What should mom do with $200k inheritance?

Reader says...
My mum was given an inheritance to the tune of $200k.

Not knowing what to do with the money, my mum deposited it in the bank without our knowledge and of course, she was “invited” to speak to a bank’s representative and...






I experienced some difficulty convincing her to put a significant portion of the remaining sum into her CPF as she is apprehensive that the money will thereafter be “locked up” for life and she can only get a small portion of it every month.

I do not think the sum in her CPF RA is anywhere near the BRS.






Unfortunately, every individual is only limited to a maximum of $100k in SSB.

What do you think are good alternatives for someone like my mum (62 this year) to park her remaining sum?

I take it upon myself to find out more about the most logical way to optimise the growth of this sum of money while still keeping it safe for her later years.





AK says...
I think you have to explain to her the importance of an annuity and CPF LIFE.

We will not always make the most prudent financial decisions in our old age.

Having a dependable monthly income for life in her golden years will provide peace of mind for her and the family.


"What if I live longer than expected?"







Related post:
Retirement adequacy for late bloomers 101.

Voluntary contribution to CPF MA in 2019.

Reader says...

AK sifu.. Wah next year MA up to 57200...

Excited siah..

Can top up again to get tax relief.

Can I ask u if the interest from the existing MA for 2018 will flow back to MA to meet the 2019 BHS?

If yes then sian.. Cos I cannot top up in cash in Jan 2019 to MA.

Many ppl said why increase nearly 5%..

I think if they don't increase..

Health care inflation in Singapore will eat up our BHS eventually.

I do welcome such increase. Give me a chance to earn more interest n tax relief. 😂






AK says...

Interest earned this year in MA will go to SA if MA is full and will go to OA if MA and SA full.

So, beginning of 2019, you can top up the MA $57,200 - $54,500 = $2,700 😀


Reader says...

Song song Gao jookoon

It's your fault..

Make me so excited every Jan lol








AK says...

Sorry for giving your heart stress. 😛

Bad AK! Bad AK!


Reader says...

I also say.

Nvm I got sufficient MA to do body checkup and buy free insurance 😂






So, do you want free medical insurance in Singapore?

If you still don't know how, read the related posts at the end of this blog.

If AK can do it, so can you!




Related posts:
1. Medisave voluntary contribution in 2018.
2. How to get free medical insurance in SG?

Should NSF invest $30k savings and pay $4k a year for insurance?

Reader says...

I am a fairly new reader on your blog.

I am thankful that you are sharing your knowledge, and at the same time I have a few questions that I would like to seek your opinion on.

I am currently serving NS.

I have been working part time since 18 and have a saved up 30K which I am planning to use for my university fee (Private).






I am not sure whether I should invest with the amount of money that I currently have or just leave it untouched as it is money that I would require in the coming years (approx.1-2 years).

I am also currently spending $4000 a year on an insurance saving plan (25 year plan, 10 years of paying).

I will have to commit to it for another 8 years before I can stop paying, after reading up I have found out that it is not a wise decision to continue, however cancelling the plan now would only ensure me a value of 1k++ returned.

Thus I am unsure if I should or should not continue with it as the whole plan last for 25 years.

AK says...

Welcome to my blog. 🙂

I will never invest with money which I will need in the near future.

As for insurance, my preference is to buy term and invest the rest.

However, an insurance savings plan can be good for people who do not want to bother with investing themselves but would rather let someone else do it for them.

(Then, you are basically treating it as a pseudo bond component of your investment portfolio.)

You decide. 😉







Related posts:
1. Invest with peace of mind.
2. Financial security plain and simple.

Which type of insurance for parents and why?

Reader says...
What do you think of the idea of getting insurance for own parents who are in their late 50s and still healthy?

My parents do not have insurance coverage.

I'm planning to get for them a hospitalization insurance + term life w/ critical illness.






I view it as a protection against my financials should anything happen to them.

Because at the end of the day i'm probably be the one who is footing the bill should any mishap happens.






Thinking along that line, i'm thinking if i should actually profit from the demise of my parents. As a form of investment from the lump sum payout from term plan =X

What would you do?

