Why will a person with high net worth (say 2m) need endowment, annuity or retirement plans? - Seedly
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Anonymous

Asked on 25 Nov 2020

Why will a person with high net worth (say 2m) need endowment, annuity or retirement plans?

This is something I have going around in my head. Hypothetically, if someone has 2m and no debts, he can simply invest the funds into a dividend-paying ETF to receive regular income immediately. And assuming he is able to survive on those dividends, what are the reasons for getting endowment, annuity or retirement plans that provide payout after X years later?

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    Hi anon,

    Quite simply, because they want certainity.

    An annuity provides a guarantee because an insurance comapny is the only entity in the world that can weigh both sides of the coin.

    Die too early? You won't lose out, you still get the death benefit. Add that to the income received and it'll be more than what you put in. The insurer doesn't have to worry about paying you income any more.

    Live too long? Your premiums may have been used up but the risk pool of other annuity participants will ensure that you can continue to receive your income. The insurer doesn't need to pay you a death benefit any more.

    ETFs, REITs, stocks, and the like, are still risk based investments or income assets. They can lose value at the worst possible time, or even halt payouts when you need it the most (just look at HSBC). When half your portfolio is crashing and burning, you will be glad you have a part of your pie unaffected and churning out income that you need to ride out the storm.

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    Question Poster

    28 Nov 2020

    Hi Elijah, understand your point on taking on risk. But what will you say about index/bond ETF, instead of specific stocks? Will you think the risk will be drastically reduced?
    Elijah Lee

    Elijah Lee

    28 Nov 2020

    Hi QP, I'd say reduced, but not eliminated. You just need to see the performance of the STI this year to know what I mean. Or even Japan's market since 1990. Pick the wrong instrument/sector/region, and you can wipe out your invested capital, or lose a significant bulk of it. That is why you need a hedge against that risk.
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    If you have 2m, you will become an accredited investor. Who can access to wider range of investment that normal people are not able to access. And with 2m, you should be very savvy in investing, thus, Wont even look at endowment, annuity, retirement plan.

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    Question Poster

    28 Nov 2020

    From my understanding, AI status is based on voluntary declaration? The person may not want to sign up as an AI. Never mind how he/she achieved 2m. We can simply reduce the amount to 1m and say this person invests all into some index/bond ETF that pays 3% to get 30K dividends annually. He can already get paid now rather then X years later (in case of annuity). Right? Or may I missing something here?
    Tan Siak Lim

    Tan Siak Lim

    30 Nov 2020

    Can't agree more with J.S! People from all trades can become millionaires. Doctors, lawyers, Engineers, Accountants, even Hawkers! They are definitely not savvy with investments. Also, they maybe risk adverse, which makes investments not suitable for them. Because of their high networth, a loss of just 10% maybe very difficult to stomach. Which is the reason why some will want retirement plans that are will not lose money if hold to maturity. And many high networth people are not looking for high return, just 3-4%pa return is satisfactory for them.
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    Sharon

    Sharon

    Level 7. Grand Master

    Answered on 28 Nov 2020

    I'd think it depends on the stage of life this person is at.

    Usually, the rich will still want to get richer. So I find it may be quite unlikely they will go for dividends paying ETF.

    If he/she is still accummulating wealth, then they may invest in high growth companies that could 2x-100x their $2m.

    However, if he/she is near retiring or retired, the important thing is capital preservation.

    Although dividend-paying ETF may be an attractive way to receive regular income, at their calibre they may have other financial vehicles that could be better suited to preserve wealth.

    After all, no man is an island. A high networth person will likely consider estate planning.

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    PolicyWoke

    PolicyWoke

    Level 5. Genius

    Answered on 27 Nov 2020

    Hi Anonymous,

    It depends on that someone's financial objectives. Different individuals have different objectives. To some, endowment policies, including annuities, may be a suitable fit. If that someone is unsure of the objectives, he/she may seek advice from a financial advisor.

    Disclaimer: PolicyWoke is a traded endowment policies broker.

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    It depends on how comfortable the person is with specific instruments. ETFs are like stocks, so it presents a higher risk factor. A person may be more risk adverse and choose to invest into endowments, annuities and the like. I've come across HNW individuals doing this before.

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    Teo See Hwa

    Teo See Hwa

    27 Nov 2020

    The Rich want their Money to work harder, the poor just want to spend it.
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