I write this article to help retirees, who are not savvy in investing, to decide on how to invest their savings to get a monthly income for a lifetime and leave behind some balance for their children and grand children. Should they buy a life annuity? If not, how should they invest their money?
Calculate the total amount of your assets, excluding the flat or house that you now live in. Estimate the monthly income that you need to live comfortably. If your total assets is more than 300 times of your monthly income, you are quite comfortable. For example, if you need $1,000 a month, you need more than $300,000 in savings (i.e. personal savings and CPF).
Another way to look at this matter is to take your total assets and divide by 300 to get the monthly income. Will this be sufficient to meet your living expenses?
If you have more than this ratio of assets that can be invested, you can manage your own investments. The best choice is to invest in a low cost investment fund, such as the STI exchange traded fund that is available from the Singapore Exchange (SGX). This fund is invested in the top 30 shares listed in SGX. It is well diversified and has a low expense ratio of less than 0.5% per annum. It will earn a market rate of return, which is likely to average more than 5% over the long term, net of expenses.
If you invest all of your savings in the ETF, you can sell 1,000 shares to realize money to spend at regular intervals. If you need $1,500 a month, the sale of 1,000 shares will provide about $2,800 which can last nearly two months.
If your ratio of assets to monthly income is less than 300 times, you may have to consider investing in a life annuity. The best annuity is provided by CPF Life. It provides an investment yield of about 4% and has low expense ratio. It operates on a mutual basis and shares the actual experience of the fund fairly among all the annuitants, i.e. it is not taken away as profits for shareholders.
Some people are uncertain about the choice of the four options. Look at the amount that you will get under each option and choose the option that suits your need. Do not try to calculate which option gives you the best value, as you really do not know how long your future lifespan is.
If your health is poor, relative to your age, you should avoid CPF Life and keep your money under the Retirement Account to be withdrawn monthly. If you are in fairly good health for your age, you can choose any of the option under CPF Life and leave the worry about future life expectancy and investments to CPF, instead of trying to manage the money yourself.
If you have to buy a life annuity from an insurance company, you have to consider the following - how much of the annuity payout is guaranteed and how much is variable? What is the amount taken away by the insurance company to pay its expenses, distribution cost and profit for shareholders? If the answers to these questions are vague, or if the amount that is taken away is more than 0.2% per annum of your invested sum, the annuity is likely to give poor value.
There is a chapter on selecting a life annuity in my book, Practical Guide on Financial Planning. It is available in the major bookstores and can be ordered online here.
Tan Kin Lian
Make sure the retirees have a good medical insurance cover before talking about investment.
ReplyDeleteMy advice to retirees never to consult insurance agents to plan your retirement funding. Of course not forgetting those agents who masquerade as financial consultants, be careful of them. You will be ruined becuase you never have enough or they lose for you. Remember, they sell and peddle products and not planners.
ReplyDeleteBe aware of those agents who try to sell their annuity products to you with all kind of arguments.
Just remember that CPFLIFE IS THE BEST and no annuity plan can beat it.
For those who bought annuity plan from private insurers please have them checked. You have been short changed. These salesmen have cheated you of the best plan. Consult a qualified planner and see whether you can sue them for mis-advising you. These agents have no conscience and they only sell you to make a commission. This commission is ill gotten and cursed money which will bring disaster to them. There are many of them, all shape and sizes, both genders.
ntuc agents are still peddling their annuity despite poorer than CPFLIFE.
ReplyDeleteAre ntuc insurance agents for their customers or for themselves?
This is the problem of greed and dishonesty when money is the reward. Insurance agents like them are willing to betray the trust of their own policyholders for commission.
Indeed commission is the root of all the evils insurance agents are willing to commit.
Someone should take them to court for inappropriate recommendation and conflict of interest.
NTUC agents will say that their annuity is better than CPF Life because the payout will increase each year.
ReplyDeleteBut they don't bother to highlight the fact that the guaranteed annuity amount is so pathetic that you need to stay alive till at least 88 yrs old just to match the CPF Life amount that you can get from Day 1.
