Financial planning - preparing for redundancy

First posted in January 2010. Re-posted in July 2010

Redundancy is defined as retrenchment and premature termination of contract. It represent loss of employment that is initiated by the employer. There were 16,000 redundancies in 2008 and has already reached this fugure for the first 9 months of 2009, representing 0.8% of the employed population.

This figure does not represent involuntary loss due to "difficulty of working with management" or "asked to leave". If the other reasons are included, the redundancy rate is likely to be much higher, maybe 2% a year or higher. The risk of being terminated during a working life could be more than 50%.

Many workers who are lost their jobs involuntarily will face difficulty in getting another job that pays equally well.  There are many mature workers who have been unemployed for several years.

It is important to be financially prepared for involuntary loss of job. Here are the necessary steps:

a) Have liquid savings representing 6 months of earnings
b) Reduce your fixed commitments, especially on life insurance savings
c) Buy a property that represents not more than 4 or 5 years of the family income (after deducting cost of employing a maid)

You should avoid savings in a life insurance policy, as the regular premiums will be a financial burden when you are unemployed, and you will suffer a large loss, or penalty, if the policy is terminated early. If it is terminated within the first five years, you may lose up to 50% of your savings. You can only break even if you pay the premium for more than 15 years, in most cases.

It is better to save in a savings account or save-as-you-earn account (which pays slightly higher interest) and invest in an exchange traded fund, money market fund or a unit trust that has low initial and annual charges. If you have to withdraw your savings, you do not suffer a penalty, but you do have to take the market risk.

These concepts are explained in my book "Practical Guide on Financial Planning", which will be available in the bookstores in March 2010. It is important for young people to be educated about these principles before they start work, and to avoid locking up their savings in an inflexible, high cost, life insurance policy.

You only need to worry about medical insurance (e.g. Medishield) at the start. You do not have to worry about life insurance until you are married. After marriage, you can have Term Insurance or Family Income benefit at a low premium (say, 1% of your annual income). You can check this website for an indication of the premium for Term Insurance.

Tan Kin Lian