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Inflation adjusted retirement income plan.

Tuesday, March 12, 2013

I like easy-to-understand financial products. I am not very good with numbers and I got flummoxed by complicated structured deposits offered by the banks before. 

Totally confusing.

I also get very confused by complex insurance products. My insurance agents know not to offer me anything that is too complicated. 

I usually tell them not to call me and that if I need something, I will call them.





I have bought products from AIA, Prudential, Great Eastern Life, NTUC Income, Aviva and AXA before and many are still in force. There was UOB Life as well but it was bought over by Prudential.

Today, I came across a product by AXA which claims to be an inflation adjusted retirement income plan

Sounds good, doesn't it? 

Intrigued, I decided to have a look see.

However, one look and the initial good feeling is gone:






OK, if you think I am going to start on how we can get better returns by doing our own investment, that is not what I am going to do. I am just going to share an observation which is I just don't think that the product lives up to its claim of being inflation adjusted.

In the example, the product says that there is a 3.5% increase in guaranteed annual income payout year after year from age 65 to 80 but does it provide us with inflation adjusted returns on our capital? 

This is my first impression when someone tells me that a plan is inflation adjusted.

In the example above, a total of $285,300 was contributed over 15 years or $19,020 per year. 

Then, there is a waiting period of 5 years (accumulation period) before a yearly payout over the next 15 years kicks in.

Almost 47% of the payout is non-guaranteed. The guaranteed portion amounts to S$463,500.





Assuming that inflation is lower than 3.5% per annum and that it is a more normalised 3% per annum, that $19,020 paid at age 45 would have to be $34,352.22 to keep its purchasing power intact at age 65. 

In the example, age 65 is when the first guaranteed annual income is received. Instead of $34,352.22, it is only S$ 24,000!

Each payment from age 65 to 80 would have to be at least $34,352.22 in order not to lose any purchasing power, year on year.

The nice chart with the lengthening bars over the next 15 years hides the fact that from age 65 to 75, the purchasing power of the payouts in those years are much reduced. 

Only at age 76 would the guaranteed annual income exceed $34,352.22. 

So, the first 10 years of guaranteed annual income are not able to compensate for inflation!





I don't need the annual payout to grow 3.5%. To me, that is a gimmick to give an appearance that the payouts are inflation adjusted. Just give me $34,352.22 every year as this would truly be inflation adjusted, assuming a 3% inflation rate per annum.

The total guaranteed annual income over a 15 year period should, therefore, be $34,352.22 x 15 or $515,283.33 to make the offer palatable. 

This is 11.17% more than what is guaranteed by the insurer.





Of course, they can say that there is a non-guaranteed component of $407,260 which could be paid out at age 80. 

Well, not only is 80 a long way to go, we need greater certainty at retirement and non-guaranteed just doesn't cut it.

This product is a no go for me.

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27 comments:

lzyData said...

It's great that you point out how this is basically a standard insurance product if we take out the "inflation adjusted" part, celebrity endorsements or not. This is why we keep coming back to ASSI :)

AK71 said...

Hi IzyData,

Oh, yes. Irene Ang and Patricia Mok. This raises another question.

Having actors and actresses promoting some atas restaurant is OK but is it OK for them to endorse financial products? Wouldn't that introduce some emotive factor which could impair the judgement of the audience? ;p

SnOOpy168 said...

Those flower pots & vase are just paid to show faces.

This product looks very tempting on the surface. To the lay persons, like my elderly (dad) & mom some years ago was talked into buying some 10 year contracted products call Vitamin-something @ DBS bank, which gives a few payout initially than stopped. Excuses me, for 2 70+ years old. Thats a bit long time frame right ? Too bad, there is no free-look window period at that time. So by the time I find out, too late. Pleading ignorance of the documents with signature is a very "difficult to get out of" argument.

I am sure that the insurance agents will not explain the pitfalls well to the PH (policyholders). Kicking themselves in their own butt.

Bottom line is, refer to ASSI & other sensible blog for more common knowledge.

