Reallocate as interest rate rises in a slowing economy.

Interest rate is rising.

PM Lee recently warned of a possible recession in the quarters ahead.

Put rising interest rate and a slowing economy together, we get a rather gloomy picture.

The evil which is inflation is preferred to the evil which is deflation.

Although inflation is the lesser evil, it isn't as benign when it is heightened which is what we are seeing now in the world.

We can reduce inflationary pressure either by increasing supply of goods and services which are in demand or tempering demand for such goods and services.

As it is difficult to increase supply right away, central banks are trying to tame inflation by increasing interest rate in an effort to reduce demand.

Increasing interest rate increases the cost of debt.

Credit is the lifeblood of commerce and most businesses are leveraged to some degree.

If the economy is healthy, businesses can pass on the higher cost of doing business to their customers and higher finance expense that comes from higher interest rates are naturally a part of such cost.

However, it becomes more difficult for many businesses to pass on such higher costs to customers if the economy is suffering from malaise.

Heightened inflation, rapidly increasing interest rates and low economic growth is not a good mix.

In such a situation, even very strong companies will not be spared a slowdown as most entities would be less ready to part with their money.

Already, we see some big name MNCs both in the old and new economies warning of very difficult quarters ahead.

Only the fittest will survive but even they might not emerge unscathed from such a toxic cocktail.

As an investor for income, I believe that businesses which are able and willing to pay a meaningful dividend should be favored.

To make sure that dividends are sustainable, these businesses should also provide necessary goods and services and have stronger balance sheets.

They too will take a few punches during hard times but they should be able to roll with the punches.

I think staying invested is still the way to go but, like I said, I should mostly be invested in businesses which are able and willing to pay dividends even during hard times.

So, with this in mind, I have taken a hard look at my largest investments since they impact the performance of my portfolio the most.

The strategy to increase my investments in DBS, OCBC and UOB during the COVID-19 induced bear market has turned out well and sticking with this strategy makes sense to me especially with interest rate rising.

I am also interested in increasing my investments in ComfortDelgro and CLCT on weakness as they seemed to have lagged in price recovery while their businesses look more attractive to me in recent times but for different reasons.

I am leaning more towards ComfortDelgro which has a stronger balance sheet and also because looking at the numbers which have improved, there is a fairly good chance that future dividends will be higher and could even go back to pre-pandemic levels.

CLCT's plan is to increase the proportion of new economy assets in their portfolio and I foresee more fund raising in the future.

So, I will increase my investment in CLCT slowly and not bulk up in a hurry.

REITs are required to pay out at least 90% of their operating cash flow to investors to enjoy tax benefits and this is a source of comfort to me.

The REITs in my portfolio are rather conservative when it comes to debt and in the case of IREIT Global, some of their rental income is linked to the German consumer price index and higher inflation could see a greater increase in income.

In my list of largest investments, the only entity which did not pay a dividend during the last bear market was Centurion Corporation.

Amongst my largest investments, Centurion Corporation also has the weakest balance sheet apart from Wilmar International.

However, Wilmar International is in the business of food production and distribution which, in my opinion, is recession proof. 

Given their size and market dominance, they should be able to charge higher prices.

Wilmar also has good options available to unlock value for shareholders and they were paying dividends even during the pandemic.

I increased my investment in Centurion Corporation as Singapore decided to live with COVID-19.

For those who are interested in my thoughts on the matter, read:

1Q 2022 passive income.

In an environment of rapidly increasing interest rate and slowing economy, however, with a rather weak balance sheet, it could be harder for Centurion Corporation to bring home the bacon.

In my original blog on why I invested in Centurion Corporation, I crunched some numbers on how rising interest rate could impact Centurion Corporation's interest cover ratio.

For those who are interested, read:

Added Centurion Corp to portfolio.

Of course, if they are able to increase asking price per bed meaningfully to balance the increase in the cost of debt, then, they should be OK.

Although they would be able to do so easily in a healthy economy, it might not be so easy during times of economic malaise.

Wait, didn't Centurion Corporation do quite well even when the economy was unhealthy?

Yes, they did but they didn't have to deal with rapidly increasing interest rates.

I don't know everything and I might be missing a few things here.

So, I have decided to only reduce my exposure to Centurion Corporation and not go to zero.

