: If a person is not willing to risk losing money for his cash and yet is willing to buy a property using the same cash, he or she is being inconsistent. Usually they will justify saying that any losses is merely “paper losses”. However a lost is a lost. There is no such thing as paper lost.
3. It is important to look at one’s net asset from a portfolio point of view. Putting 90% of the net asset into the same thing is a foolish thing to do. Actually putting 90% of net asset into cash is a foolish thing too. It will be safer to put it into Treasury Bills rather than with a financial institution that can go under.
4. The importance of having insurance is obvious in this case. If the couple has sufficient insurance, they would not be required to hold so much cash. Notice that insurance is compulsory – it is a matter of whom is the insurer. In this case, neither children has the capacity to be the insurer (insuring the risk of major illness expense incur by their parents). Therefore, the couple has to self-insure by holding large amount of cash for something which may or may not happen. There are many other retired personnel who do not even have the means to self-insure. Thus, the default insurer will be their children regardless of the children’s financial standing. If they have no children, than the government becomes the default insurer and obviously this is funded by taxpayer money. In this case, the taxpayer is the default insurer. In other countries which taxpayer is the de-facto insurer, their tax rate is so high that life has become very difficult.
5. Gone are the days which existing generation is able to support their parents. Our economy is driven and funded by debts. That is how money is created. Each generation is burden with its own debt. Whenever a couple get married in Singapore, they will immediately incur a debt of at least $200,000 even if their income is a low four figure only. If the debt ridden generation support their previous generation, it will mean that the existing generation’s debt will be enlarged (the obligation to support another person can be seen as a liability (debt) if it is viewed as a discounted future cash flow). If the existing generation cannot clear off their debt, it will than be passed on to the next generation and so forth. Actually this looks like a ponzi scheme isn’t it? When the “bubble” burst, the entire country will just collapse. This isn’t far fetch – United State is now facing the bursting of that debt bubble.  
6. Due to the reluctance of people wanting to do financial planning, government has to pass legislation to “force” each person to save up. Scheme such as CPF Minimum Sum and CPF Life are scheme that “force” CPF members to do financial planning. Opt-out insurance scheme like DPS, Eldershield, Medishield and HPS are insurance planning by compulsion. Financial planning by compulsion is a blunt knife as it ignores the unique circumstances of each person. Ironically, there is no financial planning done for compulsory scheme and “opt-out” schemes. However, apparently there is no better alternative that the government can do because people refuse to use their rights to do their own planning. Thus, I support CPF Minimum Sum Scheme and CPF Life and all other “opt-out” insurance schemes.