Is buying an annuity plan for retirement to supplement CPF payouts preferable to investing the amount in stocks or bonds?

Hi anon,

This does depend on your profile and objectives along with your resources available.

If you had enough resources such that all of your income in retirement can be provided for by guaranteed income sources, then there's simply no need to risk your money in stocks and bonds. Peace of mind in retirement is priceless and only guaranteed income sources such as CPF LIFE and retirement income plans can provide you with that payout on a monthly or yearly basis. Annuities with a lifetime payout feature also ensures that you do not outlive your savings.

Dividends and coupons from stocks and bonds are potentially a good source of retirement income but relying or over-reliance on such income sources alone can create huge inconsistencies in your retirement cash flow. Dividends can fluctuate and companies may withhold the dividends during bad times (e.g. ComfortDelgro did not pay an interim dividend and the banks slashed dividends). You will appreciate that your income is predictable coming from an annuity plan when facing times of great economic uncertainty. Diversifying your income producing investments with an annuity will ensure that you have a portion of your portfolio protected from downside risk during uncertain times.

However, the harsh reality is that most people won't be able to have all their income in retirement provided for via guaranteed income sources. Thus, some level of income investment is required typically.

Having said that, an annuity plan usually needs to be invested for a period of time before you can receive the payout. With a horizon of 20 years, there is probably enough time to build up significant value in such plans, before the payouts start. Having fuss-free income in retirement that doesn't need to be managed is something that is often very underrated and underappreciated.

There is no fixed answer as this will depend on your risk profile and objective. For instance, if you prefer to have some form of guarantee in the returns, then an annuity may be a better choice. This is because your premiums will be invested into the insurer's participating fund. In effect, you will receive both guaranteed and non-guaranteed returns. Moreoever, some annuity plans provide lifelong payouts as well. Hence, you won't have to worry about market volatility, or to outlive the plan.

More Details: What is a Participating Fund Singapore

On the other hand, if you are willing and able to tolerate investment risk, then investing in bonds and equity may give you potentially better returns. At this point, it will be good to understand the common investment risks and I have listed them here: Types of Investment Risk that You should know

In order for this to work, you must be capable of managing your portfolio such that you will achieve a reasonable rate of returns in 20 years' time. While this seems like a reasonable timeframe to achieve a decent rate of retruns, you must ensure that you invest into financially sound assets, alongside with proper investment strategies and risk management techniques. When you are able to do so (yourself or through an experienced consultant), then this will give you the additional pot of money to supplement the guaranteed payout from CPF LIFE.

Overall, I will need to re-emphasise that there is no right or wrong answer. Above all, it is about knowing you, and how to build a comprehensive financial portfolio that you can become confident with.

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