Are retirement/endowment plans from insurance companies a good way to grow retirement income? Or are there better alternatives? - Seedly
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Anonymous

Asked on 28 Jan 2020

Are retirement/endowment plans from insurance companies a good way to grow retirement income? Or are there better alternatives?

What are some of the best ways to grow my retirement fund? Should I be looking at insurance as an investment?

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Hi anon,

If you are looking at ensuring guaranteed income, then besides CPF Life, retirement plans are another alternative to supplement your retirement portfolio with guaranteed income.

In my view, CPF Life is the best annuity there is and you should work on getting that maximized first. Some people may be apprehensive with going for the Enhanced Retirement Sum, so at least work on having the Full Retirement Sum set aside. At the same time, you can consider having private annuities/retirement plans supplement what CPF Life will provide.

As an asset class, annuities and retirement plans are not impacted by market risk, which means the income stream they provide you will be guaranteed and predictable. Thus, when there is market turmoil or your investments are not doing so well, you do not need to liquidate them to raise money to fund your retirement. I would recommend that your guaranteed income sources be sufficient to cover at least your basic expenses in retirement, and some kind of 'laddering' be done so that your guaranteed income steps up over time to combat inflation.

The rest of your income streams can come from other sources, and those will likely be variable sources such as stocks and UTs. But that's another topic altogether.

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Definitely! When planning for retirement; there are needs (living expenses, utilities, medical costs) and wants (holiday, hobbies, country clubs).

Retirement plans provide a source of GUARANTEED income to you that could ensure that your needs are taken care of. If it was just purely on other types of investment vehicles, you may suddenly lose that source of payout during a bad year. Think of the current climate, if you had invested in eg. hyflux bond / banks, you'd probably be down by alot and wouldn't want to liquidate your investments at a loss. They're not the ONLY plan that can be used to plan for your retirement, but are definitely a place to start.

Think of it as having a pay cheque (needs) and a play cheque (wants).

Low risk products can help to take care of your pay cheque.

Eg. CPF Life, Annuities (retirement plans), Supplmentary retirement scheme (SRS)

Higher risk products can help take care of your play cheque

(stocks bonds property, REITS, etc.)

A comortable retirmenet would usually encompass a mixture of both. At your retiremnt age, it is unlikely that you have another 10-20 years down the road to work and make back the income if your Investments had gone south.

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There is a variant of endowment plans called Traded Endowment Policies/Plans (TEPs) which is pre-owned endowment policies that was bought-over and then re-sold by 3rd party brokers. The projected IRR is between 3.8% and 4.6%, and is usually higher projected IRR and shorter term to maturity as compared to newly incepted ones for the same policy structure.

Disclaimer: I co-founded a business trading insurance policies.

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Hi Anon,

There definitely are products that can meet this need, is there anything you are looking at specifically? Retirement and endowment plans are definitely safer alternatives as compared to investments as with such policies, the insurers are more prudent in their investments to ensure that your capital is not very stretched to the point that it might get lost entirely.

Are you looking to get a monthly payout similar in concept to CPF life?

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There are definitely alternatives. Almost everything has an alternative.

But the great use for retirement income products is that it provides a guaranteed source of income that is predictable and you can plan around.

Investing in markets directly can give you a higher return, but it is variable and you could also lose money if you don't have a long enough investment horizon or didn't manage your investments well.

Sometimes a lower return with 0 headache may be more worth it. And multiple streams of guaranteed income is retirement to me. Money coming in every month without knowing where to spend it.

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Generally, most endowment plans from insurance companies invest the policyholders' money into the company's participating fund. As a result, the returns that the policyholder gets is dependent on the performance of the fund itself. I have explained the rest of the details here: https://www.blog.pzl.sg/what-is-a-participating-fund-singapore/

Moreover, many insurance companies adopt the technique termed "smoothing of bonus" to ensure that the policyholders will receive a stable rate of return over time. Here is how it works: https://www.blog.pzl.sg/smoothing-of-bonuses-singapore/

With this in mind, the right retirement planning from an insurance company is a good way to build your guaranteed stream of income during your retirement years. Furthermore, some plans payout a step-up income, thereby ensuring that your money is pegged against the prevailing inflation rate.

If you prefer something guaranteed, then such plans may work for you. All in all, it depends on your goals and how we can use all these tools to achieve your goals.

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