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Anonymous

16 Jun 2020

āˆ™

Retirement

What are the pros and cons of a regular payout retirement plan and a lump some payout plan?

I am a 31 year old male employee. Iā€™m looking to start a retirement plan and am looking between those with regular payout vs lumpsum payout. What are the pros and cons between the 2 and at which age would be optimum to start receive the payout taking into account cpf life payout ?

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Elijah Lee

16 Jun 2020

Senior Financial Services Manager at Phillip Securities (Jurong East)

Hi anon

It's good that you have started to look at planning for retirement, as the more time you give yourself to achieve your retirement goals, the better prepared you will be. Retirement will arrive no matter what, and when it does, you would want to ensure that your vision of how your retirement is like, be fulfilled.

Regarding the two types of plans you mentioned, let me provide a brief break down of the features:

Regular Payout Retirement Plan (Annuity)

  • Regular Payouts: By controlling the rate at which you get your payout, you will not be able to over spend, but be forced to spend within your means while waiting for next month's payout. However this implies that if you pass on early, you won't see the full benefits of the plan. The guaranteed returns tend to be better than lump sum payout plans.

  • Very customizable: You can control most aspects of the plan, such as how long you wish to contribute premiums for, how long you want to accumulate your monies, and how long you want the payout period to be. This ensures that you can get a payout when you expect to retire, compared to CPF which might have a shifting goalpost. However this also means that the policy's duration is very long.

  • Waivers and Long term care benefits: Some plans provide long term care benefits which safeguards you in your golden years should you suffer from severe disability. Premium waivers also ensure that your plan will continue should you be diagnosed with say, a critical illness.

Lump Sum Payout Plan (Savings Plan/Vanilla Endowment)

  • Lump Sum Payout: You'll get a large lump sum upon maturity. Perhaps you intend to start retirement with a bang; this sum of money will help you fulfill those dreams. However, if you have no plans for the money, then you face re-investment risk, whereby your payout is not earning any returns while it is sitting in your bank.

  • Customizable: Same as regular payout, you get to specify your parameters. Other than lifetime savings plans (more on that later), your policy term will likely be up to year 25 or 30 at most, after which it ends

  • Waivers: Similar to regular payout plans.

As mentioned, there are lifetime savings plans. These plan reduce reinvestment risk as the policy value accumulated inside will continue to grow as long as you are alive, and you'll be able to access the policy value at any time. The trade off is that they have a lower guaranteed return compared to a traditional endowment or savings plan as the insurer needs to account for the fact that you might withdraw at any time in future.

I would say that a regular payout retirement plan would be more suited as a fundamental building block of retirement in addition to CPF Life. Retirement just means that income continues to come to you without you having to work. Thus the objective would be to create income streams, and in this case, income streams that supplement CPF Life. However, when you wish to start your income stream will largely be decided by your opinions on retirement.

For example, you might want to have the option of an early or partial retirement, or you are worried that you might be forced into involuntary retirement in your 50s due to retrenchment or the like. In this case, you might want a regular payout starting from 55 or 60, to give you assurance that you have a stream of income. You'll also be able to withdraw from your CPF OA/SA at this point to supplement your income stream.

If you think you'll work till 65 or you work in an industry where your job is stable, then having your income stream start later at age 70 then is another option since you have active income. This has the added benefit of increasing the accumulation period of the policy which will improve the absolute returns. A payout starting later also has the added advantage of heding inflation, since CPF LIFE payout is flat, but inflation will mean that your core expenses grow every year.

For a lump sum payout plan, you might be better served by a lifetime saving plan as you won't really know the exact year that you will retire, and will want to retain liquidity while ensuring that the policy continues to grow if you don't need the funds. This is a good complement to a regular payout retirement plan.

One option to hedge your situation is by having two regular payout plans, one from age 55 to 70 and another from 70 to 85 (start saving for this one after you complete the first one). If you find yourself not needing the money at age 55 because you are still working, you can just accumulate the payout and take it out as a lump sum later.

As you can tell, there are many parameters to consider. Speak with an advisor to have an in depth look at your beliefs and goals for retirement, so that you may have an idea of which type of plan will suit your needs better.

Pang Zhe Liang

16 Jun 2020

Fee-Based Financial Advisory Manager at Financial Alliance Pte Ltd (IFA Firm)

Generally, I will say that having a good mixture of both helps to improve your cashflow situation in the future. This is because we won't know what the future entails, other than knowing that we need more money than today.

A lump sum payout gives you the full portion of the money upfront, e.g. $1mil. Thereafter, you are free to do whatever you want with the money. Since this money is for retirement, it is unlikely that you will spend all the $1mil immediately. At this point, we need a place to store this money. Consequently, it is normally the bank or a fixed deposit at best.

On the other hand, a regular payout gives you the money that you need to cover your expenditure needs every month. Meanwhile, the remaining pot of money grows at a interest rate that is usually higher than what the bank offers (okay, I'm assuming if you choose an annuity plan from an insurance company for this purpose).

Now, back to our first point on understanding your future. At age 31, a quarter of your life is already gone and we probably have half the time left before you retire. Therefore, you need to start doing comprehensive financial planning for yourself. For instance, determine when you want to retire and how much money you need. Thereafter, create a good combination of lump sum (to meet immediate needs) and regular payout for your retirement.

Finally, depending on your current financial situation, I will try to have the payout starting between age 50 to 65.

I share quality content on estate planning and financial planning here.

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