Question: “Today I met a financial adviser for retirement planning who encouraged me to do dollar cost avearging. I was very impressed with him. I told the adviser that I got $500,000 to invest for retirement. He instead recommended that I 'go slow' by investing a small amount in order to avoid investing at the peak of the market. I understand its called dollar cost averaging. I was recommended to invest $1500 a month. I am amazed that he did not take all my money but only a very small amount.”
Answer: I checked the product you bought. It is an investment-linked policy designed for 30 years holding period. Meaning, you have to pay $1500 a month for 30 years otherwise the cost will be very large. At your age of 59 years old, it means you have to continue to pay this regular premium until you are 89 years old! In initial years, your surrender value is little or none at all. The total distribution cost (which is approximately the total commission) is $20,000.
If you had bought an annuity as lump sum of $500,000, the total distribution cost is $7500. If you had bought unit trust worth $500,000, the total distribution cost is $0 because sales charge these days is 0%.
Dollar cost averaging is usually done over one market cycle. While the length of each market cycle is unknown until it has come to past, dollar cost averaging is usually done over just one to two years. It is no point doing dollar cost averaging over 30 years. The bulk of your money would be deflated due to the erosive effect of inflation.
Do you think the adviser have your interest at heart? You may like to read this Hong Kong news article: Hong Kong consumers angry after being sold complex insurance product ILAS
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Academic papers have analysed & advocated DCA of a large sum of money over 10-12 months. Any longer and the negative effect of opportunity costs outweighs the benefits of avoiding market highs. This is particularly if the holding period is for 10 years or longer. The other important factor is asset allocation which the insurance salesman didn’t bother to even touch on, as he is too focused on selling you the expensive ILP i.e. product selling.
If that salesman is truly a professional financial adviser, he would have considered your overall networth, cashflow & financial situation & how that $500K sits in your overall financial planning. He should know that retirement planning involves inter-connected & yet separate disciplines in insurance, savings, income/cashflow, estate planning, investments, asset allocation, wealth preservation & growth, withdrawal/divestment policy.
Frankly that insurance guy is only a professional salesman, and he should inform you as such and focus on those insurance products that are truly useful for retirement planning i.e. annuities, long-term disability insurance, and hospitalization/medical insurance. Many of these earn ZERO for the salesman if you go for the basic govt schemes i.e. CPF Life, ElderShield and Medishield Life. It’s whether the salesman able to convince & add more value for you to buy the private plans. 99.99% of salesman/women cannot be bothered to spend the time, effort, IQ & EQ for these low-commission products. Hence older folks & retirees get poor deals by being sold expensive ILPs, wholelife critical illness, and endowment cashback policies which are high-commission products that don’t provide optimal outcomes for older folks.
If that salesman is professional, he should advise you that he is not well versed in all aspects of retirement planning but can help with insurance portion. For other portions he can advise you to seek help from other qualified people/companies.