04 Oct 2020
When it comes to investments, although stocks can provide high potential returns, it is also very likely that you can experience huge drawdown and volatility (just look at what happened this year). Thus its important to realise that the stock market isn’t the place to park all of your retirement funds.
If you want something safe, then you would be looking at a retirement income plan. These plans would be used to provide a second source of income or cash flow over and above all your other sources such as CPF LIFE, stock dividends or bond coupons. They are basically a form of endowment plan whereby the capital is grow, and then drawn down over a period of time to give you your income. Yes, the returns may not match stocks, but you are buying into the certainity of your retirement cash flow and removing market volatility from this segment of your income stream.
These plans basically function like CPF LIFE whereby they pay you a stream of income from a certain age, with a certain amount being guaranteed and the remaining above that being non guaranteed. However, most of them do not pay for life (unlike CPF LIFE). However they are more customizable and starting early may allow you the possibility of having a payout at 55 instead of having to wait for CPF LIFE. The youngest person I ever saw buy a retirement income plan was 21 years old.
You will want to evaluate the plans from various insurers as no two plans are similar. To me, some of the key factors you will want to look at are:
Guaranteed returns: In this low interest rate environment, having a good guaranteed return is hard to come by. Most plans have been 'enhanced' with version 2 and many have dropped in returns. There are still a few gems to be found however.
Projected returns (IRR): Insurers still have every incentive to meet the BI projections and pay out to you the maximum they can. But just take it with a pinch of salt, these plans span over 30-50 years and anything can happen.
Fringe benefits: I prefer plans that also have build in payouts in the event of disability, such as 3/6 ADL occuring, etc. Since most retirement income plans are for your retirement/old age, having this added layer of payout helps if unforseen things happen
Customization: A good plan will provide you with a myraid of options to tweak, such as payout age, payout duration, premium term, etc. By getting something suited to your needs, you will be able to distribute the returns the way you want it, when you need it.
Type of retirement you want to lead: You can get one that pays out from as early as 50 for early retirement. You can get one that pays out from 65 if you'd like to complement CPF LIFE. And you can get a lifetime income annuity for wealth perservation for your next generaton.
While I have a comparison table for certain age groups, it's better that you speak with an independent financial advisor to understand more about your options so that you can find something for your needs. There is not much point in a high guaranteed return with the payout only coming at say, age 90. That would be too late for most.
For retirement planning, annuities/retirement plans can work. It gives you a monthly payout upon retirement age and the objective is to complement your CPF payout during your later years eg. AIA Retirement Saver. If you'll fancy a lump sum withdrawal, then an endowment will work.
Endowment plans have a capital guaranteed usually (check the BI table) and it's great for saving up while getting a bit of guaranteed interest and non-guaranteed bonuses depending on the performance of the Par Fund. Some even allow a transfer of ownership to your child eg. AIA Smart Wealth Builder.
Do ensure you've sorted out your insurance coverage as well before embarking on your savings/investment journey and consult a licensed financial advisor for options.
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