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. Angelines 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.

Fredericks 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 fathers 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 brothers holidays. Fredericks

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 Angelines 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 Angelines 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 Angelines 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 Fredericks 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

Fredericks 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

portfolio. 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 members 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 Fredericks financial

planner, analyse the key features of CPF LIFE and discuss the difference between the

current Minimum Sum Scheme and CPF LIFE.

(20 marks)