Compared to other types of life insurance policies, an annuity or retirement plan is more often sold than brought. This means that a financial adviser usually has to put in more effort to close an annuity with a prospect, compared to a protection plan.
InterestGuru.sg list 5 reasons why you should invest in a retirement annuity plan to cater for your retirement income and expenses.
- Wealth Preservation (Ensure that your savings do not get eroded by inflation over your retirement period)
- Principal Protection (Allows you to receive a monthly income and withdrawal your principal)
- Income Payout Options (Optimise your income stream according to your retirement lifestyle)
- Long-term Care Expenses (Payout an additional stream of income for disability during your retirement years)
- Legacy Planning (Recieve an income stream while leaving part of your assets for future generation)
1. Wealth Preservation – Protect against Inflation
Assuming an inflation rate at 3% p.a, the present value of your $100,000 can only purchase goods and services worth $74,400 in 10 years time. Given another 10 years, the value of its purchasing power would further depreciate to $55,000.
Rates on a short-term savings account or term deposit, typically range between 0.7 to 1.5% p.a will never catch up to inflation.
The “risk-free” rate of financial returns will always be lower than the rate of inflation.
This means that your money will always be losing its purchasing power over time if you are not willing to accept risk on your principal.
Consider this: If preserving the purchasing power of your money is the primary objective, consider a retirement plan that you only need to pay a premium over a short duration. The perfect scenario would be placing your insurance premium in a single lump sum or over a 5 years period.
Such retirement plans will allow 100% capital guaranteed upon the start of the income payout period. Further assurances will include a minimum guaranteed rate of financial returns and a higher non-guaranteed rate of projected investment returns.
Paired it with a longer time horizon before you start to collect your income stream, and you can be assured of a superior rate of financial returns.
Other alternatives: Consider long tenor SGS bonds or AAA-rated Government bonds. Typically u can expect to receive 2.5% to 3% yield when held to maturity. Note that early termination or surrendering of a bond instrument may result in a loss of your principal.
The best retirement plans for wealth preservation
Consider retirement plans with an increasing or inflation-proof income over the desired payout period. This stream of income is usually guaranteed to increase by a minimum rate (~3.5% p.a.) on a yearly basis.
Alternatively, consider a high-income payout retirement plan that allows you to only pay the insurance premium in a lump sum or over a short number of years. This will allow you to better take advantage of compounding return on your principal investment.
2. Principal Protection – Guaranteed of Capital Investment
Looking to collect a stream of income while having the option to withdrawal all your money in a lump sum whenever you wish to? To top it off, you expect your principal investment to be guaranteed with no investment risk.
The above demands may be possible if you allow yourself to invest time in return for an income stream and 100% withdrawal of principal investment.
Consider this: If you wish to seek a meaningful and stable rate of return on your money, you must be prepared to have a longer holding period. After all, there must be a fair exchange between the time horizon for financial returns and principal protection.
Other alternatives: Similar to the objective of wealth preservation, SGS bonds or AAA-rated Government bonds with a long time horizon or perpetual maturity may also partially fulfil your needs for liquidity. However, the expected yield may be slightly lower compared to an annuity.
The best retirement plans for principal protection
Consider retirement plans with a high guaranteed principal upon withdrawal. This allows you to keep your options to fully surrender and receive all or most of your principal while receiving a regular income stream.
Some retirement annuity plans may also be compounding your principal investment while paying out an income stream. This allows you to receive a higher lump sum than your original principal investment when the plan is fully terminated.
3. Income Payout – Stream of Stable Income
Generating a stream of income during your retirement is much easier than accumulating a lump sum for your retirement.
At the age of 40, you would need to save $36,000 on a yearly basis over the next 25 to retire at age 65. Your actual savings of $900,000 would compound to approximately a million at age 65, based on a 1% annual interest rate.
However, it would be too late to start a retirement plan with meaningful financial returns at age 65. Hence, you will expect to draw down on your savings for $50,000 yearly over 20 years. Since you are drawing down on your principal, any deviation or additional spending would result in a lower financial budget in the later years.
In any case, your savings will be fully depleted by age 85.
Could your savings have generated better financial returns if you start an annuity plan for yourself? Let’s compare with the 2 scenarios below:
Scenario 1: Saving a million dollar over the next 25 years in a retirement plan ($900,000 accumulated in a retirement annuity plan)
- Annual/ Total premium paid: $36,000 ($900,000)
- Premium term: 25 years
- Yearly income payout: Up to $122,000
- Total Guaranteed/ Projected payout: $900,000 (Up to $2,440,000)
Results: For the same amount of $900,000 in savings, your principal is guaranteed and you can get up to $122,000 instead of $50,000 for the next 20 years. This has the effect of you drawing down from 2.4 mils when the actual savings is only $900,000.
Scenario 2: Saving to a million dollar drawdown over the next 20 years in a retirement plan ($50,000 yearly income for 20 years)
- Annual/ Total premium paid: $15,000 ($375,000)
- Premium term: 25 years
- Yearly income payout: Up to $51,000
- Total Guaranteed/ Projected payout: $375,000 (Up to $1,020,000)
Results: If the objective is to draw down from a million dollar during your retirement, you only save $15,000 instead of $36,000 yearly over the next 25 years. The effects of $375,000 in an annuity may allow you to potentially receive the same or higher drawdown compared to a total savings of $900,000.
