Finance for kids and adults ??

Prof Emeritus Lewis Mandell is in Singapore until next week. He teaches Economics for Managers in the UB (University at Buffalo) Executive MBA programme, which is offered in partnership with the Singapore Institute of Management.

Professor Mandell, who has researched financial literacy issues in the last 15 years, says teaching financial literacy to kids doesn't work. Financial literacy is defined as the ability to make important financial decisions for one's own benefit.

'I'm very pessimistic. I have been doing research continuously, tracking levels of financial literacy which have not gotten any better, and also attempting to measure the impact of educational programmes. The research gives no reason for optimism. It basically shows that students in high school who have had a course in financial education are no more financially literate than those who never had such a course. That's an indication that we have not figured out how to teach financial literacy.'

Since the financial crisis, regulators have been grappling with how the sale of investment products should be tightened particularly when investors are relatively financially unsophisticated. In Singapore, the Monetary Authority of Singapore has proposed a test to ascertain investors' knowledge before they can invest.

Prof Mandell says financial illiteracy takes a heavy toll on individuals and society. '(Mistakes) aggregate. They were not the sole factor in the meltdown but they were an important factor. If everyone makes a bad decision it can have a bad effect on the whole society. Is it possible to educate people to the extent that they will not make such mistakes? It does not appear to be possible.'

There are, however, ways to raise the chances that children will absorb sound personal finance principles. One way is to allow them real experience with money - with adult guidance.

Prof Mandell himself was allowed by his parents to invest his college education savings. 'When I was 13, my parents said - you have some money and you have an interest in the market. They called my broker, who was a cousin and told him to let me trade my own account. That was before there was online trading. So I'd call him and he'd invest. That helped me develop a great interest in finance.'

His daughter, he recounts, came home one day when she was 12, and said she wanted to invest in Pepsi instead of Southwest Airlines which was then a fast growing stock. 'She said - 'I think (Southwest) is boring. My friends and I all like the commercials for Pepsi. I want to invest all my money in Pepsi'.'

Prof Mandell told her to call the broker and to go ahead with whatever was jointly decided. 'The broker said - rather than invest all your money in Pepsi, let's invest half in Pepsi and half in Southwest.

'Pepsi fell. She lost some money but she learnt something extremely valuable. To this day she's very good at personal finance. She has a very good understanding that no matter how much you like a stock, it doesn't mean it will go up.

'I believe that it is useful to get children involved in their own finances to give them a degree of control with adult supervision. If they realise they are spending and investing their own money, they'll be much more serious about it than if it was a game.'

Children, he adds, should also be able to open their own savings accounts and have control over their spending. In Singapore, child accounts are typically jointly opened with a parent. Banks such as OCBC, however, do allow accounts solely in the child's name, from as young as five years old. Yet another avenue is to allow a child to have a supplementary credit card with limits on spending. This, he says, will teach the child to spend responsibly within a budget. Supplementary cards, however, can only be issued to a child of at least 18.

'I believe strongly in child accounts. I believe that a child should at a very early age have an account in his or her name, and that the parent should encourage the child to get into a behaviour of saving . . . If a parent can take money out of the account it doesn't give the child identification with those assets.'

Research on the effect of allowances on children yield startling results. There are generally three types of allowances, he says. One is a regular allowance. A second form is an allowance as a form of reward, for doing chores, for instance. A third is not to give a regular allowance, but to give money when the child asks for it.

'It turns out that children who get a regular allowance have the lowest financial literacy. Columnists are well meaning and often argue that an allowance teaches responsibility but it's the opposite. The ones who do best are those who get an allowance for doing chores or meeting expectations. They're followed closely by those who don't get a regular allowance but who ask for money.

'My reasoning is that children who get a regular allowance - it's like being on welfare. You're not reinforcing good habits. You're saying that regardless of how good or bad you are, I'm giving you this amount, and it doesn't tend to teach responsibility.'

Prof Mandell has been working on a proposal as part of the Obama administration's efforts to address the need for an 'automatic' retirement savings option that is safe and simple. His proposal, dubbed RS + (Real Savings +) is a portfolio that aims to provide capital and inflation protection with some upside from equities.

