Singapore is one of the countries with the highest median death age or it simply means that Singaporeans live long lives.
According to Worldbank, Singapore’s median death age was 65.7 years in 1960 (birth year) and has increased to 83.1 years in 2018 (birth year). That’s a compounded annual growth rate of 0.41%.
Singstat has reported that 1 in 3 people in Singapore would live beyond 90 years old.
It is natural for a retiree to worry about running out of retirement funds before his death.
While the stock market can provide high returns, you can also experience a large drawdown on your capital, and the recent volatility is a stark reminder of that. Hence, the stock market isn’t a safe place to park all your retirement sum.
The most prudent way is to buy an annuity to provide for your retirement cash flow.
An annuity is a financial product that pays out income for a life time. Typically, it comes with fixed payout, is capital guaranteed and underwritten by an insurance company.
You may have thought of relying on your CPF money for your retirement. Indeed, CPF LIFE is an annuity programme that pays out for life from age 65. However, the cash flow may not be enough for you and you would need to plan and supplement with other income generating assets during your retirement.
I will discuss the features and benefits of private annuities to do just that.
#1 – Guaranteed Capital and Guaranteed Payout for Life
The death payout is often higher than the total premium paid. Also, the surrender value for an annuity plan is usually higher than the total premium invested after a lock-in period. As such, your capital is guaranteed and will be returned to you or your beneficiaries.
The key benefit of an annuity is the guaranteed payout on a monthly or yearly basis. Annuities with a lifetime payout feature also ensures that you do not outlive your savings.
Dividends can be a good source of retirement income but relying on it alone might create large inconsistency in your cash flow. This is because dividends will fluctuate and companies would even withhold the dividends during bad times. You will appreciate that your income is certain from an annuity plan even during times of great uncertainty.
Moreover, stocks are considered high-risk investments. Assuming that you need $3,000 income per month during retirement and you have invested all your capital in stocks. At 4% withdrawal rate, you need to invest about $900,000.
During a period of high volatility like what we have experienced this year, your high-risk investment portfolio may decline by 30% to 50%. Are you willing to accept wiping out $300,000 to $450,000 from your portfolio? Are you able to afford such losses during your retirement years?
Thus it makes sense to diversify your investments with an annuity. At least you will have a portion of your portfolio that is protected from downside risk due to the capital guaranteed feature of an annuity.
#2 – Tailored Made For You
There are many ways to structure an annuity plan to fit into your retirement portfolio. You can adjust the payout age, payout duration, inflation adjusted payout, premium term and many other options. There’s no one-size-fits-all and you should optimise them to your advantage. By using a tailor-made plan, you will be able to distribute your wealth in a more effective way and receive the payout only in the years you need it.
#3 – Returns and Lock-in Period
In general, the returns from annuity is not as high as investment from stocks or even some bonds. This is understandable as the risk level is lower compared to stock or bond investments. Typically, you can expect 3% to 4% returns from an annuity. But buying an annuity is not just about the returns. It is about providing certainty of cash flow and protecting your capital from market volatility which we have discussed earlier.
An annuity plan usually needs to be invested for a certain period before you can receive the payout. If you are only looking for short term investments, annuities should not even be considered. You will usually get back less than the total premium invested If you surrender or terminate the plan prematurely. While there are plans that begins paying out at the first policy year, the returns are usually too low to even make sense.
#4 – Types of Annuities
Annuity plans have evolved over the years and now you have plenty of options to choose from. There are 3 types of annuity plans that could fit into retirement plans of most people:
Type 1: Annuity for Early Retirement (Payout before age 65)
It was announced in the National Day Rally 2019 that the official retirement age in Singapore will go up to 63 in 2022 and will be raised further to 65 by 2030. Our CPF LIFE payout starts from age 65. If you want to retire earlier, you need to generate sufficient passive income for retirement. For example, a person at age 35 who plans to retire at age 50, he can get an annuity plan with payouts from age 50 to age 65:
- Entry Age: 35
- Premium Term: 15 years
- Premium Amount: $992.50/month
- Payout Age: from 51 to 65
- Projected Payout Amount: $1,672.24/month
Type 2: Annuity for Retirement (Payout between age 65 to age 85)
65 to 85 years old is a golden period for retirement. During this period, we want to enjoy the wealth we have accumulated as much as possible. To supplement the CPF LIFE payout, we can get a private annuity plan to increase our passive income. Assuming a person at age 40 needs $4,000 income per month. He can get an annuity plan with $2,000 payout each month between age 65 to 85, on top of the CPF LIFE enhanced standard payout of $2,180 per month.
- Entry Age: 40
- Premium Term: 10 years
- Premium Amount: $1,098.15/month
- Payout Age: from 66 to 85
- Projected Payout Amount: $1,969.08/month
Type 3: Annuity for Longevity (Payout for lifetime)
There’s an increasing possibility that you would live beyond the median death age of 83. To avoid outliving your savings, you can get an annuity plan that pays out for a lifetime. This type of plan usually comes with a cash value when you surrender it. There is also a death payout which will be higher than the total premium invested, so that your family will certainly get back more than the total premium invested. Here is an example of an annuity plan that pays out for life from age 60:
- Entry Age: 45
- Premium Term: 15 years
- Premium Amount: $1,500.55/month
- Payout Age: from age 60 till death
- Projected Payout Amount: $1,265.83/month
- Projected surrender value: $309,209 at age 85
Do note that the examples above are purely for illustration purposes. I did not perform any comparison as the main focus of this article is to explain the concept of private annuities rather than to do a product comparison. Annuity plan should be well tailored to an individual.
#5 – The Best Annuity Plan
The best annuity plan is not the one that gives you the highest returns. The best annuity plan should be one that fits into your retirement portfolio and help you achieve your goals. There is no point getting the highest return but at a very old payout age (e.g. at age 90). You can get the highest returns but you get the returns too late.
Conclusion
I have always advocated investing in a well constructed balance portfolio by mixing high-risk and low-risk investments. Adding a private annuity plan into retirement portfolio will provide some income stability during retirement and protect part of the capital that you have accumulated over the years. If you need a tailor-made annuity plan, please drop me a message in the contact form.