As my total passive income held up quite well during the two years when Centurion Corporation suspended dividend payouts, I doubt reducing my investment would have any meaningful impact in terms of passive income generation which makes this decision an easier one for me.

Although Centurion Corporation still looks undervalued to me as it trades at a huge discount to NAV, to be honest, this discount could reduce as valuation of their assets could take a hit.

It would be interesting to see how the management navigates the challenges ahead and how they might unlock value for shareholders.

They are trying to sell some assets in the USA now which if successful should help in reducing leverage and unlocking value.

To this end, I believe they should ramp up their effort and sell more assets.

Like Phua Chu Kang said at the onset of the COVID-19 pandemic, "Things different already."

In the grand scheme of things, this is a relatively minor shift of resources but because I am more inactive than active as an investor for income, it might seem like a big event.

Remember, mentally unstable AK is just talking to himself, as usual.

Have a plan, your own plan.

Recently published:
Avoid this in a rising interest rate environment.

Related posts:

1. Rising interest rate flashback... 

2. Largest investments 1Q 2022.

3. Investing with peace of mind.

Why retirement is not an option for some people?

Ever since I went on a low carbohydrate diet, I have been consuming more protein and fats. 

One of the things I do eat from time to time is fish and I enjoy Batang fish quite a bit.

This evening, I paid almost $5 for my fish dinner:

150 grams of Batang fish. 

Just nice for a grown man or at least for me.

A dusting of turmeric powder, a sprinkling of garlic salt and some butter. 

1 minute in the microwave oven at 800 watts, followed by a drizzle of extra virgin olive oil and it is good to eat.

Yummy.

Anyway, as I was walking home from the supermarket, I tossed some numbers in my head.




$5 doesn't seem like a lot of money but to someone who makes $100 a day, that is 5% of his daily pay. 

(Once upon a time, that was my daily pay too.)

Considering the fact that $20 goes to his CPF, $5 is actually 6.25% of his take home pay. 

This is quite a big percentage.





Let us say this person depends solely on his CPF savings to fund his retirement and let us say he hit the FRS 10 years ago and CPF Life pays him $1,380 a month from today for life, he would get $46 in pocket money a day. 

In such a case, $5 is going to be almost 11% if his daily allowance!

The price of Batang fish would probably increase over time too.

Of course, he probably won't be eating Batang fish everyday but it is just an example to show how our CPF savings are probably not going to be enough to retire on.

If we depend solely on our CPF savings for retirement funding, it is quite possible that we would have to continue working beyond age 65.




This is for CPF members who have the FRS at age 55 too as this fishy example shows. 

For CPF members who do not have the FRS or even the BRS at age 55 and if their CPF is the only source of retirement funding, the chance of them ever being able to stop working is almost non-existent.





To people who are still unhappy with having money locked up in their CPF accounts and who want their CPF money returned to them because they have no savings to retire on, you have to wake up. 

You cannot retire. 

You have to continue working.





Related post:
CPF Life payout estimator.

Food inflation in Malaysia and Singapore.

We are always saying how things are cheaper across the Causeway and I do it too. 

I have said it often enough to get rebuked by some of my Malaysian friends.

"You Singaporeans only find it cheap because of the strong S$. 

"Life is actually very difficult for common Malaysians, you know.

"And you people come here and drive prices up.

"You think the people in Johor like higher prices?"





I grew up loving McDonald's fast food.

It was always a treat.

These days, I still go to McDonald's and I like ordering the S$2.50 Fillet o fish. 

Since they dropped the price to S$2.00 before increasing it to S$2.50 for the burger alone, I have not had the meals.

The meal comes with fries and a drink but costs S$5.00.

It is just paying more for extra (and empty) calories which I don't need.





In JB, I remember it cost me about RM9.00 for a Fillet o fish meal.

That is less than S$3.00!

It is like paying 50c for fries and a drink!

It is a no brainer for me.

Of course, I would take the meal! 

Yes, I know.

Suddenly, I am OK with with the extra (and empty) calories.

Bad AK! Bad AK!





For the Malaysians, however, paying for a Fillet o fish meal in Malaysia is like Singaporeans paying for a Fillet o fish meal in Singapore.

It is not more affordable for them.

Actually, it is the opposite.

I found out that an optometrist makes about RM4,000 in Malaysia but an optometrist makes about S$4,000 in Singapore.