AK says...
Life insurance are for people with dependents.

If your parents do not have dependents anymore, they only need Medishield Life (H&S) or a private shield plan if they can afford it.





If they are Singaporeans, they should already be covered by Medishield Life.

If C or B2 wards in government hospitals are acceptable, they do not need a private shield plan.

As for critical illness (CI) coverage, it is to provide us with a sum of money for our living expenses in case we are hit with an illness that prevents us from working and making a living.

H&S expenses should be covered by a H&S plan mostly and not by a CI plan.






If we no longer depend on income from employment and are able to retire comfortably, I don't see the need for a CI plan (especially when they are so expensive for seniors).

Please read related posts too.





Related posts:
1. Insurance weakened a family's balance sheet.
2. Do your parents have enough insurance?
3. Why do we need critical illness coverage?

We must pay a premium for "best" healthcare.

Reader says...
I would like to ask you regarding H&S insurance. I have spoken to a few agents to understand more about the H&S products that they are offering.

They would frequently mention “Do you want to stay in private for the best healthcare?” “With riders, you don’t have to worry about co-insurances or deductibles..”






Sounds enticing but I got a shock when I looked at the premiums I have to paid in the long term run and also, I am wondering how am I be able to pay for the premiums once I stopped working in the future. Premiums are highly likely to increase in the future.

So, I asked myself do I really need the ‘best’ healthcare? I am quite contended with decent healthcare that has government subsidies.

As such, I thinking of getting a H&S + rider that has coverage for B1 and below.





The reasons being:
• The premiums paid in the long run is still within my range

• I don’t want to be slapped with a huge bill that cannot be claimed and end up worrying about it

• I hope to have affordable out-patient treatments as a subsidised patient. As some illness need permanent follow ups and not everything can be claimed. 






For Ward B2 and below, one will be considered as subsidised patient. The rest will be considered as private

Can I ask for an unbiased third party view? I am ok with staying in B1 and below + decent healthcare from the public hospital. 

Do think the coverage is sufficient for my requirements? Or am I missing something? Thanks for talking to yourself again.

AK says...
If you are OK with staying in B2 or C ward, then, you only need Medishield Life.

If you wish to stay in B1 or better ward, then, you need a private shield plan.

I am inclined to believe that a higher class ward will provide a more comfortable stay which could help promote recovery.





However, whichever class we are warded in, I believe that we would have access to the same quality of healthcare. :)


Related post:
Is my insurance agent scaring me?

1st voluntary contribution to CPF account in 2018.

AK has become a bit more IT savvy and he now contributes to his CPF account using internet banking at home.

OK, you are right. 

I admit. 

AK has become even lazier in his retirement and will try not to leave home, if possible.





Bad AK! Bad AK!

How to do it? 

Er... You mean how to contribute to CPF account using internet banking or how to become even lazier?

Who threw a shoe at me?

Who? Who?

See related post #1 at the end of this blog.





Anyway, I just did my first online voluntary contribution to my CPF account in 2018!

This was to my CPF-MA which, of course, earns 4% interest a year.

For those of us who are still gainfully employed and paying income tax, contributions to our own CPF-MA will also enjoy income tax relief.

For people under 55 years of age who have already maxed out their CPF-SA (i.e. hit the Full Retirement Sum) and for people who are 55 or older, no top up to the CPF-SA is allowed.

However, we can still contribute to our CPF-MA if it has yet to hit the Basic Healthcare Sum (BHS).







The BHS is $54,500.00 in 2018.

Contributing to our CPF-MA if it has yet to hit the Basic Healthcare Sum (BHS) is a good way to earn 4% interest a year.

Of course, in the process, this helps us to enjoy "free" H&S insurance too.

See related post #2 at the end of this blog.





Last year, I said doing a contribution to our CPF-MA at the start of the year would get us an $88 "ang bao" from the government.


For those who still have mandatory contributions to their CPF accounts and hit the BHS in 2017, with the higher BHS in 2018, they can make a voluntary contribution of $2,500 to their CPF-MA now.

This means that they will get a $100 "ang bao" from the government!





What about AK?