The default option in most US retirement plans is a target date fund where the asset allocation shifts to a more conservative profile as a worker nears retirement. But such funds came under fierce criticism in the crisis as their fairly heavy equity weightings caused severe losses.

Prof Mandell's portfolio would invest a portion in Treasury Inflated Protected Securities, at an allocation that would deliver the principal on an inflation adjusted basis at retirement. The balance is to be invested in equities through low cost index funds. 'My idea is to use financial engineering to develop products that are not going to make rich people richer, but to make ordinary people safer. They may use derivatives but to benefit the ordinary person rather than the financial institution.'

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We all need to invest early and start the day you start your first job ! !

We all dream of having a golden retirement - to indulge in new hobbies, travel and spend time with family. Whether you want to retire comfortably or lead just a simple lifestyle, you should take retirement planning early and seriously. You have to manage the transition from an employment income to an alternative stream of income - from savings or investments - to support your retirement period.

The time spent in retirement will rise with increasing life expectancy, so planning will also include managing longevity and inflation risks.

Start early :

There are times when retirement is forced upon individuals. By planning ahead, you ensure you are ready when it happens. Ideally, the best time to start planning is the moment you start work. When you have time to build your nest egg, you do not have to play catch-up. You do not have to take a higher investment risk to meet your retirement goal.

Points to remember :

Getting started early (regardless of the amount) is a means of forcing you to be disciplined. If you are 40, you are 264 pay cheques away from retirement, assuming you work till 62. If you put aside $1,000 per pay cheque, you will have a nest egg of $264,000. If you were to invest it at 4 per cent per annum, this amount will grow to $423,620.

Key factors that you should keep in mind include aiming to pay off your loans, such as mortgages, before you stop work. Also, educate yourself and be familiar with the financial world to help you get started. Ensure also that you have sufficient protection plans as medical costs are likely to increase as you age. Do not over commit on loans or spend on wants ( needs is important, not wants ), eg. car, club membership,etc which you do not really got to have them in life.......

Buy health protection plans, such as hospitalisation and surgical plans, critical illness and long-term care, when you are young and healthy to keep costs low.

Government schemes :

First, you can start with your Central Provident Fund (CPF) savings to build your retirement portfolio.  CPF members aged 55 from year 2013 (with at least $40,000 savings in their retirement account with the CPF Board) will automatically be enrolled in the national annuity scheme, CPF Life.  They can look forward to a stream of annuity income from age 65 for life.

Most are familiar with CPF savings but overlook another critical source of funds - the Supplementary Retirement Scheme (SRS).  For those who pay income taxes, SRS can be an excellent tax-deferral scheme. Each dollar of contribution to the scheme will reduce your taxable income by the same amount.

Individuals can leverage on this scheme to build a stream of retirement income. You can plan it such that your SRS drawdown starts at age 62 before your CPF Life Plan payment begins. You must complete your withdrawals in 10 years.

Alternative income streams :

Using cash savings and investments to build your retirement nest egg is another way.

A well-diversified retirement portfolio, consisting of investments in equities, bonds and commodities as well as fixed deposit savings, will provide staggered income streams. The proportion you place in each asset class will depend on the investment risk you are willing to take.

Having an annuity in your retirement portfolio is prudent because it would pay you an income as long as you live. You may want to supplement CPF Life payouts with annuity products to hedge against inflation.

With this, you do not have to worry about how long you live. The annuity products can be structured in your portfolio to cover your basic lifestyle expenses from age 65.

Guard your nest egg :

Don't be complacent about monitoring your retirement plan. Ensure that you monitor it - once a year, at least - as your investment risk appetite may fall or change over time.

Demise of a Singapore Great Legend...

PM Lee Hsien Loong's condolence letter on the demise of Dr Goh

15May2010

Dear Mrs Goh,

ON behalf of the government and people of Singapore, may I convey my deepest condolences to you and your family on the passing of Dr Goh Keng Swee.

Dr Goh was a founding father of Singa-pore. He belonged to the core group of leaders who struggled against the British colonial government, fought the communists in Singapore, and stood up against the communalists while Singapore was in Malaysia. After Singapore became independent in 1965, he tackled our nation's most critical problems, and laid the foundations for our prosperity and security. Without him, the Singapore story would have been very different.