The former pays RM9.00 (0.225% of his salary) while the latter pays S$5.00 (0.125% of his salary) for the same meal.

Although inflation is affecting food prices everywhere, it is worse in Malaysia than in Singapore.

Malaysia Food Inflation  Forecast 2016-2020

Food Inflation in Malaysia is expected to be 4.50 percent by the end of this quarter, according to Trading Economics global macro models and analysts expectations. Looking forward, we estimate Food Inflation in Malaysia to stand at 4.70 in 12 months time. Source: HERE.

Singapore Food Inflation  Forecast 2016-2020

Food Inflation in Singapore is expected to be 2.50 percent by the end of this quarter, according to Trading Economics global macro models and analysts expectations. Looking forward, we estimate Food Inflation in Singapore to stand at 2.90 in 12 months time. Source: HERE.

I have made a mental note to be more sensitive when I talk about the cost of living when I am with my Malaysian friends.

Malaysia cuts food subsidies.




Related post:
We manage our savings better!
Malaysia and India pay higher interests in similar pension schemes but our Singapore dollar is rated AAA and has appreciated against the currencies of many other countries.

A chat on inflation and cost of living (UPDATED JULY 2018).

This was a chat I had with a reader who is also a very concerned parent.

T
do we see a 3% increase in basic necessities costs? 

Perhaps 1-1.5% is more reasonable?


AK
core inflation. That would be 2 to 3% per annum. 

Recently, we have been experiencing deflationary pressure but even so, food prices saw inflation of 2.2% or so, year on year. 

Oil prices being so low now contribute to deflationary pressure but I don't this this will last more than a year or two. 

I hope that the Singapore dollar stays relatively strong and that we don't see inflation at 5% again just like a couple of years or so ago.




T
(Referring to the CPF) 3% incremental retirement sum will amount to 445k retirement sum 34 years later.... 

Oh wow... It will wipe out a lot of middle income ppl's Sa! 

Seen from the perspective of a 21 yr old male who just entered the workforce at 21 yrs now in 2015

AK
Inflation is a monster but we rather have that than deflation. wink emoticon 

 things will get more challenging in the years ahead. 

I remember a bowl of Lor Mee was 50c when I was in Primary One. 

Fast forward almost 40 years, it is $3 a bowl today. 

I think the price has gone up by more than 3% per annum. 

It is not an easy job to keep cost of living down. I don't want to be the government.







T
Cost of living will definitely go up over a period of 30-40 years.... 

Think the bigger challenge would be ensuring wages keep up.... 

During that time of 50cent lor mee, wages were probably around the 300-500 mark I guess



AK
I too young to know what wages were like. 

I think everyone must be financially prudent. 

What we have control over, we must make the best of things.





T
I worry abt the daughter's future.... 

I can instill financial knowledge into her from an early age but I'm afraid cost of living goes up too fast

AK
We probably have less control over our wages or prices. 

However, we have control over what we spend on and how much we save.




T
Yup... That I totally agree.... 

If cost of living goes up much faster then wages, it does not really make sense for the future generation to live like a hermit just to plan for retirement... 

What kind of life would that be?

AK
It really depends on our expectations and if we are willing to manage them, I feel.




T
I already lead a life sorta like a hermit just so I can afford my daughter's future academic needs and my own retirement needs.... 

I think I'm not at your level yet but I'm spending less then 600 per month on my own food, transport and personal needs so I think I'm on the right track.

Anyway I just wanna let u know I learnt quite a lot just from your posts.... 

Once I have my emergency fund set and a war chest ready, I'll start investing.....

Maybe the details of which stock which REIT, gearing and debt etc I still don't understand... 

But I learnt a lot from the concepts behind it. The concept of delayed gratification. Saving 100% of your income etc.

We are approaching a time in history now that simply earning a salary and saving will not be enough for even a simple retirement. Investment knowledge is important.








AK's closing comments:
I hope that Singapore doesn't become another Hong Kong or Taiwan where young graduates cannot afford to buy an apartment. 

I hope that Singapore doesn't become another Japan which suffered not one but two lost decades.

I am sure many Singaporeans have the same worries. 

(Source:
https://www.straitstimes.com/asia/east-asia/taiwan-youth-struggle-to-find-well-paying-jobs)
.............