See for yourself:

My CPF-MA is lower than the BHS for 2017 because there was a deduction made to pay for my H&S insurance plan last year.

Lacking mandatory contributions from being economically inactive means that I would be able to make a bigger voluntary contribution to my CPF-MA.

So, my ang bao from the government is going to be more than $100!

How much more?

You calculate yourself hor.

Happy New Year!




Related post:
1. Online contribution to CPF.
2. Free H&S insurance in Singapore.

Insure against longevity risk but not like this.

Reader says...
Hi need some feedback on annuity plans/rates.

Pay 16k per year for 5 years. 

Payout monthly $800 per mth for 10 yrs. annuity rate is 12% correct?





AK says...
It is not really comparable because this annuity pays only 10 years.

It is more like an endowment than annuity.

So, I think it might be wrong to valuate this like an annuity.

It is more like a savings plan without any insurance component.

An annuity is an insurance against longevity risk.

Reader says...
If like cpflife forever then it is more like wholelife policy?

AK says...
Life insurance is different.

That is more for your dependents.

We don't need life insurance unless we have dependents.

We buy annuity in case we are blessed with long life and it helps to fund our golden years.





Reader says...
U know of any annuity plans that u feel is worth considering?

AK says...
CPF Life 😉

Reader says...
What is the limit for CPF-RA?

AK says...
You will know the limit for your cohort when you turn 55. 😉





Reader says...
Just wondering if its u, wud u buy that plan?

AK says...
Basically, you are just getting back $96K for saving $80K.

That is a $16K gain.

And you are not even getting it in one shot but spread over 10 years.

20% gain and spread over 10 years is 2% per year.

It sounds innocent but it isn't

There is a cost to this.







Instead of paying us 100% all at once (like a regular endowment plan), they hold back and we are paid a very small % monthly over 10 years.

Conservatively, we could be losing another 2% every year because we could have placed the money in a Singapore Savings Bond.

So, what are we making here? Nothing!

They are not giving us more than what we could get from a Singapore Savings Bond.





Add the fact that you actually pay over a 5 year period (i.e. $16K x 5), without considering opportunity cost, you are getting less than 2% a year in return (when the $800 a month payout starts) because the waiting time for the first few $16K payments made is longer (i.e. 1 to 4 years more).

To me, it is rubbish.

We would be better off just placing the money in a Singapore Savings Bond.

This product gives an illusion that it is an annuity when it really isn't and even as a savings plan, it fails miserably.

There, I have said it.





Guess which insurance company is selling this product?

Really, no one cares more about our money than we do.

Don't ask barbers if we need a haircut.





Read another blog on insurance published yesterday:
Life insurance a heavy burden. What to do?

Related posts:
1. Rather have an annuity or not?
2. When to get a private annuity?
3. What is effective annuity rate?

Life insurance a heavy financial burden. What to do?

Reader says...
I would like to seek your self talk on whether a person should continue paying premiums for his whole life insurance policy.

Person A initiated a whole life policy with the premium payment duration for 25 years.

After 4 years, the surrender value is now around 20% of the total premium payment till date.









As the monthly premium is occupying a huge part of his monthly cash flow, he is considering to replace the whole life insurance with a term life insurance to "cut losses".

In addition, he is also considering to terminate his child's whole life policy which was initiated in 2016.

After spending time getting himself educated, he realised there might not a need for his child to have a whole life policy.

In addition, the sum assured may also be not that significant in the future, given the inflation rate.

What self talk would you give yourself if you imagine yourself to be Person A in the given scenario?












AK says...
In a nutshell, we need life insurance if we have dependents.

If we do not have dependents, we don't need life insurance.

We can get adequate life insurance and keep the cost of insurance significantly lower by buying term.

Whole life insurance is relatively expensive life insurance but it has a saving or investment component which might appeal to some people.

However, for people with budgetary considerations, term life is the best option.







We need life insurance because bad things do happen but we do not need whole life insurance.

Before terminating your existing whole life insurance, make sure that you get term life insurance of equivalent coverage first.

Ideally, your term life insurance should be for as many years as you think you would have dependents.