BTW: The annualised returns on that fixed 10 years thingy from DBS Bank is less than the savings account interest. The with-growth immediate 10 years annuity which i had recommended to my parents at that time, yields about 7% p.a at the point of signing.

skipper said...

AK,

I just cashed out 2 $75k Whole Life policies bought in 1992. One gave back $38k and the other $57k. What a big difference. Both are big MNCs. One is American and the other British. The Brit did much better in this case. All of them have caveats on their returns and you will only find out when you cash in.

AK71 said...

Hi SnOOpy168,

They are probably paid to be at the event but if they are promoting the product, does it mean that they genuinely believe in the product or does it mean that they believe the product is genuinely good? There is a difference. ;)

Of course, if we are cynical, we could say that they don't really care as long as they are paid to be at the event. :(

My parents signed up for a structured product from DBS almost 10 years ago which paid them 10% "interest" after 3 months! The lock in period is 15 years with some pretty nice looking non-guaranteed bonus. I think they would be lucky if they should get back their capital a few years from now. The fund is still underwater...

Theoretically, the best people to get advice from on insurance products should be insurance agents because they are the trained professionals. However, as they have vested interests, we must not take what they say as the Gospel truth.

If we rely on others to help make decisions for us, we have to take responsibility for deciding to rely on others.

One look at TheFinance and I see the number of blogs belonging to IFAs has increased. Some are more objective than others but all have vested interests.

TheFinance has become an advertising platform for these IFAs' blogs to reach out to more potential clients. There is nothing inherently wrong with this but readers just have to be aware of possible vested interests.

AK71 said...

Hi skipper,

I hope you got back more than what you put in over the years, not considering inflation in the same period of time. Of course, we have to be realistic and take into consideration the cost of providing insurance all those years.

Coincidentally, I received a cold call from an insurer when I was replying to SnOOpy168 earlier.

Usually, I wouldn't bother with cold calls but I gave the guy a chance since the topic of insurance is on my mind now. Failed.

It was painfully transparent that he was trying to get me to buy something, pushing out offer after offer, without taking the trouble to understand what I want...

Poh Soon said...

I was convinced to buy a product from Prudential many years back using funds from CPF special account. Up until today, it is still losing $$. In addition, i also lose out in the should be received Interest for CPF special account.

Typically, if one able to save the same amount and make 3.5% passive income, they should not bother with that insurance plan, which claim to inflation adjusted.

AK71 said...

Hi Poh Soon,

You are absolutely right and an investment return of 3.5% per annum is not too difficult to achieve.

I recently bought a 10 year term life. Coverage: $440k. Premium: $800+ a year. The cost of insurance is about 0.2% per annum which is fairly cheap. This product which is also from AXA makes sense for me.

For me, to be convinced to use money in the OA or SA for any insurance products, the guaranteed returns must be more than 2.5% and 4% per annum respectively. Otherwise, it is a no-go.

More than 10 years ago, I plonked $20k from my CPF OA into a product by UOB Life which guaranteed a 4% compound return over 10 years. I got back >$30k when the policy matured. Unfortunately, the product was discontinued years ago.

SnOOpy168 said...

AK

I do not know of any other stars, but Jackie Chan won't endorse anything unless he used and is convinced of it. eg that certain herbal hair shampoo.

Having spend a few months in the insurance business, knowing that most agents knows nuts about their products. Only that if you sell the "flavour of the month", there are more incentives. They are humans on commissions afterall.

I left because I felt guilty that 20 years later, something like those bad experiences on the investment happened and I am morally "liable" for it. This kind of 黑心 $, i rather not earn.

Back to this topic. Perhaps we build up holdings on the yield stocks via regular purchases. And buy term policy seperately for our "just in case" insurance coverage - health, travel and disabilities. We can still do the job.

Some will say that term will increase with each renewal or age brackets. Yup, still it is far cheaper than anything that promises you return of cash or capital or invests for you "as a form of savings".

