Last Updated on 8, June 2016
In this article, I would like to give a description on a case I worked on to help my clients monetise their existing assets in order to provide for a retirement income.
My clients – husband and wife – were going to be 55 years old. Personally I felt that this age may be a little old to start a retirement plan. But it is better late than never.
The couple expected their expenditure to be $4000 per month or $48,000 annually. From my needs analysis, here was what I found:
Cash: $500,000
CPF-OA/SA (combine): $350,000
Liabilities: None
Property: 1 5-room HDB only
I found that they were not willing to take risk because they were ‘burnt’ by stocks before. Hence, I did not recommend any high risk investments such as unit trusts and Exchange Traded Funds. I also found that they did not have the ability to take risk since their existing assets were still insufficient to retire immediately.
For those who are unfamiliar with retirement products, typically retirement products have the following features:
- Accumulation phase. In this phase, the client can select either single premium or regular premium
- Payout phase.
- In this phase, the retirement income will be paid to the client either monthly or annually.
- Moreover, the payout phase can be perpetual or a limited time frame (say 20 years).
- Most retirement products do not adjust its payout with inflation. For example, CPF Life’s payout does not adjust for inflation. However, one particular product does increase with inflation at 3.5%pa.
- In addition, the payout can be totally guaranteed, partially guaranteed or no guarantee at all. CPF Life’s payout has completely no guarantee so as to keep the CPF Lifelong fund to be always solvent (see the reply from Ministry of Manpower in response to my letter to the Straits Times on my concern that the solvency of CPF Life lacks any government guarantees).
- Death benefit. Most retirement products’ death benefit declines over time. For those who wish to leave a substantiate legacy need to be aware that the regular payout would be much lower.
I sourced from various insurers and I recommended all the products shown in two tables below to create such passive incomes. The products will cost them $763,200 (including the purchase of CPF Life).
Recommended Retirement Products for Ms
| CPF Life Basic | Product A | Product B [1] | |
|---|---|---|---|
| Premium type | Single premium | Single premium | Regular premium |
| Premium | $161,000 | $100,000 | $10,785.00 x 10 years |
| Payout start age | 65 | 65 | 70 |
| Payout ends | Until death | Until death | 89 |
| Guaranteed income | $0 per month | $463.40 per month | $6,000 annually increasing at 3.5%pa |
| Total Projected income (including any non-guaranteed income) | $1,083 per month | $576.25 per month increasing at 2%pa. | $0 |
| Total Guaranteed Income over the policy term (until 99 years old) | $0 | $183,506.40 | $169,815 |
| Total Guaranteed Income divided by Total Premiums | 0% | 184% | 157% |
| Any non-guaranteed payout? | Yes, the entire monthly payout is not guaranteed | Yes, a non-guaranteed monthly payout depending on the performance of the par fund. | Yes, a non-guaranteed maturity value. |
| Death benefit | Exact formula not disclosed. | The single premium with interest at 2.5% per annum and bonuses accumulated during the deferred period less total already annuity paid. | 101% of premium less income already paid plus non-guaranteed amount. |
| Remarks | Assumed 3.75% | Assuming 4.75% | Assuming 4.75% |
Recommended Retirement Products for Mr
| CPF Life Basic | Product A | Product C | |
|---|---|---|---|
| Premium type | Single premium | Single premium | Single premium |
| Premium | $161,000 | $100,000 | $133,350 |
| Payout start age | 65 | 65 | 60 (5 years later) |
| Payout ends | Until death | Until death | Until death |
| Guaranteed income | $0 per month | $503.40 per month | $166 per month |
| Total Projected income (including any non-guaranteed income) | $1,146 per month | $625.85 per month increasing at 2%pa. | $500 per month |
| Total Guaranteed Income over the policy term (until 99 years old) | $0 | $199,346.40 | $77,688 |
| Total Guaranteed Income divided by Total Premiums | 0% | 199% | 58% |
| Any non-guaranteed payout? | Yes, the entire monthly payout is not guaranteed | Yes, a non-guaranteed monthly payout depending on the performance of the par fund. | Yes, a monthly payout consist of a non-guaranteed 3%/12 of single premium. |
| Death benefit | Exact formula not disclosed. | The single premium with interest at 2.5% per annum and bonuses accumulated during the deferred period less total already annuity paid. | 101% of the single premium + non-guaranteed terminal dividend. |
| Remarks | Assumed 3.75% | Assuming 4.75% | Assuming 4.75%. |
Ms. is expected to outlive Mr. in view of her longer life expectancy (they are of the same age). The decline of purchasing power of these passive incomes for Ms is more problematic in view of her longer life expectancy. Hence, it is with deliberate intention that the Product C was selected for Mr. because this product guarantees that the death benefit remains as 101% of the single premium at the expense of lower income. Should Mr. predecease Ms, the entire premium is ‘refunded’ and can be used to help offset her higher cost of living in the later years. This is provided he writes a will bequeathing the policy to her.