I cannot and would not give specific advice but I hope that talking to myself has helped to throw light on the matter.










Related posts:
1. Holistic approach to financial freedom.
2. Insurance weakened family balance sheet.

Have a savings plan and invest fearlessly!

Reader says...
Recently, an agent came to me asking me I should get a saving plan.

As she said that people can invest fearlessly is becos they have a saving plan (safety net) if anything to happen, there's still a saving account.





The saving plan is like pay for 5 years then after 15 years can take the money out with interest.

She says the money can be used for my baby education funds or my personal funds after 15 years.

What r your thoughts on saving plans?

AK says...
What is the guaranteed return?

See for yourself if it is worthwhile.

As a guide, Singapore Savings Bond (SSB) pays 2.16% p.a. guaranteed if held for 10 years.

This is a AAA rated sovereign bond.





So, this savings plan which the insurance agent is trying to sell to you must return much more than this to make it worth considering.

1. 15 years is a long time to hold. You will be sacrificing liquidity for a very long period of time.

2. Insurance company is not a AAA rated country like Singapore.








If you want a similar safety net, locking up some money in SSB for 10 years could be the answer. 🙂

(Unlike a savings plan from an insurance company, you will not suffer any monetary loss for early withdrawal for SSB although the returns would be lower if not held for 10 years.)

15 years is a very long time and in that time, there could be a stock market crash (or two) and I would rather have more money to invest with.

So, with this consideration in mind, putting the money in SSB is a better option for me. 🙂







To be fair, such products (i.e. savings plans) are useful to some people.

These people probably have lots of spare cash and are probably not interested in investing in stocks or hard assets.

These people might not be financially savvy and just want somewhere relatively safe to plonk their money.







If you are financially savvy, buy term and invest the rest. 🙂

Related posts:
1. Insurance weakened family's balance sheet.
2. 2.02% interest attractive? It depends.
3. Singapore Savings Bond good or not?

See this month's Singapore Savings Bond: HERE.

Which CPF Life Plan for me? Basic, Standard or Escalating? (UPDATED JULY 2018).

An annuity is supposed to help fund our retirement. 

So, I should be looking at getting a bigger payout, if possible, and not a smaller one.

So, my choice is the Standard Plan.

I know there are people who would like to leave more money behind for their children and they might say I think the way I do because I have none (or at least I think I have none).

OK, maybe so.

However, I do feel that children should take care of themselves once they are adults. 

Some might tell me that this is a Western idea. 

OK, then, how did this Chinese saying come about?

儿孙自有儿孙福，莫为儿孙作马牛。

Bad AK! Bad AK!

Now, for some numbers.




Following my last blog on annuity rates, if we were to choose the CPF Life Basic Plan in order to possibly leave more money behind when we die, the annuity rate is approximately 7.16% (i.e. $991 x 12 /$166,000). 
- Refer to Ervin's comment on annuity rate at the end of this blog.

If we were to choose the Standard Plan, the annuity rate is much higher at approximately 7.88% (i.e. $1,090 x 12 /$166,000).
- Refer to Ervin's comment on annuity rate at the end of this blog.

I feel that when it comes to an annuity, the bequest should not be a primary consideration because leaving a legacy is not the purpose of an annuity.

An annuity is not a legacy planning tool. 

An annuity is a retirement funding tool.

What about the new CPF Life Escalating Plan?

I would probably stick to the Standard Plan as receiving a more meaningful sum of money right from the start and for many years after that is intuitively more attractive to me.

Intuition is fine but let me see if I can explain my choice mathematically.

The CPF Life Escalating Plan's annuity rate will escalate at 2% every year. 





Therefore, for the annuity rate to be on par with that of the CPF Life Standard Plan's, it would take about 11 years.

Only from the 12th year, the Escalating Plan's annuity rate would be higher than the Standard Plan's. 

This means its monthly payout would only become higher than the Standard Plan's then.

This seems attractive but in terms of total dollars received from the first payout, it would have lagged behind the Standard Plan and, logically, it would take many more years to catch up with the Standard Plan to make up for the "shortfall".