Terms insurance and needs, I will go buy direct from Income and Direct Asia. Cutting out the middle man. Their telephone support are pretty OK and responsive too.

Like SKipper - I recently cashed out of an ILP, which I bought in 1994. 1/2 the premium was to buy some unit trust within the AIA group. The figures of premium paid vs NAV of the units looked positive and in the money, only in the past 4-5 months. Not forgetting the HUGE & FAT admin charges levied on each transaction. It is like the stock brokers' Min comm $35 per hand, no matter what you buy.

Took an awful lot of signed forms and emails to get the redemption done. Not to mentioned that the original agent had left, rejoined and then something to this agency.

It is 1st time that i received a 5 fig cheque in the mail, just like that. Feels good but scared that I will squander the cash away.....hence, going shopping from the market for 7-8% yield stuff. Hoped that the prices will hold and goes up.... hehehehe

Huat ah.

AK71 said...

Hi SnOOpy168,

So you left the Dark Side? Hahaha... Kidding. A guest blog about your time as an insurance agent sounds interesting. ;p

I guess the 5 figure cheque you received from the insurer is more than all the premiums you paid since 1994?

Poh Soon said...

I had bought a term insurance from Prudential, which will matured in 6years time. Still not sure whether i will get more than the amount that i paid over the year.

SnOOpy168 said...

AK . I had left that industry over 14 years ago. I am unsure if anything said of those days will bear relevance today.

Afterall, it is only a few months and by their standards, I am classified as a loser / drop out.

Certainly don't missed those days. But on the whole, it has given me insight into how this "1st year 50% commission" industry works.

AK71 said...

Hi Poh Soon,

A term policy that gives you back money? That seems like a good deal!

My 10 years term life won't give me any money back at the end of the 10th year. :(

AK71 said...

Hi SnOOpy168,

Wah! 50% commission?! OMG!

skipper said...

AK,

The American one, lost some but the British one was almost $20k more than what I put in.

The customer service was a world of a difference between the two. Guess which was much, much (emphasis) better ?

AK71 said...

Hi skipper,

Don't reveal the answer here. Maybe, you can do a guest blog on this. ;p

Poh Soon said...

Hi Skipper,

i'm suspecting that the American one have better customer service.

Lolx.

Ben said...

Hello AK,

I really enjoy reading your blog. May I ask, which insurance products from Great Eastern and Prudential have you bought?

Ben

opal said...

Better go for plain vanilla insurance, and invest in other investment vehicles, right?

AK71 said...

Hi Ben,

These were bought so long ago. Let me see. I got a whole life policy with CI rider from Prudential till 85 years old and I got a 21 years endowment from GEL. :)

AK71 said...

Hi opal,

Buy insurance for the sake of insurance? Sounds like a good plan. ;)

skipper said...

Poh Soon,

Wrong answer. Check out post from AK.

hjteo said...

Hi AK,
Wish we had the internet when younger, then I could BTIR instead of depending on insurance agent recommendations. Well, no point crying over spilled milk. Now at least can undo some of the policies and reinvest properly =)

AK71 said...

Hi hjteo,

What is BTIR?

There is a lot of good and also plenty of bad stuff on the internet. So, we still have to know how to tell the good from the bad. :)

Coincidentally, my friend just asked me about this AXA plan which apparently is named "Retire Happy". I told him read about it in ASSI. ;p

Ken said...

Hi AK71,

What hjteo meant for BTIR term is "Buy Term, Invest The Rest".
Crudely speaking, Focus on Buying Term Insurance which eliminates cash rebates, incentives etc. & Invest the Variance between Buying Term and Buying ILP/Endowment into Other Investment Vehicles.

Hope it helps a bit.

Warmest Regards,
Ken

AK71 said...

Hi Ken,

Thanks very much! BTIR certainly economises a long phrase. :)

AK71 said...

For Singaporeans and PRs, why bother with something like this if we have yet to max out the benefits of our CPF membership (i.e. FRS in CPF-SA and BHS in CPF-MA)?

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