.............
We do what is in our power to make sure that we are able to weather the storms which could come our way. 

We should not think that we would always see fair weather.

When we are prepared, we would have less to worry about.





Related post:
Don't think and grow rich. 

Why we should buy the biggest and most expensive home?

Bro, good, knock some sense into her head!






Whenever I tell people not to buy a home that stretches their finances to the max (and beyond), often, I would get the reply that if they don't buy a home that is as big as possible, that is as expensive as possible, they might not be able to afford something like it in future due to inflation.

I have blogged about how our homes are really consumption items and not investments although it is hard for many to accept that especially when they see real estate prices in Singapore sky rocketing in recent years.




Of course, in recent months, the mood has become a tad more cautious but many people still think of their homes as investments and assets which are a good hedge against inflation. 

A recent argument put forward by someone along this line provided the catalyst for this blog post.

That someone said recently that if I were willing to buy some physical gold and silver as a hedge against inflation, why not a bigger and more expensive home?

Well, I have to say that my motivation for having some gold and silver is, in fact, an insurance against the flaws of fiat currencies. 

Embedded in that motivation, therefore, is the belief that precious metals are a hedge against inflation. So, this person is right in this respect. 

However, his understanding is incomplete.

The vast majority of us have to use leverage in the purchase of a home. 

A home purchased with a loan is a liability for the next 20 years, 25 years, 30 years or whatever the duration of the loan should be.

Only a home that is fully paid with our own money is an asset. 

Before that, we might have control over the property and the ability to enjoy using it but we do not have ownership of the property.





Another point is that if we have developed a crisis mentality, we would know that having some precious metals as insurance also makes sense because they are portable. 

Our home, even a shoebox apartment like mine, is not portable. 

Well, there are exceptions, I suppose, and those who live in caravans and houseboats might be the really smart ones.





Finally, precious metals usually form less than 10% of our wealth, for those of us who have them. 

However, for most of us, our homes easily form 50% or more of our wealth. 

This is why people say that Singaporeans are asset rich but cash poor. 

That asset they are referring to is usually our home.

"Professor Benedict Koh, director of the Singapore Management University's Centre for Silver Security, says the asset-rich, cash-poor phenomenon is an outcome of over-investment in property. And the proportion of such seniors is only going to rise as the population ages, say Prof Koh and other observers.


"Ms Peh Kim Choo, director of Hua Mei Centre for Successful Ageing, is worried that the asset-rich, cash-poor problem will be exacerbated as baby-boomers retire over the next 20 years. This is the generation that entered the workforce after CPF and the message of home ownership were introduced, she says.


"As more of these folk retire, says Ms Peh, "that is where we will see a lot more of the asset-rich, cash-poor situation". It cuts across both public and private housing, she notes. Her centre has counselled such seniors living in larger HDB flats."

Source:
http://www.straitstimes.com/the-big-story/case-you-missed-it/story/asset-rich-cash-poor-retirees-speak-20131203

What makes thinking that we should get the biggest and most expensive homes we can afford now because real estate prices will always go up in the long term particularly risky is complacency, the lack of a contingency plan, the lack of a crisis mentality.

Of course, vested interests would want to propagate the belief that there is never a bad time to buy a home and we don't have to time the market.

Apart from questions we should be asking these vested interests, we should ask ourselves some questions.


What if we were to lose our jobs? 

What if we were unable to continue working for any reason? 

What if we had bought at the peak of the market? 

What if the property market should crash in the next few years?


Do we have the financial resources to cope in such instances and if we should have some financial resources, would these financial resources remain strong or weaken in tandem?





I have been through a few economic cycles. 

I have seen how bad the bust in an economic cycle could be and how they affected families and friends.

It could be that this time it is different as I certainly do not possess the ability to look into the future.

However, we might want to remind ourselves that although history does not repeat, it does rhyme.




Related posts:
1. Disastrous investments in the property market.
2. Singapore properties will surely make money.
3. Two questions to ask buying investment properties.
4. Buying a home within your means.
5. Buying a property: Affordability and value for money.

Bonds, REITs and the instant gratification of yield.

The message that inflation is eroding our wealth because the banks here offer such measly interest rates for our savings has become quite pervasive. 

I am sure that the message has been good for sales in some industries too as many more people are worried now. 

I know my parents talk about it a lot more these days.




