How To Grow Your Nest Egg

By saving and investing

How to grow your nest egg by saving

The amount of money you will need to live comfortably when you stop working is not an easy number to conclude. Some people are cautious and live frugally while saving aggressively. Others are complacent about their future and assure themselves that they have CPF savings to fall back on.

From coin banks to stashing money under the mattress to…

To build a sense of security for the future, most people put their money in savings accounts and fixed deposits. This is seemingly better than saving in coin banks and under mattresses because of the interest to be earned. However, the interest awarded with such accounts is so little that it would take decades to build a substantial amount.

Will $2012 become $20.12 in 20 years' time?

If you're relying on cash savings for your retirement, be aware that inflation can depreciate the value of your savings. When setting savings goals for your retirement, remember to set your target in future dollar value.

How to grow your nest egg by investing

You can retire. But your money shouldn't retire. Making your money work hard for you can be an effective part of your retirement savings plan.

Before you invest

From low to high-risk products, short to long-term instruments, you should have an understanding of investment basics before you commit to any investments. Do your own research, educate yourself through courses and speak to your financial adviser to know what you're getting into. Here's a brief introduction to the terms you should familiarise yourself with if you are planning to invest:

Asset Allocation

This is how you divide your money to various asset classes. Asset allocation reduces investment risk as losses in one asset class are often offset by gains in another. This way, you are balancing the risks by not putting all your eggs in one basket.

Asset Classes

The different investment products available are usually classified as "asset classes". Assets within the same class tend to react similarly in different market conditions. It is therefore important to understand the levels of risks and return for each class before deciding upon the option that is best suited for your investment goals. In general, there are three main asset classes:

• Cash or cash equivalents

• Fixed income or bonds

• Stocks or equities

Diversification

This age-old advice will guard you against major losses - don't put all your eggs in one basket. Investment diversification means spreading your investments over different baskets of asset classes. This way, your losses will still be manageable should some of the baskets fail.

Investment Risks & Returns

From low to high, all investments come with risk. That's why you have to envision the worst-case scenario for every investment you make. Just ask yourself, "Can you afford to lose this amount of money?" The investment risk spectrum is usually classified from low to high, with higher risks promising higher returns.

Investment Time Horizon

This is the length of time over which an investment is held until you need to sell your investment. There is no such thing as 'the right time frame'. Everything is dependent on the investor's investment objectives.

• Long Term: Usually more than 10 years. Riskier investments can be considered as there is enough time to ride-out any fluctuations in prices.

• Medium Term: Usually a period of 4 to 9 years. Typically invested with a conservative mix of stocks and bonds.

• Short Term: Usually less than 3 years. Normally invested in guaranteed securities like high-interest savings account or bonds.

What can I invest in?

Cash and Cash-Equivalent Products
This includes savings accounts and "cash-like" investments like treasury bills and money market funds. These offer relatively low rates of returns compared to other kinds of investments.
Risk: Low | Returns: Low

Fixed Income or Bonds
Bonds and other "fixed income" products are loans to a government or a company. Since you are lending money, you are promised an interest on your money and the face value of your investment at the end of the agreed loan term. Offering better returns than cash equivalent investments, there is more risk as you are lending your money out for a longer period. There is also the risk that the government or company whom you loan to might collapse, leading to a loss of your invesments.
Risk: Medium | Returns: Medium

Stocks or Equity
You can grow your money by investing in stocks if the stock increases in value or if the company you bought shares in pays a dividend. However, investing in stocks is volatile as the value of a stock can fluctuate so there is no guarantee that a stock will make money or that the company will pay a dividend.
Risk: High | Returns: High

Unit Trust / Mutual Fund
When you buy a unit trust or mutual fund, you are putting your money in with many other investors and leaving the investment decisions to professional fund managers. The fund managers use their knowledge and experience to decide what the best investments are for the fund. The level of risk and return of a unit trust or mutual fund are variable and depends on what it invests in. This is a relatively low cost way of investing in a variety of stocks.
Risk: Variable | Returns: Variable

Life Insurance
You could purchase an Investment-Linked Plan (ILP) life insurance policy or a whole-of-life Participating (PAR) insurance plan that provides a combination of protection and investment. Your premiums buy you life insurance protection and investment units for potentially higher returns.

Endowment Plans
Endowment plans provide life insurance coverage for a fixed period. Upon maturity, the insured receives the sum assured at the end of the term. An example of an endowment plan that is specifically tailored for retirement is Aviva's MyRetirement – a capital-guaranteed retirement plan that provides monthly-guaranteed retirement income for 10 years upon your chosen retirement age.

Planning for retirement?

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