Consider this: If you wish to seek a meaningful and stable rate of return on your money, you must be prepared to have a longer holding period. After all, there must be a trade-off between your time horizon in exchange for high financial returns and a guaranteed on your principal.
Other alternatives: A diversified investment in ETFs or Unit Trust Funds may yield even higher financial gains. The aggressive risk takers may wish to take higher risk via full equity investments, while moderate risk takers can consider income funds that pay a non-guaranteed monthly dividend.
The best retirement plans for income payout
Consider a high-income payout retirement plan that allows you to potentially receive a much higher income over your retirement years compared to traditional savings instruments. The only drawback is that early surrendering or partial termination of your annuity plan will result in financial loss.
If lifelong income is your concern, consider a retirement plan that pays out for a whole lifetime. This reduces longevity risk, ensuring that you will not be left high and dry during your old age.
4. Cater for Long-term Care Expenses
You will never be as healthy as you are 20 years from now. As a matter of fact, you are currently not as physically healthy compared to the same you, 20 years ago. The need for long-term care is real, despite any illusion you may have of being physically and mentally independence towards your end of life.
With old age, comes increased financial cost for medical and personal care. Instead of burning your finances on long-term care needs, seek out retirement plans that provide increased income payout upon disability. Insurers may have their own terms such as failing to perform 2/ 3 out 6 Activities of Daily Living or specific conditions.
Consider this: Protect your income stream and maintain a standard of living by ensuring your retirement income is not diluted to cater for assisted living expenses. This can be a built-in rider for some retirement plans or added on as a rider to applicable plans.
Other alternatives: Standalone disability income plans may help to reduce your dependence on your intended retirement income stream. However, such insurance plans may require a high annual cash payment, depending on its coverage terms and validity.
Upgrading your ElderShield 400 payout via an ElderShield Supplement. This can allow you to receive a higher monthly payout over a lifetime as long as you are severely disabled. Your Medisave can be used to partially or fully fund your ElderShield Supplement, depending on your age.
Additional resources: Compare ElderShield premiums and benefits across all insurers in Singapore
The best retirement plan(s) for long-term care
Consider retirement plans with guaranteed income multiplier to ensure that you do not have to fork out for age-related expenses from your desired retirement income stream. The need for long-term care is a certainty, but proper retirement planning can ensure that it does not greatly limit your desired retirement lifestyle.
5. Legacy Planning for Future Generations
Your wealth and legacy do not have to stop when you do. You may have wished to pass on a sum of money to your further generation upon demise, yet receive a stream of income and financial liquidity as you live.
A term plan to age 100 with a high death sum assured can provide financial assurance in the event of your demise. However, instead of receiving an income, you would be paying an insurance premium towards the term plan.
Consider this: This is where a retirement plan that pays you a monthly income and accumulates your wealth fits both your retirement needs and your legacy planning. All of these, while allowing you the flexibility of terminating your annuity for a guaranteed lump sum cash value.
Other alternatives: A Universal Life (UL) policy may also leave a lump sum of money upon your demise, but partial withdrawal usually incurs surrender charges and reduction of face value. The entry point for a UL may be significantly higher with most of the financial benefit towards your beneficiaries and lesser to you.
An endowment plan that allows lifetime accumulation may able be applicable, as such policy allows you to withdraw from the accumulated cash value with no penalty. At the same time, the remaining cash values of the policy can still be assigned to a third party to continue wealth accumulation at your discretion.
The best retirement plan(s) for legacy planning
Consider retirement plans with a high guaranteed principal upon withdrawal. This allows you to collect a stream of income while leaving the insured to continue owning the annuity to receive income and future surrender value.
Can a single retirement plan fulfil all 5 of the above-stated benefits?
A single annuity plan is UNABLE to completely meet all the above needs for wealth preservation, capital protection, income generation, long-term care and leaving a legacy. However, a retirement plan can be structured via multiple annuities to cover all your financial needs and objective upon your retirement.
We list the best retirement plans to cover all your retirement lifestyle needs according to the categories below:
- The 3 Best High Income Payout Retirement Plans in Singapore (2020 Edition)
- The 3 Best Lifetime Income Payout Retirement Plans in Singapore (2020 Edition)
- The 3 Best Inflation-proofed Retirement Plans in Singapore (2020 Edition)
- The 3 Best Retirement Plans with Principle Withdrawal Features in Singapore (2020 Edition)
- The 3 Best SRS Retirement Plans in Singapore for Wealth Accumulation (2020 Edition)
Always aim to start planning for retirement as soon as you are financially stable and already have all your health and protection needs covered. The earlier you start, the better compounding effects work in your favour.
Read about: Retirement Planning in Singapore: 2020 Comprehensive Guide *Popular*
More details about investing in a retirement plan
Refer to our Retirement and Annuity Comparison Portal to find out more about product specific features, benefits and income payout. We bet the results will differ more than you think across all the insurance companies!
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