Amount Of Savings: Affecting Your Investment Strategy More Than Your Life Stage
Basic Of Budgeting: 50/30/20 Budget Rule
For someone who is a total “NOOB” to budgeting, the 50/30/20 rule is a quick go-to formula to help you kick start the journey on salary allocation.
For those who are not sure of what the 50/30/20 budgeting rule is about, here’s a quick recap.
| Percentage Allocated | Where Is It Allocated To? | What To Spend On? |
|---|---|---|
| 50% | Needs | Groceries Housing Utilities Health Insurance Payment for transport Daily Necessities |
| 30% | Wants | Shopping Dining Out Hobbies |
| 20% | Savings | Savings |
This budget allocation rule may be a simple guideline, but it is not elaborated nor does it take into account all the various circumstances which an individual is in.
Or as how one of our Seedly Personal Finance Community member, Zhirong, puts it, “A lot of advice is piecemeal rather than a journey”. He can’t be more right!
TL;DR – Your Amount Of Savings Affects Your Investment Strategy More Than Your Life Stage
Investing Through Life Stages For Singaporeans
For the longest time, the life stage of a Singaporean is used to determine the risk appetite and investment strategy.
In fact, Seedly once broke down a Singaporean’s life stages according to their age and gave a general starting point in terms of risk appetite.
| Age Range | Goals | Return Expectations | Risk Appetite | Liquidity |
|---|---|---|---|---|
| 20-30 Years Old | Education, Marriage, Holiday | High | High | Low |
| 30-40 Years Old | Children, Education, Insurance | Moderately High | Moderately High | Moderately Low |
| 40-50 Years Old | Children's Marriage, Retirement | Balanced | Balanced | Balanced |
| 50-60 Years Old | Retirement | Moderately Low | Moderately Low | Moderately High |
| More than 60 Years Old | Holidays, Estate Planning | Low | Low | High |
From there, a highly recommended rule of thumb to stick to will be:
(110 – Your Age) = % of the portfolio that should be in equities
Investment Strategy And Portfolio Mix At Various Life Stages
In fact, the Sunday Times recently published a breakdown of life stages and investment strategy.
| Age Range | Situation/ Life Stage | Investor Profile | Investment Strategy | Portfolio Mix |
|---|---|---|---|---|
| 20 - 30 | Fresh graduate or those who have worked for a few years | Willing to assume a relatively higher level of risk to achieve long-term capital growth. | High growth (Aggressive) | Equity funds |
| 31 - 40 | Planning to get married or buy a new home | Willing to assume an above average level of risk to achieve higher returns | Growth | Mixed asset funds (eg. 70% of asset in equities, 30% in fixed income securities) |
| 41 - 50 | Planning to send children to study overseas | Willing to assume a medium level of risk to achieve stable returns | Balanced | Balanced asset funds (eg. 50% of asset in equities, 50% in fixed income securities) |
| 51 - 60 | Children grown up and working | Willing to assume a relatively low level of risk to achieve stable capital appreciation | Conservative | Capital stable asset funds (eg. 30% of asset in equities, 70% in fixed income securities) |
| 61 and above | Approaching retirement | Willing to assume the lowest level of risk with primary focus on capital preservation. | Defensive | Conservative fund |
Source: Allianz Global Investors
Both of the above illustrations give a good start point, it is all lacking in one important factor that can immediately change one’s risk preference.
Cutting away all the fluff, our risk preference at any stage in life actually boils down to one very important factor. The amount of savings you have.
Your Amount Of Savings Determines Your Life Stage
Think of it this way, everything we try to achieve affects our savings directly.
- We try to clear our loans as fast as possible so that we can start saving
- The occupation and salary an individual is getting, affect how much he can save every month.
So what if someone were to be at a certain life stage, but the amount of his savings has yet to catch up?
The Correlation Between Age And Amount Of Savings Is Inaccurate
It is inaccurate to correlate age with the amount of savings we have. A common assumption will be that younger Singaporeans will have lower savings compared to the older generation of Singaporeans.
We all know that there will always be outliers.
The Amount Of Savings Matters!
Having a $100,000 worth of savings at the age of 20 years old compared to someone at age 50 affects their risk appetite.
The amount of savings at various life stage can influence his risk appetite.
It Is All About The Savings
Your life stage affects the liquidity required, but the earlier you achieve your savings target at various stages can help you with your investment strategy.
The inefficiency of a general 50/30/20 budgeting formula happens when one is more advanced in his personal finance journey. In this case, his amount of savings!
For simplicity, here are the assumptions we made:
- Assuming a Singaporean looking to retire at age 62, he will need $300,960 in savings. We set it as $400,000 in savings to keep things simple.
- Assuming our goal is to reach our retirement amount as soon as possible, and once we hit $400,000 in savings, we become risk-averse.
Editor’s Note: This is solely based on my point of view. Do reach out to us if you feel otherwise! We would love to hear from you and improve this article!
| Age Range | $10,000 in savings | $50,000 in savings | $100,000 in savings | $200,000 in savings | $400,000 in savings |
|---|---|---|---|---|---|
| 20 - 30 | High growth (Aggressive) | High growth (Aggressive) | High growth (Aggressive) | Defensive | Defensive |
| 31 - 40 | High growth (Aggressive) | Growth | Growth | Balanced | Defensive |
| 41 - 50 | Balanced | Balanced | Balanced | Balanced | Defensive |
| 51 - 60 | You are in deep trouble | Conservative | Conservative | Conservative | Defensive |
| 61 and above | You are in deep trouble | You are in deep trouble | Defensive | Defensive | Defensive |
- If you do not have enough savings by the time you are past 50 years old, it is time to have a proper back-up plan.
- After the age of 61, whatever savings you are stuck with, is important. Any unnecessary risk should be avoided.
- At age 41 to 50, your children’s education is important, hence, a balanced portfolio ensures that you will still have a minimum safety net.
- If you are young and have got high savings, you will be able to adopt an aggressive investment portfolio to get to your savings target as fast as possible.
Investment Strategies And What To Invest In?
Here’s a quick recap on investment strategies and how one should allocate his investments:
| Investment Strategy | Portfolio Mix |
|---|---|
| High growth (Aggressive) | Equity funds |
| Growth | Mixed asset funds (eg. 70% of asset in equities, 30% in fixed income securities) |
| Balanced | Balanced asset funds (eg. 50% of asset in equities, 50% in fixed income securities) |
| Conservative | Capital stable asset funds (eg. 30% of asset in equities, 70% in fixed income securities) |
| Defensive | Conservative fund |
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