The two graphs below show the projected income in nominal terms. As it can be seen that the combine passive income reaches as high as $67,000 (the requirement is only $48,000 a year).
Unfortunately, measuring nominal terms is the wrong method of calculation. The two graphs below show the projected income at 2015’s value using 3%pa inflation. It can be seen that the total income stream did not even exceed $40,000 a year in 2015’s value.
This means it is not possible to generate a $4000 per month passive income in view of the existing limited resources. This is the reason why I wrote in the beginning that the couple does not have the ability to take risk as their assets are insufficient for retirement. That is also why retirement planning has start when young. Moreover, it is not possible to ‘teach old dogs new tricks’.
It is interesting to note that Ms. has an agent who sold her a retirement product which generates a passive income starting at age 56. Frankly speaking, this is not suitable since she cannot retire at this age but will need to work for a number of years. This is a result of product pushing / selling without conducting a full fact find to establish the real needs of the clients.
My recommendations to them
- Reduce current lifestyle in order to reduce expenditure.
- Increase savings through reduction in spending and increasing income. It is not the time to go into semi-retirement at this stage.
- Work beyond the retirement age 65 so as to delay the onset of retirement.
- Rent out a room to generate another source of passive income.
- Downgrade their HDB to smaller HDB flat.
- Purchase all the products I recommended to them.
Conclusions:
- Retirement planning has to start early. It is too late to start thinking of retirement planning at age 55.It is important to establish one’s ability and willingness to take risk. If there is an insufficient retirement resource, there is no ability to take risk. This means no matter how willing you are to buy high dividend yield stocks, property, write options, gold and what not, you just could only be contented with low risk products.
- It is important to take in account of inflation. Most retirees underestimate the inflation monster.
- Different life expectancies of husband and wife are required to be taken into account when selecting suitable retirement products.
- Financial advisers who do not do any fact find and push products WILL DEFINITELY SELL YOU products that are not suitable.
If you have any queries on retirement planning, feel free to contact me.
[1] Product B is best suited for those who are younger.
The following chart shows what happens if the individual nearest birthday is 37 years old.
Annual premium = $20,000.75 for 20 years.
Receive an annual passive income starting at 65 of $29,092 for 20 years. This income increases at 3.5%pa.
Total premium $400,015. Total guaranteed payout $823,376 !
In the event if life assured dies at any point in time, the death benefit is:
- Higher of:
- 101% of the total Premium Paid less any Retirement Income payouts already paid; and
- 0; plus
- Deposited Retirement Income with non-guaranteed interest (if any); plus
- Accumulated bonuses (if any);
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Thank you for your writeup.
Much have been written about ETF, but you still consider it a risky investments for retirees. Is it really so?
I have agents who introduce plans that require me to pay upfront an amount but the note is ‘returns are not guaranteed’, so I am a bit apprehensive of the projected 4.7% return. By the way, am 61 years old, still working.
Thank you
What are the alternative investments or products that are guaranteed? Even CPF Life with its high interest rate is not even guaranteed by the Government. In life, you cannot have the cake and eat it all. That is why financial planning is so important as the purpose is not to get rid of risks but to manage risks.
As for ETFs, yes it is a high risk investments.
I recently read about deferred annuities where I can invest a lump sum now to allow for ‘Old Age’. We don’t know how long we will live so need income until death. Eg invest sum now to start payments in 25 years, payments to continue until death. Can you advise on these arrangements
The CPF life, Product A and C described above are examples of deferred annuitues. What about these kind of products you want to find out?
Any recommendation for Product A and C? Is Immediate Annuities good? Any recommendation for Term insurance other than SAF Group Term Insurance? Thanks