Accumulation of Savings

This table shows the accumulated amount of savings at various rates of interest, and the reduction caused by the charges taken away from your savings by the financial product.

For example, if you save $500 a month and earned 5% per annum for 35 years, you will get an accumulated amount of $569.018. If the financial product takes away 2% per annum (which is quite common) to give a net return of 3%, you will get an accumulated amount of $373,656, or a reduction of 34%.

A good financial product will take away a reduction of 0.5% leaving you a net yield of 4.5% and an accumulated sum of $510,894 or 37% higher than $373,656. An example is an exchange traded fund (ETF) or a low cost unit trust.

Choose a financial product that takes away not more than 1% of your yield. Avoid financial products, including most life insurance policies, that takes away more than 2% of your yield, leaving you with a poor return.

When you buy a life insurance policy, you get a benefit illustration. Look at the figure shown as "reduction in yield". You will find the reduction to be more than 2%. If you do not know where to find it, ask the insurance agent to tell you (it is the duty of the agent to explain this infromation to you).

If you have already bought a whole life, endowment or investment-linked policy, or a variation of these plans, you can ask the insurance company to send you the benefit illustration again and tell you about the reduction in yield.

A survey carried out in my blog indicated that 80% of people who bought a life insurance policy were not told about the distribution cost (which causes a large portion of the reduction in yield) and, after learning about it, almost all of them felt that the distribution cost is too high. They felt that the agent should have told them about it.

The remaining 20% who were told about the distribution cost could have bought a single premium policy where the distribution cost is quite small and is likely to be explained by the agent.

Tan Kin Lian

Note: This new chapter will be added to my book on Financial Planning: Practical Steps