Case Study - The Foo Family

Frederick Foo, aged 46, is a technical consultant with an established telecommunications company in Singapore. He is happily married to Angeline Ang, aged 41, and they have no children. Quite unfortunately, Angeline was diagnosed with multiple sclerosis, a chronic disease involving damage to the nerves in the brain and spinal cord, when she was aged 28, just shortly after they got married. The cause of the disease is unknown and there is no cure. There are only treatments that can ease symptoms and shorten the duration of attacks. Angeline's debilitating disease has stopped her from having children as her weak body cannot carry a pregnancy through

to full term. Despite this, Frederick has firmly stood by her in all her struggles with the disease and has given her all his love. He does not mind not having children of his own and hopes that Angeline will survive the dreaded disease for as long as she can. Thankfully, Angeline had purchased comprehensive hospitalisation and medical insurance coverage much earlier. Hence, the cost of treating her disease has not put a financial strain on the family. Frederick's father was killed in a fatal car accident when Frederick was only 12 years old. His widowed mother had to single-handedly raise 2 children on her own. At that time, his father did not have any form of life insurance coverage and there was no money to tide them through such a difficult time. Having lost his father at such a young

age and having witnessed how his mother had to struggle to raise the family on her own, Frederick still suffers from the psychological trauma of his father's sudden death.

He fears that death could come to him at any time like it did for his dad and hence does not want to live a life of regrets. The positive aftereffect is that Frederick lives a day at a time and cherishes the people around him. He is very generous with his family members and often brings his mother and his younger brother and family on holidays

too. Now that Frederick has a successful career as a senior telecommunications consultant, he desires to make his mother happy, to show his appreciation for her, and to take care of her as his father would have done. He believes that his mother would like the whole family to be together and does not mind paying for his brother's holidays. Frederick's younger brother, Lawrence, is married with a son and works as a cook in a French restaurant. Each time Frederick takes his entire family on holidays, he would spend about $20,000. As a result of the events in his life which have shaped his values, Frederick lacks financial discipline when it comes to controlling his expenses. It has become hard for Frederick to strike a good balance between being generous and exercising financial prudence.

Since Angeline's diagnosis of multiple sclerosis, Frederick is even more than ever focused on living his life to the fullest with his family and has put little thought into planning for the future. In his mind, the future holds too many unknowns. He would rather enjoy his life now. Frederick also pursues his personal interest passionately. He

likes to keep fit and exercises regularly at an exclusive gym and spa. He has also engaged the services of a personal trainer to help him with his workouts as he feels he needs encouragement to exercise. The gym membership and personal trainer fees cost him $5,000 per annum. Frederick also loves playing drums and attends weekly drum lessons at a music school near his home. He views these activities as outlets for him to help reduce his work stress. It has been a good 13 years since Angeline was first diagnosed with multiple sclerosis.

Frederick is elated to see that Angeline is coping well with the disease and is hopeful that Angeline will survive the disease in the years ahead. At age 46, Frederick has only just become aware of the need to start planning for the future, in particular, his retirement with Angeline. The thought of planning for the future came during one of his routine gym workouts when Frederick felt strangely exhausted and tired after a regular workout. To him, it was a clear sign of ageing. That set him thinking about the future and the unpleasant consequences of not being able to work for as long as he thought he would be capable of.

Due to Angeline's poor health, Frederick is the sole breadwinner. They currently live in a 3-bedroom condominium and Frederick is currently using his CPF savings to service the outstanding mortgage loan on their home. They bought the home 5 years ago when they upgraded from their 4-room HDB flat in Jurong West. Although a 3-bedroom condominium might be too large for just the two of them, Frederick enjoys the extra space in the house and feels that purchasing a larger home would be a good way of participating in the real estate boom with little risk. The 3-bedroom freehold condominium cost them $1.6 million and they have utilised all their CPF savings for

their home purchase. Currently, Frederick is servicing the mortgage loan solely from his CPF Ordinary Account savings. He does not expect to accumulate much CPF savings in his Ordinary Account as the bulk of the money goes towards servicing their mortgage loan. When he retires at age 60, Frederick hopes to keep their current home

and hopes that he does not have to sell the house due to a lack of retirement funds.

Frederick hopes to retire at age 60 and estimates that he will spend at least 20 years in retirement together with Angeline. Frederick currently earns $80,000 per year and it is estimated that his wages will grow at 3% per annum. They currently have an uninvested cash savings of about $110,000. Their savings have been uninvested as the couple has been too caught up with coping with Angeline's disease in the earlier years to give any thought to investments. Frederick and Angeline are almost clueless when it comes to investing their monies. With little idea of how he should go about planning for retirement, Frederick has approached you, a financial planner, for advice on retirement planning matters.

Question 1

As Frederick's financial planner, analyse why it is important for Frederick to start planning for retirement now given his circumstances.

(15 marks)

Question 2

In an attempt to better prepare Frederick for the challenges in saving for retirement, explain and discuss the common pitfalls in retirement planning and advise on the strategies to help Frederick overcome such pitfalls.

(20 marks)

Question 3

Apply the Replacement Ratio Method using a replacement ratio of 70% to estimate Frederick's required retirement income when he retires at age 60.

(5 marks)

Question 4

Estimate the lump sum which Frederick and Angeline would require when Frederick retires at age 60. Assume an inflation-adjusted return in retirement years of 2.5% per annum.

(5 marks)

Question 5

Assume that Frederick invests their current savings of $110,000 in stocks and earns an inflation-adjusted return of 5.5% per annum. Estimate the future value of their current savings at retirement and determine if there is any shortfall in the retirement funds at retirement and the amount of the shortfall. In your computations, assume that the impact of CPF savings is negligible.

(5 marks)

Question 6

Given that Frederick has not been saving much for retirement all this while, there is a high chance that Frederick may need to downgrade from his existing condominium to a smaller one at retirement. To convince him of this possibility, estimate the additional on-going savings that Frederick will need to set aside yearly from now based on his current resources. Assume that the achievable inflation-adjusted rate of return on the additional on-going savings is 3.5% per annum.

(4 marks)

Question 7

As Frederick and Angeline lack financial planning knowledge, it would be important as their financial planner to ensure that they understand the steps in designing a retirement ortfolio. Discuss the steps for designing a retirement portfolio.

(16 marks)

Question 8

Frederick needs to seek some clarification on the withdrawal of CPF monies when he reaches age 55. Describe what happens to a CPF member's Ordinary and Special Account savings when he turns 55. As Frederick and Angeline both fear that they will not be able to meet the prevailing CPF Minimum Sum when the reach age 55, you need to highlight the specific CPF rulings with regards to the withdrawable amounts at age 55.

(10 marks)

Question 9

Frederick has heard of the Minimum Sum Scheme and the CPF LIFE Scheme but has little idea on what these schemes are. Frederick would like to understand these schemes better so that he can make a decision when he turns 55. As Frederick's financial planner, analyse the key features of CPF LIFE and discuss the difference between the current Minimum Sum Scheme and CPF LIFE.

(20 marks)