So, what do people do? They go hunting for higher yields. One of the easier things to do is to go to the banks and invest in products which promise yields which are much higher than the said interest rates. 

Many also go to the stock market to look for stocks, bonds or preference shares which offer yields that beat inflation.

In the hunt for higher yields, we might want to keep this in mind:

"Always remind yourself that investing is a long term activity. So, avoid the instant gratification of yield... think carefully about how you are getting that yield... But there is a tendency in this environment for everybody to feel like 'I've got too much cash rotting in the bank, earning nothing, and I have to do something with it.' ... Don't just buy the highest yielding investment out there. Historically, that's how people get themselves into trouble."  - Tad Rivelle, CIO, fixed income, TCW.

Is the low interest rate environment we see the new normal? Won't interest rates go up again? Pause and ruminate on this for a bit.

When we are offered a high yielding investment, we should ask how the investment is delivering the promised yield and if it is sustainable. If sustainable, for how long is it sustainable? What is the likelihood of a capital loss at various entry prices?

I like how Tad said we should avoid "the instant gratification of yield". 

It sounds similar to how we should try delaying gratification in consumption as we try to build wealth.

By saying that we should avoid "the instant gratification of yield", Tad is probably suggesting that we could possibly get in at a lower price in future and get a higher yield then, everything else remaining equal. 

The suggestion that people who get in now could lose money as prices fall in future is there as well.

I don't know if Tad had a working crystal ball when he said what he said but I know I don't. Could the low interest rate environment persist? 

It could but with experts saying that interest rates could rise sometime next year, shouldn't people in long term and perpetual bonds be worried? 

What about people in interest rate sensitive investments like REITs?

If interest rates should rise, yes, these investors should be worried. However, the bond holders should have more to worry. Why? 

Well, if interest rates rise, it is probably because higher inflation demands it. 

Bonds are not businesses. They are IOUs issued by businesses. They only have to pay the agreed coupon and nothing more. 

Bonds tend to do badly in an inflationary environment as interest rates rise.

For REITs, we can reasonably expect their asking rents to increase in an inflationary environment. There will be constant adjustments made as cost of new debt becomes higher but as long as rents are lifted higher in tandem, there is really no issue, everything else remaining equal. 




So, when investing in a REIT, one of the things to look at is the possibility of higher asking rents in future which involves a whole gamut of considerations which mostly can be neatly sorted under two headings, "supply" and "demand".

When the Fed finally decides to raise interest rates, I am sure that market prices of yield instruments will take a hit just like they did middle of last year. 

How big a hit? 

I have no way of telling but I have an inkling that prices would in all likelihood overcompensate to the downside.

Depending on what our existing investments are, some will suffer more than others but chances of any investor escaping unscathed would be slim. 

So, now, do we liquidate all our investments and do a Chicken Little which is what some people have done?

Well, we could but knowing that I don't really know, my preferred method has always been to stay invested while maintaining a high level of liquidity. 

So, doing what I do means being able to continue receiving income from my investments which increases the level of liquidity that I have.

After all, what is the best way to ride out volatility? Having plenty of cash.




So, bonds or REITs, before we plonk in any money now, we might want to temper our expectations by reminding ourselves of the risk that comes with the instant gratification of yield.

Related posts:
1. Get paid more waiting for opportunities.
2. How to earn 6.3% interest after 4 years?
3. Nobody cares more about our money.
4. Never lose money in REITs or real estate?
5. Perpetual bonds: Good or bad?

Whole life insurance, universal life insurance and investing.

"It is a horrific investment!"

This blog post is actually a reply to Kenneth Chua, who left very thoughtful comments regarding how whole life insurance has worked for him: here.

Since not many readers visit the comments section, I thought I should bring the comments section in as a blog post especially when I believe I have something important to talk to myself about:


Hi Kenneth,

Yes, times have changed and there are many more options available to us now in Singapore to help us plan for retirement.

When I am in my 60s, I could be amazed by how things might be different just like how my parents find how things are more complicated nowadays compared to the time when they were in their 20s. Life was simpler then.

Well, we are lucky that we have a paternalistic government who, most of the time, do the right things. We still have to try to grow our savings to ensure retirement adequacy on top of what the government is trying to do for us.

With Singapore's core inflation at about 3% per annum, the whole life policies which I have are only tracking inflation with returns of about 3% per annum. While it helps to know that my wealth is not shrinking, it is not growing either.