Dr Goh was both a far-sighted visionary and a pragmatic manager. He was a man of ideas, but also excelled at bringing these ideas to fruition. Whatever the challenges, Dr Goh would stay calm, bring to bear his capacious mind, work out the best course of action, and then act decisively to solve the problem.

In his 25 years in office, Dr Goh served in the most important ministries, making bold, imaginative changes to the policies and structures that now define Singapore. As Finance Minister, he initiated the industrialisation programme and set Singapore on the path of sustained development and prosperity. As Defence Minister, he introduced national service and built up the Singapore Armed Forces (SAF) from scratch. As Education Minister, he totally restructured the education system, from primary schools to the universities.

In addition to the SAF, Dr Goh created and nurtured many institutions, including the Economic Development Board (EDB), Jurong Town Corporation (now called JTC Corporation), the Monetary Authority of Singapore (MAS) and the Government of Singapore Investment Corporation (GIC), which have endured and become distinctive features of Singapore's structure of government. He also set out the key principles guiding many of our policies, always in pellucid and magisterial prose. The fundamental tenets of thrift and hard work, free enterprise and prudent public finance, and harmonious industrial relations continue to form the bedrock of Singapore's competitive strengths and success.

For Dr Goh, success meant more than leaving poverty behind. He believed that for a nation to grow in confidence and resilience, it needed spirit and soul. Hence he conceived and launched projects like the Jurong Bird Park, the Singapore Zoological Garden, the Chinese and Japanese Gardens, and the Singapore Symphony Orchestra, for Singaporeans to relax, unwind, and develop an appreciation for the finer things in life.

In every organisation he headed, Dr Goh nurtured a culture of continuous adaptation and improvement to stay abreast of the changing world. He set high standards, and groomed and trained young officers to meet his exacting requirements.

Dr Goh strongly supported leadership renewal, a continuing imperative for Singapore. He actively pushed for the transition from the founding generation to a new, younger team of leaders who would lead Singapore to greater heights of achievement. In 1984, he himself requested to step down from Cabinet, though he remained active in many other roles, both in Singapore and abroad. What he created has endured, and become the foundation for succeeding generations to build and improve upon. However Singapore has progressed and transformed itself since Dr Goh retired, it still bears the imprint of the master builder of modern Singapore.

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DR GOH KENG SWEE, who died at the age of 91 yesterday, has been described as 'an intellectual politician,' 'a political entrepreneur,' and 'a social architect.' He was indeed an intellectual and a politician. He was also entrepreneurial in his thinking. And having served at various times as minister for finance, defence and education as well as chairman of the MAS, his thoughts and deeds had a far-reaching social impact. But Dr Goh was arguably, first and foremost, an economist who was able to harness his profound understanding of the subject and put it to work in the real world, for the betterment of people.

As finance minister in Singapore's first self-governing cabinet in 1959, he inherited a situation that he characterised as 'wretched.' Unemployment was 14 per cent, there was an acute housing shortage and reserves stood at a paltry $300 million. By the time he quit public life in 1992 (he had retired from politics earlier, in 1984), Singapore's GDP had increased by more than 11 times, manufacturing output had risen 20-fold and reserves were up more than 300-fold.

Although he had studied economic theory and continued to track new ideas in the field throughout his life, Dr Goh was disinterested in theory for its own sake. 'Governments are seldom moved by doctrines, principles, theoretical arguments and analyses which academics consider important,' he believed.

Dr Goh saw himself as a practitioner and cared most of all, for what he called 'the practice of economic growth.' He once wrote: 'A practitioner is not judged by the rigour of his logic or by the elegance of his presentation. He is judged by the results.' In his ideas and policy prescriptions he was guided as much by his knowledge as by experience, which he described as 'a harsh school in which there are no alibis for failure.'

Dr Goh's innate pragmatism and scepticism of received wisdom was translated into policy. In the 1960s, he rejected notions of 'import-substituting industrialisation' which were then fashionable among economists - the idea that countries should try to promote manufacturing by substituting for manufactured imports. He understood that this would cut off Singapore from the discipline of international competition and create vested interests among business and labour groups. Instead, he welcomed multinational corporations (MNCs), again in defiance of conventional wisdom, which viewed them as instruments of capitalist exploitation. Thus Singapore was able to industrialise quickly, tapping into best practices in technology, knowledge and management. Other countries were later to emulate the Singapore example.

