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Will I retire happy?

Tuesday, March 11, 2014

I received this email from a reader recently:

Hi Mr. Tan,

I stumbled upon your blog and read about your analysis on the inflation-adjusted retirement plan. currently, I have a term plan and am currently considering on a retirement plan, which I have recently signed.... And it is the above-captioned one.

I am 35 and based on this plan, I expect to retire at 55 and this plans covers me up to 70.

I will be paying total premiums of $70,875 for 15 years,
In which there will be a 5-year accumulation period.

Thereafter, my total guaranteed retirement income is $115,875 from age 65 to 70.

If I assume the inflation rate from now is 3% p.a., I should expect my guaranteed payout to be $115,171.88 for 15 years. Which seems like the plan is marginally palatable. But now that you got me thinking about the returns on my capital, it looks like I am losing the returns during the 5-year accumulation period. Am I right? Should I be worried?

I have already signed the plan and realized that there are more demerits to my proposal than I thought it had because I was focused on reserving retirement income while having a longer coverage on death & terminal illness. Like I cannot surrender it before retirement age, or else I lose everything.

Also, it would be great if you could post an article advising on securing more $ for retirement for worried young Singaporeans.

I hope I can get your advice on this.

Thank you very much!

SI



My reply:

Hi SI,

Er... I am not a Mr. Tan. I think you might have mistaken me for one of the 4 presidential candidates in the last presidential election. ;p

If you have already signed up for the plan, there is little else you can do about it, I suppose, short of terminating it and suffering losses.

I think that if you follow my reasoning and calculations in the blog post you mentioned, you will see why I don't think the product will do the job it says it will do.

Anyway, I don't wish to cause you further anxiety. There is a non-guaranteed portion in the product. It could work out nicely for you in the end if they deliver on that, much delayed though it might be. :)

As for how to secure more money for retirement for 'worried young Singaporeans', I blog about it on and off:

1. Earn more
2. Spend less
3. Invest for a second stream of income

This is my peasant mentality to financial freedom. :)

Best wishes,
AK


Related posts:
1. Inflation adjusted retirement income plan.
2. To be a happy peasant.
3. Very first step to becoming richer.
4. Wealthy nation cannot afford to retire?

15 comments:

seefei said...

I always think investment-linked product insurance has an additional cost layer that eat into our profit. I rather buy a plain-vanilla term insurance and use the extra money to invest on my own.

Furthermore, like AK said, the investment return is dependant on the market at the point of redemption. That is not comforting.

AK71 said...

Hi seefei,

Er... Did I say that? Aiyoh, I blur. ;p

Anyway, with insurance, it is all about buying the right type of insurance. Some insurance products are just gimmicks. :)

Jared Low said...

Hi AK and Sl,

Your image used looks familiar to me and got my attention. Since I'm familiar with it, maybe I could weigh in a bit. =)

Retire Happy is a retirement plan that pays you with increasing retirement income from your selected retirement age, i.e. 55 years old.

As its policy term is longer than the usual endowment plans, RH is able to give you a guaranteed returns of 2.29%p.a., which amounts to $115,875.

In addition, you will start receiving non-guaranteed bonuses from the end of 3rd policy year. Once it is declared, it is guaranteed and will pay out upon maturity.

Assuming a fund projection of 4.75% p.a., the total rate of return to you is 4.25%. Including the bonuses, the total projected payout is $192,749.

RH aims to build the foundation of your retirement planning. Not just limiting to RH, all retirement plan aims to provide you with reassurance that your income is guaranteed. And also to reduce the anxiety that one may experience when investment markets become unfavourable in pre- and post- retirement stages.

It could buy your some time to recover from economic crisis, should it happen before or during your retirement.

We do encourage you to keep investing for potentially higher and better returns to supplement your retirement needs.

However, in the event of unexpected crisis, at least you know that your basic necessities will be taken care of with the guaranteed income.

Retirement Planning is a big module by itself and there are many strategies you can adopt.

For example, risk averse individual can consider transferring their savings into RH which gives a higher interest rate than the bank over the long term.

Or to the investors, you could take profit yearly from your investments and lock it with RH.

Many people that we work with do not know how to/want to/no time to do their own investment. Some also consider RH because they want to get money out of their sight and out of their mind.

Because everyone is unique, there is no one size that fits all. Some like it, some stay away from it. It all depends on your life and financial experience with unique preferences.

If you have yet to receive your policy document, you may consider to free-look the policy.

If you have received more than 14 days, please note that pre-mature termination in the first 2 years do not have any cash value.

I encourage you to speak with your trusted adviser for a more prudent advice.

AK71 said...

Hi Jared,

I like this paragraph most:

"Many people that we work with do not know how to/want to/no time to do their own investment. Some also consider RH because they want to get money out of their sight and out of their mind."

I think there will always be a market out there for insurance products like this one because people are ignorant or simply couldn't be bothered.

Well, in such instances, who are we to tell them they are being silly? ;)

Jared Low said...

皇上不及太监及.

If they aren't interested, there is nothing much can be done also.

But if they don't, then the money would be missing too.

Is more like, no fish prawn also can. =O

AK71 said...

Hi Jared,

You calling me a 太监 har? -.-"

I think many people like SI here care enough and as we can see in SI's case, she is quite bothered by it.

In my initial analysis of the product about a year ago, I concluded that there is simply no guarantee that this product will be the inflation adjusted retirement income plan it says it is. It could be but there is no guarantee that it will be. See: Inflation adjusted retirement income plan.

