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What is effective annuity rate and is CPF Life competitive?

Sunday, October 22, 2017

A reader read an article in The Straits Times on CPF Life and asked me to write a piece on it.

I have blogged about CPF Life so much already and, so, to avoid boring anyone too much, I will try to keep this short.




This is taken from a recent chat with another reader:

foolishchameleon said...
... with so many annuities in the market, what returns would be considered decent?
2.5%? 3% ?

AK said...
What is a decent return? I have not done any comparison lately but I know none is able to come close to what CPF Life is able to generate which is a minimum of 4%.
However, if it is only 2.5%, I might as well just do annual VC to my CPF account as the OA pays 2.5%. So, intuitively, I would demand at least 3% from a private annuity.

(Source: https://singaporeanstocksinvestor.blogspot.sg/2017/10/how-insurance-weakened-familys-balance.html)







So, when the article in The Straits Times says CPF Life is able to offer a 7.1% effective annuity rate based on $100,000 premium, what are we looking at here?

We are not talking about effective interest rate here. 

We are talking about effective annuity rate.

If we are talking about interest rate, then, based on $100,000 savings in our CPF-RA, the first $30,000 gets 6%. Next $30,000 gets 5%. The rest gets 4%.

Average interest rate is 4.9%. 

I hope my math is up to scratch.





An annuity rate is not interest rate as it refers to how much is paid out as a percentage of our premium each year.

So, in the CPF Life example mentioned in The Straits Times, a 7.1% annuity rate based on $100,000 gives us $7,100 a year or $591.66 per month from age 65 for life.

It isn't a 7.1% interest rate.

It is quite clear that annuity rate and interest rate are different especially when we remember that some of this regular payout is a return of capital which is why at some point in our old age, when we pass on, there is nothing left for our beneficiaries.
Source: 
The Telegraph, 17 May 2017.




















Taken from the article in The Straits Times:

The report highlighted that with CPF's interest rate structure, CPF Life is able to provide an effective annuity rate of 7.1 per cent based on a $100,000 premium.

"This compares favourably with life annuities in most markets," stated the report. The annuity rate was calculated based on the ratio of annual payout to premium paid, for a male member born in 1962, or is 55 this year, who receives payouts at age 65.

It is no wonder that financial experts like Mr Christopher Tan, chief executive of Providend, believes that every retiree's portfolio must include an annuity plan to hedge against longevity risk.


He says: "CPF Life is currently the best annuity plan in the market. It is low-cost and offers high return."




Read full article here:
http://www.straitstimes.com/business/invest/is-the-new-cpf-life-plan-ideal-for-you

Related posts:
1. An annuity.
2. Retirement funding.
3. CPF Life Escalating Plan.

Retirement funding assurance for the average investor.

Saturday, October 21, 2017

I have met many people who told me they didn't believe in the CPF and they didn't believe in CPF Life.

When I explained that CPF Life is an annuity that would pay us a monthly income for life from age 65, some would go on to say that they didn't believe in having annuities.





There are different reasons given for not having an annuity but amongst investors, those that do not believe in annuities usually believe that they can always do better investing their own money.

It could indeed be the case that some of us constantly outperform the market.


See related post #2 at the end of this blog.

Well, I am not too confident of my own ability to do so.

So, I like to have some assurance that I would have a basic retirement income that is predictable.





In case my investments do not perform well enough in certain years, I have a well I can depend on. 

Having a well helps us to live well.

Sorry, I couldn't resist it.


Really.

No Evian? At least have well water.


That is what an annuity like CPF Life can do for us.
AK anyhow draw one.

Peace of mind is priceless.

Related posts:
1. An annuity.
2. CPF Life Escalating Plan. 

What to do with $45K? It depends.

Friday, October 20, 2017

Reader:
I have a bal of 45k which trying to find place to put. need for kid study or health problem. Is posb invest-saver a good choice?







AK:
Since you say you might need it for health problem, then, it is not money you can afford to lose.
Go for the safest options.
In case you are wondering, safest options are those that will not result in monetary loss. 🙂
So, if you need the money, you know you can get 100% of it.


Reader:
ya. cause read many earn from this invest saver but not savvy in investment. think just buy some good stock to keep is better.






AK:
Invest saver is an investment plan.
There is a risk of monetary loss.
The same goes with stocks.
Invest only with money u can afford to lose.

Also read this:
Investor psychology.

Reemployed with lower pay and worried about retirement.

Thursday, October 19, 2017

Reader says...
I have been a reader of your blog for many years now.

Similar to your childhood experience - my parents also went thru bankruptcy during my teens and bad memories of money lenders coming to the old house.