While he had great respect for market forces, Dr Goh was not coy about pursuing an activist industrial policy, despite the claims of what he called 'liberal theoretical economists' that no government can foresee future economic changes and should therefore refrain from trying to pick winners. 'It would take a very obtuse economist not to have recognised that the electronics industry was in a state of dynamic expansion in the mid-1960s,' he declared. Singapore went on to leverage the electronics industry for the next four decades.

But in welcoming MNCs, Dr Goh pragmatically refrained from sticking to a target list of industries. Most were welcome. To the charge that targeting growth industries amounts to picking winners in a horse race, his reply was 'if you bet on every horse you are certain to pick the winners.'

On the crucial issue of economic growth, Dr Goh was suspicious of the prime role that economists traditionally accorded to capital investment. He also recognised that human skills and knowledge, especially technical expertise, were equally critical drivers of growth - something he also noticed in the advance of Japan, Korea and Taiwan. He viewed entrepreneurship as being important as well, although not just that of the traditional 'towkays' who built fortunes out of nothing. He recognised that even MNC managers, although paid employees, perform entrepreneurial functions, because 'they introduce a new product, or they open up a new supply of components for their parent companies.' Indeed, he believed that even state-owned enterprises could be entrepreneurial, especially when they entered areas that were previously under-invested or neglected by the private sector - a rationale for the formation of many government-linked companies in Singapore, which Dr Goh supported. However, mindful of the failings of state enterprises in many third world countries, he insisted that while government could own enterprises, it should never interfere in management. This has remained the governance model for all of Singapore's GLCs.

After retiring from politics, Dr Goh advised the Chinese government on the development of special economic zones and the promotion of tourism. He became an avid student of China's economic resurgence, and was prophetic about its prospects. As far back as 1993, he said: 'I believe China's economy can continue to grow at between 8 to 12 percent annually in most years over the next 2 decades.' He was also confident that China's economic reforms would continue. He was proved right.

As a minister, Dr Goh had his own distinctive style. For instance, he liked to see things for himself. CapitaLand CEO Liew Mun Leong, who worked with him in the Ministry of Defence, recalled in an interview with BT that he would often pick up the phone and call a line-manager or technician directly rather than go via the manager's superiors. He was also demanding, including of rigour. 'I expect every request for finance from me to be properly presented, well argued, with figures to substantiate,' he once directed.

Although an uncompromisingly tough policymaker, Dr Goh was a humanist at heart. In her vivid and insightful biography 'Goh Keng Swee: A Portrait', his daughter in law, Tan Siok Sun points out that, a classical music fan himself, Dr Goh believed that man should not live by economics alone. 'There is also a need for some soul,' he said. Thus, many of Singapore's recreational facilities and institutions - the Japanese and Chinese Gardens, the Jurong Bird Park, the Zoological Gardens, Sentosa Island, and the Singapore Symphony Orchestra were his initiatives and he persisted with them even though some of them lost money.

In fashioning an economic system virtually from scratch and building the institutions to make it work, Dr Goh was perhaps fortunate to have had the backing of an equally pragmatic and visionary prime minister. Historians will record that he and Lee Kuan Yew were a dream team. In December 1984, when Dr Goh retired from politics, Mr Lee wrote him a letter in which he is quoted to have said: 'Your biggest contribution to me personally was that you stood up to me whenever you held a contrary view. You challenged my decisions and forced me to reexamine the premises on which they were made. Thus we reached better decisions. This benign tension made our relationship healthy and fruitful.'

For all his towering achievements, Dr Goh remained modest and even retiring. He rarely sought the public eye and granted few interviews. Looking back towards the end of his life, all he allowed himself to say was 'life has been kind me in that I had this opportunity to make my contribution to Singapore's development and to lay a foundation for the next generation to build on.'

With the passing of Dr Goh Keng Swee, Singapore will mourn one of her greatest sons and the world has lost one of the most brilliant economic practitioners of his generation.