Retirement in Singapore is often associated with hitting the milestones of reaching age 65 and receiving our CPF LIFE payouts. However, as some of us may already know, CPF LIFE may not always be sufficient for all. This is because payouts under CPF LIFE are based on how much we contribute to our CPF account, which is in turn limited by the Full Retirement Sum and Enhanced Retirement Sum. For those below 55, we can only make voluntary contributions up to the Full Retirement Sum. For those age 55 and below, we can make voluntary contributions up to the Enhanced Retirement Sum.
For example, if we are 55 in 2021 and have set aside the Enhanced Retirement Sum ($279,000 as of 2021) in our CPF Retirement Account, we will get about $2,080 to $2,230 each month via CPF LIFE payouts from age 65 onwards. This is good, but depending on our lifestyle preferences, there may still be a gap between our ideal future retirement expenses, and the maximum amount we can receive each month from CPF LIFE.
One of the ways we can bridge this gap and assure ourselves of a more comfortable retirement is by purchasing a retirement insurance plan. Unlike CPF LIFE, there is no contribution limit for retirement insurance plans. If we want to pursue a more comfortable (or even luxurious) retirement, we can choose a retirement plan that pays out a higher retirement income each month. Of course, this means the premiums we pay will be higher.
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For those of us who want a steady stream of income in our retirement as well as insurance protection, a retirement insurance plan can be a great addition to our retirement planning. However, with different plans available on the market, choosing the right plan is not always simple.
Here are 4 factors we should consider when choosing a retirement insurance plan.
#1 Payouts That We Receive Is Based On The Premiums We Pay
The first thing that most of us will think about when it comes to buying a retirement insurance plan is how much we will get. There are three main factors that will determine the payout that we will get.
The first is the premiums that we pay. If our premiums are higher, then correspondingly, our payouts will be higher. The second factor is the premium term. The longer our premium term duration, the more we will be paying. Lastly, the accumulation period will allow our nest egg to compound so the longer it is, the more we should expect to have.
For retirement insurance plans, there is typically a guaranteed and non-guaranteed component for the monthly payouts. For those who want a higher guaranteed income, you should expect to pay higher premiums to achieve the desired payouts.
Regardless of the underlying fund performance, the insurer will have to pay out the guaranteed component of promised payouts. If the fund performs poorly, the insurer may pay out less for the non-guaranteed component. The proportion of guaranteed and non-guaranteed payouts would be spelt out in the benefits illustration.
#2 Check If There Is An Increment Factor To Account For Inflation
While our parents’ generation could have bought a plate of chicken rice for 50 cents, you won’t be surprised to pay $5 for that same plate of chicken rice today. If we intend to retire in 30 years, we shouldn’t expect to pay $5 for a similar plate of Chicken rice in the future.
This means if we are planning for our retirement today, we would need to account for the increased cost of living in the future, even if our lifestyles remain the same.
Not all retirement insurance plans available on the market today account for inflation. This means that we would need to make our own calculations as to the retirement income we desire in today’s dollars, and then add in our own increment factor to account for inflation so that we can maintain our desired lifestyles in future dollars. If this sounds complicated, you may wish to consider a plan that includes an in-built inflation increment factor.
An example of a retirement insurance plan that offers an inflation increment factor is Etiqa’s new Enrich retirement plan. This plan offers a choice to opt for payouts that increase at 2% p.a. to account for inflation. Considering that MAS Core Inflation measure has risen 36.7% in the past 20 years (or about 1.8% a year averaged out), Etiqa’s Enrich retirement plan has a realistic increment factor of 2% p.a. to counter inflation.
#3 Flexibility In Choosing Our Premium Terms & Retirement Payout Options
Another advantage of retirement insurance plans is the flexibility in premium and payout terms. If we don’t fancy retiring at 65 years old, we can design your retirement insurance plan such that you can commence the monthly payouts earlier. For example, Etiqa’s Enrich retirement plan allows us to commence payout at age 60. We can also choose between a retirement payout period of 10 or 20 years.
Of course, if we want to start our payout earlier, or have a longer payout period, this means our monthly payout will be lower. If we wish to increase our payout level, we would either have to pay higher premiums, opt for a longer premium payment period, or purchase our retirement insurance plan at a younger age. For retirement insurance plan, our premiums (minus the distributions costs) are essentially invested on our behalf by the insurer and the amount is compounded during the accumulation period. The longer the accumulation period, the more time our premiums have to grow to our desired returns.
#4 Insurance Protection For Our Retirement
One key differentiation of retirement insurance plans from passive income investing is the insurance protection that these plans offer (aside from the guaranteed income component).
Our retirement years are usually also the time when we start to be more concerned about the legacy we leave behind for our loved ones as well as concerns over our own health as we age. In addition to providing us the financial security of a retirement income, retirement insurance plans also provide us with the peace of mind that our loved ones are adequately provided for in the event of our passing.
This article and accompanying images (if any), were reposted from DollarsAndSense. The views and opinions expressed are those of the author and do not necessarily reflect InterestGuru.sg.