Reflections on National Day celebrations

'SIAO on' (a Singaporean term for being overly serious or on the ball) is how my closer friends describe me when it comes to National Service (NS). I started serving my NS in the army at the age of 19 and continued to volunteer beyond my liability till March this year at the age of 50.

People asked me why I do it and my answer is that I believe in the need to defend our country. As I read the events unfolding in Afghanistan and watched the horrific video of people falling to their deaths mid-air from the US airplane taking off at Kabul, it further reinforces this conviction.

Former prime minister, the late Lee Kuan Yew knew this when Singapore was thrust into independence in 1965. He understood the vulnerability of our tiny island-state and was concerned about the security of the fledgling nation that had just been separated from Malaysia, and even more so when the British troops pulled out of Singapore in 1971. So, our leaders decided to build our own armed forces.

Besides putting in place military defence, our leaders also understood the importance of a strong economic defence. As a small country with no natural resources, importing most of its food and dependent on external trade for income, with no hinterland, Singapore was not expected to survive.

These gave our leaders two convictions. First, we need to make ourselves relevant to the world so that we can survive and second, we need to build strong reserves so that we can withstand any crisis that may come our way. This gave birth to the Government Investment Corporation (GIC) as well as Temasek Holdings. Together with the Monetary Authority of Singapore (MAS), they manage three pots of the country's reserves.

The farsighted decisions to build our own armed forces as well as strong reserves have enabled us to enjoy peace and security. In addition to the ability to fend off would-be invaders, security is also in the form of financial reserves which give investors confidence in Singapore. This was seen during the Asian Financial Crisis in 1997.

During the Global Financial Crisis in 2008/09, reserves were drawn down to finance a package of measures, including subsidising employers' wage bills to preserve jobs and co-sharing the risk of bank lending to help companies stay afloat.

In the Covid-19 pandemic, the strong reserves bought us sufficient vaccines quickly and also supported companies to protect workers' livelihood.

The Singapore experience has taught us that whether we are in the accumulating phase or withdrawal phase of our lives, there is a need to build sufficient reserves to buffer against unpredictable events. But while a lot is written about having an emergency fund in our accumulating years, very little is discussed about having reserves in retirement, which is even more important.

Seven buckets

In Providend's RetireWell methodology (you can read about it from my previous articles on our website), we integrate various retirement assets (properties, CPF, insurance endowments, equities, bonds, etc) into a spending plan that ensures a reliable income during retirement, and still ensuring a financial legacy if desired. The assets are optimally divided into seven buckets with assets in each bucket being used at different periods of time in retirement.

For the financial assets such as equities and bonds in the buckets, we assume a certain rate of return for planning purposes. But if the assumptions do not hold true, we may not be able to have the expected income as planned. So we did a study on the rolling returns of our portfolios spanning over a 30-year period (which included many volatile market events such as the 2000 dot-com bubble, the 2000-2002 bear market and of course, the 2008 GFC. The results are shown in the table above.

The good news is that over this 30-year period, none of our portfolios returned zero per cent, or lost money in any instances. This supports our belief that in the long run, the stock markets always give a positive annualised return.

The bad news is that positive returns do not always mean sufficient returns as can be seen by the various instances where the portfolios' returns were lower than the assumed returns used in our planning. That means we may not have the desired income in retirement. One way to mitigate this risk is to spend less. But that may not always be possible or desirable due to various "life decision" reasons.

Reserve Bucket

Our solution is to create a "Reserve Bucket" where a certain amount of assets is set aside and invested long before it is needed.

But the question is - how much should one set aside as reserves? If we want to set aside for every possibility, we will need too much capital which is not practical. But if we set aside too little, then when circumstances call for it, the reserves may not be enough.

Space constraint does not allow me to elaborate on how we determine how much is enough and the kind of portfolios the reserves are invested into. Suffice it to say that a lot of empirical work has gone into finding that optimal balance.

Since young, I have loved to celebrate National Day and would not miss a single National Day Parade (NDP) because the parade in its entirety always tells the Singapore story. For me, celebrating National Day and watching the NDP are the time I set aside to be grateful for being a Singaporean.

If you are a Singaporean, when you watch the parade this evening, I hope you enjoy it and feel the sense of pride and gratitude for how far we have come. I hope you also remember the precious lessons that our forefathers have passed down to us. Build strong reserves for yourselves and before you are gone, perhaps put in place a legal structure and guide your future generation on how the reserves can be used wisely.

• The writer is CEO, Providend Ltd, Singapore's first and probably sole fee-only comprehensive wealth advisory firm. He can be contacted at chris_tan@providend.com