Financial Planning by Need Area *(Part II — skills)*

Concept

Financial planning is organised around distinct need areas, each addressing a different risk. The skill is to identify unmet needs, prioritise them (protection before wealth-building), quantify the shortfall, and match a solution to the client's situation, time horizon and risk tolerance. Part II adds the *numbers*: sizing each gap with a calculation.

Key rules & facts

• Protection (death / disability / critical illness / medical): two sizing methods —

- *Human Life Value (HLV)* — capitalise future income (income × working years, discounted).

- *Needs-based* — total obligations − existing resources = coverage gap. Generally preferred: tailored to actual needs rather than inflated by raw income.

• Savings / emergency fund — a liquid buffer, typically 3–6 months of expenses (verify), built *before* investing.
• Investment — *asset allocation* is the primary driver of risk/return; *diversification* reduces unsystematic risk; higher expected return demands higher risk tolerance + a longer horizon.
• Retirement — CPF LIFE is a lifelong annuity paid from the Retirement Sum, but usually replaces only *part* of pre-retirement income (verify). Retirement gap = income needed − expected income; longevity and inflation widen it.
• Estate — will (estate assets) · CPF nomination (CPF monies, which fall *outside* the will) · insurance nomination (policy proceeds) · LPA (appoints a donee if mental capacity is lost).

Need areas — how to size each

Worked example — Needs-based protection (coverage gap)

Client's obligations and needs:

• Outstanding mortgage: $300,000
• Income replacement for family (5 years × $60,000): $300,000
• Children's education fund: $150,000
• Final expenses: $20,000
• Total need = 300,000 + 300,000 + 150,000 + 20,000 = $770,000

Existing resources:

• Current life cover: $200,000
• Liquid savings/investments: $80,000
• Total resources = 280,000

Coverage gap = 770,000 − 280,000 = $490,000 of additional cover required.

Worked example — Human Life Value (for contrast)

Annual income $60,000, 20 working years remaining, discounted at 4% (PV of an annuity):

PV = 60,000 × [(1 − (1.04)^-20) ÷ 0.04].

• (1.04)^20 ≈ 2.191123, so (1.04)^-20 ≈ 0.456387
• (1 − 0.456387) ÷ 0.04 = 0.543613 ÷ 0.04 ≈ 13.5903
• HLV ≈ 60,000 × 13.5903 ≈ $815,419

Note HLV (~$815k) exceeds the needs-based figure (~$490k gap) — HLV can *over-state* cover because it is driven by raw income, not actual obligations. This is why needs-based is generally preferred.

Worked example — Emergency fund

Monthly expenses $4,000; target 6 months (verify).

Fund = 4,000 × 6 = $24,000 to hold liquid before deploying to investments.

Worked example — Retirement gap

Desired retirement income: $40,000/year. Expected income (CPF LIFE + other): $25,000/year (verify CPF figures).

• Annual shortfall = 40,000 − 25,000 = $15,000
• Over a 25-year retirement (ignoring inflation/returns, for a first estimate): 15,000 × 25 = $375,000 additional capital needed.

Inflation and longevity would push this higher — a fuller calc discounts the stream and indexes it for rising prices.

Worked example — Education need

Future degree cost in 15 years: $120,000. Already earmarked today: $20,000 growing to an estimated $35,000 by then.

Funding gap = 120,000 − 35,000 = $85,000 to accumulate via regular savings.

Exam angle

Situational / case-cluster questions — "client 30, married, 1 child, mortgage — which need is most urgent?"; sizing a coverage gap from given figures; and matching the right tool to the right asset (CPF nomination vs will).