Try educating the public and I am sure that the take up rate for a product like RH will reduce significantly. :)

Maybe, one day you will become an IFA. I think you will be super as one. ;)

AhJohn said...

The sellers always confuse people with absolute amount after tens years, never count into inflation!

AhJohn said...

Recently, I have an idea.
Buy a property and rent out, also buy a mortgage insurance, the whole package should be better than life insurance.
But for own disability, no idea yet.

Jared Low said...

LOL. I didn't say that. Is just an expression. =)

I see that you and AXA had a different perspective on the inflation adjusted concept. What they claimed is different as what you expected.

From your point of view, your inflation adjusted means projecting the annual premium by 3.5%p.a. till the retirement age.

On the other hand, the marketing says is increasing income at 3.5%p.a. at retirement age to combat inflation.

To make it a fair comparison, the guaranteed rate of returns vs inflation should be 2.38% vs 3.5% respectively.

In terms of guaranteed returns, I think is not bad. But that is at the expense of longer time horizon and sacrificing some financial flexibility.

LIA recently reduced the projection rate for participating plans to 3.25%p.a. and 4.75%p.a. to better reflect the current investment climate. That is also to better manage the expectation of the projection returns.

The total rate of return at 4.75% p.a. is 4.33%.

Let say we assume a more conservative return and meet in between the guaranteed rate of return and at 4.75%, its still about 3.35%, or maybe more.

If your concern is being shortchanged in the first 10 years, than maybe a level payout of $30,000 for 15 years would be more attractive to you. At age 80, there is still a maturity benefit of $307,699.

Maybe I will/won't. But I'm still great no matter where I go. =D haha.

SOLIDCORE said...

Hi AK and Sl,

My take on this is simple. If you want investments, get investments. If you want insurance, get insurance. Never mix both because you get less of each.

I've previously bought 30k worth of investment linked insurance products in 2007 and of course, it took a beating in 2008. I sold it, with a loss of 8k. Being mid twenties at that time, it was a big blow to me having lost 8k of my hard earned savings. But with my remaining 22k, I mustered my courage and started reading up on stocks and investments. To date, I've recovered my 8k and some more to boot.

Having said that, I do still have another insurance which is also investment linked and how I wish it can be converted into a simple traditional one .... but of course it can't. So my silly but simple strategy is to convert it into money market and make miserable next to nothing gains but intend to deploy into stocks in the next major correction which would inevitably come. I think this way I will be able to *hopefully* make decent gains for my retirement perhaps 3 decades later.

Just my 2 cents.

In the meantime, Sl, my humble opinion is to have multiple sources of income. Having a base of what you have already committed yourself isn't a bad idea cause there are worse ones, eg "24% gains blah blah schemes". Higher certainly comes at a lower value gain, and in reverse, higher gains comes at a lower certainty.

To retire.... one shouldn't have too lofty of ideals and aim for sky right? Cause at that age what we want is to be firmly planted to the ground where even Richter scale 9 earthquakes cannot knock us over.

Good luck!

AK71 said...

Hi Ah John,

I think it is really our job as buyers to do due diligence before committing to anything. Of course, if the seller has misrepresented, then, there is a case against the seller. :)

As for investing in properties, as a very long term investment in a country like Singapore, it seems like a good idea. We should invest in assets that will keep pace with or beat the inflation monster. Must be careful with the tools we choose. ;)

AK71 said...

Hi Jared,

Oh, yes. I am very sure that I have a different perspective from AXA on the "inflation adjusted concept". LOL.

I think we have provided readers with enough reading material on the matter. Readers can decide for themselves from here on whether RH is a good product for them. :)

AK71 said...

Hi Solidcore,

Hey, thanks for sharing your experience with us here. :)

Yes, what you are suggesting is prudent. Don't mix investment and insurance. We shouldn't treat this subject like washing our hair with a 2 in 1 shampoo to save time. LOL. Actually, I hardly see those 2 in 1 shampoo anymore. Why har? ;)

As for having multiple streams of income, that is a good idea but I would be quite happy if most people simply establish a second stream of income. That would already be a big step forward. :)

NV said...

"...an inflation adjusted retirement income plan.."

As some may argue differently ;), I think we should calculate returns for the entire period from point of capital injection, and not just from the point of receiving the income stream (this also to give a fairer initial comparison between competing investment products, before going into details). For this product highlighted by reader of AK's blog - personally, if the income stream is increasing 3.5%pa, personally it doesn't make the cut to be defined as inflation adjusted as there is a 20 year period of capital deployment before the returns start coming in.

The returns for the guaranteed portion is roughly 2.3% (+/-) for the entire 35years of the plan. Some people will be happy with this level of guaranteed return with the potential upside from the non-guaranteed portion. But their attention may be distracted by the headline mentioning 3.5% yearly increase in income from the 21st year onwards (for further 15 years). A case of showing the so-called "good" while not showing the "bad"??

"it is really our job as buyers to do due diligence before committing to anything."

AK71 said...

Hi NV,

"...I think we should calculate returns for the entire period from point of capital injection, and not just from the point of receiving the income stream..."

My point exactly and this is really quite fundamental to whether the product does the job it claims it does. :)

We might also want to remember that an underperformance or under-delivery of 1% per year over a 35 years period is much more significant than it might look at first glance.

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