Furthermore, the agents will use the 5.25% rates in the quotation to convince you, but they never highlight that the actual bonus rate for annuity is now only at most 2%.
In fact for the older annuities which had higher guaranteed amounts, the bonus rate for 6 out of the last 9 years was a big fat 0.00% The 3 years when they had +ve bonus was either 0.25% or 0.50%. This is the Best Kept Secret as surely all the agents will not even admit this.
The 0.2% per annum standard will definitely fail the NTUC annuity. Even the STI ETF (which is mainly run by computers) has expense ratio of about 0.4%.
Take Mr Tan's advice to heart. Either use diversified low-cost ETF, or CPF Life or the original CPF Retirement Account.
No need to talk to any insurance agent or consultant. Unless you just want a free coffee. But keep your wallet closed.
I am curious why 300 is used as a factor? What assumptions were used to arrive at that factor?
ReplyDeleteWill this factor differ between one who retires early, say at 50 years and one who retires late, say 65years.
Dear Mr. Tan
ReplyDeleteI thought that CPF Life is compulsory once we reach 55 years old. There is no option to opt out. You mentioned that we should leave the money in the Retirement Account if our health is poor to be withdrawn monthly. Have I missed any important point about this CPF Life? Thank you for your suggestion for people close to retirement age. It's very helpful.
Those who are born before 1957 they still have a choice of leaving in the retirement account or buy a CPFLIFE. Choosing which one will depend on your health.
ReplyDeleteBecuase of this choice insurance agents out there , especially ntuc agents ate trying to steal this dream by offering an inferior annuity.They are using false arguments to con many retirees becuase of commission. Isn't this despicable and unscrupulous?
They should be reported to MAS.
For people born after 1957, is there an option to opt out of CPF Life? Thanks
ReplyDeleteIt is COMPULSORY for those born 1957 and after and the maximum amount you can buy is the minimum sum at age 55.
ReplyDeleteCurrently the minimum sum is $117000 and will be adjusted for inflation at rate of about 3.5%.
Can I actually cancel my existing NTUC annutiy and then convert to CPF Life? Can somebody please advise me?
ReplyDeleteGood article. Also, I believe that an income annuities is a very good option for you… and is better that you buy an annuity online, because, the benefits are better.
ReplyDeleteThey consider those who are born after 1957 are still kids and therefore need to be told what to do with their own money.
ReplyDeleteUsing 300 is based on initial annual withdrawal rate of 4% of your capital amount. (Not based on the spartan movie -- that one sure die. ha ha) Based on finance "experts" and backtesting to determine that 4% is the upper withdrawal limit to have a high enuf confidence level that your retirement pot can last for long haul, say 30 yrs.
ReplyDeleteYou can even allow for adjustments due to inflation, although you need a "sizeable" portion to be in equities, say 50% to 70%.
You can get a good explanation here.
If you like to play with charts, monte carlo simulation, see whether you can retire now, see how long your money can last, see how much money you can spend each month etc etc; try the T Rowe Price Retirement Calculator here.
To Irene,
ReplyDeleteYou should address your question to NTUC Income. When they give you the answer, you can send them to kinlian@gmail.com. I will check if their answer is fair to the consumer.
Irene,
ReplyDeleteif you haven't received the payouts yet terminate your ntuc annuity to switch to CPFLIFE. Choose a plan that is appropriate.
You may want to consider leaving in your Retirement Account if your health is not good and you think you would not live beyond 90 years old.
NTUC conmen are on the prowl to pounce on some old folks who do not know about the Cfplife. As time is drawing nearer to expiration these agents disguised as financial csonultants are not wasting time and going for the quick kill by what ever mean so long they earn a commission from the kill.
ReplyDeleteThanks ex-con for your input.
ReplyDeleteAppreciate your humour about 300-the movie. "Gory."
For those who are still curious the factor of 300 was used to represent about 30 years expenditure based on return of upside 4%pa.