How Well Endowed Are You? (Making the Most Out of Short-Term Endowments)
Imagine if you need to pay for a wedding in two years’ time, but in order to keep the money growing, you invested the funds and are now sitting on losses due to a market downturn. How do you tell your other half that the wedding fund has been halved?
While investing in the market is a great way to grow your wealth over time, the volatility of market cycles and unpredictable economic events mean that investments are not liquid when money is needed within a short period of time.
For short time-frames, I usually advise to
park funds in a low-risk product that will mature and pay out with interest
ahead of its intended use. Even better if there are guarantees to prevent any
loss of capital. One such product is a short-term endowment.
What is an Endowment?
Endowments in the Singapore context are insurance policies with accumulated or paid out cash values. As these endowments have fixed durations, maturities can be planned. Some endowments guarantee the principal and also the payouts.
Most endowments available in the market mature between 15-25 years, with some endowments even offering flexible maturities up till age 120. This article focuses on short-term endowments with maturities up to 5 years and how they can be used.
Short-term endowments usually have attractive
rates of return that can be higher than fixed deposits and Singapore Savings
Bonds (SSBs). Not only is the capital guaranteed upon maturity, the interest
may also be guaranteed. Furthermore, the policy is protected by the Singapore
Deposit Insurance Corporation (SDIC).
Why an Endowment?
If you have accumulated some funds but are uncertain as to when you will be deploying the capital, you can consider a short-term endowment. Your capital will still be there when you need it subsequently and the rate of return will be higher than your bank interest. So why not get paid for waiting?
Short-term endowments tend to be more
open-ended in their use, and the specific maturity date allows for easy
planning while the capital and payout guarantees give assurance. Let’s explore
some uses.
Uses for a Short-Term Endowment
1. Upcoming Large Expense
Money that has been set aside for a future
event can be used to purchase a short-term endowment policy. The fixed future
date of maturity allows the investor the ability to plan when the money can be
used, whether it is for a wedding, downpayment for a house, or for overseas
travel.
2. SRS
Some short-term endowments can be bought with money in SRS (Supplementary Retirement Scheme) accounts. Funds in SRS only earn 0.05% interest and SRS monies that were used to get a tax reduction should not simply sit around idly until the account holder turns 62 as they are constantly losing value through inflation.
3. Waiting for the Next Business or Investment
Opportunity
During the Covid-19 pandemic, many businesses struggled to survive. Some businesses shuttered in order to preserve capital. A better option than leaving their capital in the company’s current account would be to park it in a short-term endowment while waiting for the next opportunity to strike.
Property investors turned off by the latest additional property measures may wish to move their capital into a short-term endowment while waiting for the situation to cool off.
4. Exit Strategy for Higher Risk Investments
Having an exit strategy using short-term endowments can allow investors the time required for their higher risk investments to ride out market volatility.
For example, an investor can liquidate some of his upcoming living expenses from his investment holdings and park it in a short-term endowment, giving his remaining investment portfolio more time to compound.
Another way would be to ‘take profit’ from investments while in a bullish environment, and park the cash in short-term endowments of different maturities, thus spreading out the payouts over time.
5. 3-Tier Approach to Retirement
Retirees looking to create fixed income from their ample capital can use a 3-tier approach. The first tier consists of highly liquid immediate-use funds which should ideally last a year. The second tier can be made up of capital-protected products or stable investments, such as short-term endowments, which will mature at differing periods to replenish tier 1. The third tier will be their rolling investments or longer-term endowments, of which a portion at a time can be liquidated to replace tier two, leaving the bulk still invested.
With the versatility and certainty of short
term endowments, perhaps you can find a place for short-term endowments in your
financial portfolio. Do speak to our consultants if you would like to find out
more.
Written by:
“You are your best investment, but always have a Plan B”