When the time comes to draw upon the policies (i.e. cashing out at 65 like you said), the sum of money would start shrinking rapidly, both in nominal and real terms due to its utilisation and a lack of growth.

A solution would be to buy an annuity then but, of course, the money would be locked up again. Although most people would not like to have their money locked up, this is a good hedge against longevity risk for people who are not investment savvy.

For me, however, the better solution is to ensure our wealth grows at a faster rate than inflation and the sooner we achieve this, the better. Apart from saving a good portion of our earned income from active employment, investing in income producing assets that will grow in value is my preferred method.

The nice thing about this is that when I reach 65, I wouldn't have to cash out. Hopefully, these assets would still be generating income for me and this would help fund my retirement till my final day in this world.

Thanks so much for sharing. Keep the comments coming.

AK

I also replied to another reader on Universal Life Insurance recently. If you are interested in this, please read comments: here.

Related posts:
1. Inflation! What to do?
2. To retire by age 45, start with a plan.
3. The best insurance to have in life.
4. An annuity: A case study.
5. Matthew Seah explains Blue Chip Investment Plan.

"The amount that is going into insurance goes up every year and the amount that is going into investment goes down every year. This doesn't work. It is a way of investing money poorly."

Inflation hits dental fees.

I spent $87.50 this evening at the dental clinic. Scaling and polishing. Ouch! Yes, painful. Don't misunderstand. I meant the bill.

I remember my last visit cost me about $60.00 only. Well, maybe a bit more. OK, to be fair, that was about two years ago. OK, to be more accurate, maybe it was a bit more than two years.

Still, takai des ne.

They would advise me to visit once every six months. When I was younger, I did that but I cannot remember when I stopped and, now, I would visit once every two or three years. I am terrible. I know.

However, I really take care of my teeth very well. I brush properly twice a day. You would be surprised how many people don't know how to brush their teeth properly. I only use Colgate Total toothpaste. I floss. I use Listerine mouth gargle.

Although it is more than two years since my last visit, the dentist gave my teeth a clean bill of health. No decay and not too dirty either. Just had some stains in places I could not reach normally.

Not smoking and not drinking coffee probably helped as well. Another reason to give up smoking and Starbucks coffee for those of you who are addicted. Hint, hint, nudge, nudge, wink, wink.

After thinking a bit more, I guess it is OK to pay S$87.50 since I saved $240.00 by not seeing the dentist every six months in the last two years, assuming that the price was still $60.00 per visit.

Reminder to myself:
Try to see the dentist at least once a year.

Related posts:
1. Inflation: What to do?
2. Inflation hits fried bee hoon.
3. Inflation is not going away.

Inflation: What to do?

Know anyone who stayed 100% in cash?

"For the individual, staying in cash has proven to be painful even if he is spared market volatility. Thanks to inflation, $1 million in 2008 would have shrunk to $854,000 in 2013." Patrick Brenner, Schroder.

Staying 100% in cash today is still a bad idea. Inflation is not going to let up and this is something I blog about quite a bit. See: Inflation is not going away.

If you are a squirrel and save a lot, good for you but don't stop there. See: Double whammy.

So, what do we have to do to protect our wealth from being eroded by inflation? Quite simply, invest for returns higher than the inflation rate.

Don't dump money into bonds. See: Beating the Street with value deals.

Don't dump money into fancy (and misleading) products. See: Inflation adjusted retirement income plan.

Saving money is crucial, of course, but a necessary second step is investing and these might provide food for thought:

1. Grow your wealth and beat inflation.
2. Motivations and methods in investing.
3. Warren Buffett, the greatest money maker.

Jetstar increased price by 33% in the last one year!

In recent years, when I flew budget, I would buy a drink which, although was relatively expensive, provided me with some comfort in the dry air of an airplane cabin.

Well, last week, I discovered that the drinks have gone up 33% in price compared to a year ago!

It was $3.00 before. Now, it is $4.00! Wow!
 

How many things in our lives have gone up 33% in price in the last one year?

Related posts:

1. Inflation hits fried bee hoon.

2. Inflation is not going away.

3. Inflation adjusted income plan.

Inflation adjusted retirement income plan.

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.

Related posts:
1. Will I retire happy?
2. Good wife worries...