I am Malaysian and coming to 55 years old. I was made redundant middle of last year, was unemployed for 4 months and have since resumed working.






My current gross salary is just enough to cover my household expenses + medical insurance for the whole family. (wife+ 3 kids.)

My fear of becoming destitute in the old age has created self-stress, as I continue to have interrupted sleep & tension with family members as I continue to delay/disapprove of their wants.


I currently have > RM3.3Mil in Malaysia Bonds, EPF & fully paid-up endowment policies. I park SGD$0.57Mil in a Singapore bank and have 2 fully paid-up landed property (one for my parents and the other for my family worth a total of RM2.5Mil).

AK pls talk to yourself, How should this person 'live life' going forward?






AK says...
All of us need to plan for the day when we stop working either voluntarily or involuntarily.

Usually, it means saving some money first and then putting it to work.

Hopefully, by the time we stop working, we would be able to receive a regular and meaningful income to have a comfortable retirement.

If your gross salary is enough to only cover your expenses, it means that you do not have any money left to grow your savings. So, I can understand your worry.






However, I can see that you were prudent in your younger days. 

Having 2 fully paid homes, $0.6 million in savings and RM3.3 million in bonds, EPF and endowment, I feel that you could possibly have a comfortable enough retirement if you have a modest lifestyle.

Having said this, I agree that you should continue to be prudent when it comes to wants because your earned income does not have room for wants. 

To satisfy the wants, you would probably have to dig into your savings.





Assuming the old folks at home are financially independent, I would continue to work till my 3 children are financially independent.

If my parents depend on me financially, then, I would continue to work till they pass on and when all my children are financially independent.

Maybe, I could switch to part time work and have more leisure time when fewer people depend on me financially.







You could rent out one house when your parents pass on in future. 

The rental income plus the interest income from your bonds and EPF savings mean you would have a more meaningful passive income.

Money from your fully paid endowments and savings in the bank could be put to work when Mr. Market goes into a depression or whenever there is a good investment opportunity. I would think of these as your war chests.





If you are risk averse, you could think of purchasing a few annuities to fund your retirement. 

You might want to do this sooner than later so that you could start receiving another stream of passive income sooner.

At your age, your balance sheet is definitely not weak but with dependents, it could be exhausted quite quickly if you are not careful especially when you are not able to grow your savings meaningfully.






As long as you stay prudent when it comes to expenses, when you no longer have dependents, all else remaining equal, I believe that your retirement will still be a comfortable one.

Related posts:
1. Advice on saving.
2. Needs and wants.
3. To retire, have a plan.
4. Have an annuity?
5. Too late to plan at 57?

How insurance weakened a family's balance sheet?

Wednesday, October 18, 2017

This is the continuation of a conversation with a reader who is having difficulty accumulating an emergency fund and who depleted her savings after her dual income household became a single income household.


Reader:
I just read on "How many 20 years and $29,000 do we have?"

I have the Prulink too and have been paying for 12 years now.

Apart from this I have an endowment plan to be paid for another 9 years before mature.

My husband and I plus 2 kids have whole life plans, personal accidental and hospitalisation plans.








AK:
You are (probably) paying too much for insurance.

Your children don't need life insurance. Life insurance are for people with dependents. Children don't have dependents.

I won't touch investment linked policies or ILPs (e.g. PruLink) even with a 5 feet pole. I don't mix investment and insurance.





My action plan if I were in your shoes:

1. You and your husband just need term life insurance (+Critical Illness cover). (You need life insurance until your children are no longer financially dependent on you.)

2. You do not need whole life insurance. Definitely, your children don't need life insurance (until they have dependents). It is a luxury.

3. ILPs are terribly expensive life insurance. (I would get rid of this.)





4. Keep the hospitalisation insurance (H&S). (This is essential.)

5. Accident insurance is not a must but they are pretty cheap. You can keep this if you like. (Otherwise, don't renew when it expires.)

6. Endowment plan, 9 more years. A form of forced savings. Just complete it. (A plain vanilla endowment is less problematic than an ILP.)

Before terminating any of your life insurance policies, get covered with term life insurance of equivalent level of protection first.







We should increase our income if we can but we must be sure that in the event our income suffers a dip or disappears, we are able to cope.

We want to be especially careful with any long term financial commitment that takes up a significant percentage of our regular income.

Making sure that these long term financial commitments are absolutely necessary will help to avoid weakening our financial health too much.







This family can bring down their expenses rather significantly and strengthen their balance sheet by not overpaying for insurance and to buy only what they need.

Related posts:
1. Critical illness insurance.
2. Disability insurance.
3. Term life insurance.

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