If we take into consideration the time value of money which says a dollar today is worth more than a dollar tomorrow, the difference in value spanning a period of years is probably quite stark.
.




.

I have never been very good at Math and, like with all my blogs, this is just me trying my best to make sense of things but maybe not doing a good job of it.

You have been warned.


So, why would I choose CPF Life Standard Plan?

You blur?

I also blur.




Please remember that I think this is right for me but it might or might not be for you.

Yes, you have been warned again.



---------
Lee Keh Yi:
CPF has updated their CPF Life Calculator.
It show much more details now

.


.

Ervin Ong says...
Your annuity rate calculation is wrong: "CPF Life Basic Plan in order to possibly leave more money behind when we die, the annuity rate is approximately 7.16% (i.e. $991 x 12 /$166,000)". This is because $166,000 is what you have at age 55, but you only start collecting annuity at age 65. You have missed out all the interest for the 10 years period.

Related post:
1. CPF Life estimator.

2. Annuity rates.

What is effective annuity rate and is CPF Life competitive?

A reader read an article in The Straits Times on CPF Life and asked me to write a piece on it.

I have blogged about CPF Life so much already and, so, to avoid boring anyone too much, I will try to keep this short.




This is taken from a recent chat with another reader:

foolishchameleon said...
... with so many annuities in the market, what returns would be considered decent?
2.5%? 3% ?

AK said...
What is a decent return? I have not done any comparison lately but I know none is able to come close to what CPF Life is able to generate which is a minimum of 4%.
However, if it is only 2.5%, I might as well just do annual VC to my CPF account as the OA pays 2.5%. So, intuitively, I would demand at least 3% from a private annuity.

(Source: https://singaporeanstocksinvestor.blogspot.sg/2017/10/how-insurance-weakened-familys-balance.html)

So, when the article in The Straits Times says CPF Life is able to offer a 7.1% effective annuity rate based on $100,000 premium, what are we looking at here?

We are not talking about effective interest rate here. 

We are talking about effective annuity rate.

If we are talking about interest rate, then, based on $100,000 savings in our CPF-RA, the first $30,000 gets 6%. Next $30,000 gets 5%. The rest gets 4%.

Average interest rate is 4.9%. 

I hope my math is up to scratch.





An annuity rate is not interest rate as it refers to how much is paid out as a percentage of our premium each year.

So, in the CPF Life example mentioned in The Straits Times, a 7.1% annuity rate based on $100,000 gives us $7,100 a year or $591.66 per month from age 65 for life.

It isn't a 7.1% interest rate.

It is quite clear that annuity rate and interest rate are different especially when we remember that some of this regular payout is a return of capital which is why at some point in our old age, when we pass on, there is nothing left for our beneficiaries.

Source: 
The Telegraph, 17 May 2017.

Taken from the article in The Straits Times:

The report highlighted that with CPF's interest rate structure, CPF Life is able to provide an effective annuity rate of 7.1 per cent based on a $100,000 premium.

"This compares favourably with life annuities in most markets," stated the report. The annuity rate was calculated based on the ratio of annual payout to premium paid, for a male member born in 1962, or is 55 this year, who receives payouts at age 65.

It is no wonder that financial experts like Mr Christopher Tan, chief executive of Providend, believes that every retiree's portfolio must include an annuity plan to hedge against longevity risk.


He says: "CPF Life is currently the best annuity plan in the market. It is low-cost and offers high return."




Read full article here:
http://www.straitstimes.com/business/invest/is-the-new-cpf-life-plan-ideal-for-you

Related posts:
1. An annuity.
2. Retirement funding.
3. CPF Life Escalating Plan.

Retirement funding assurance for the average investor.

I have met many people who told me they didn't believe in the CPF and they didn't believe in CPF Life.

When I explained that CPF Life is an annuity that would pay us a monthly income for life from age 65, some would go on to say that they didn't believe in having annuities.





There are different reasons given for not having an annuity but amongst investors, those that do not believe in annuities usually believe that they can always do better investing their own money.

It could indeed be the case that some of us constantly outperform the market.

See related post #2 at the end of this blog.

Well, I am not too confident of my own ability to do so.

So, I like to have some assurance that I would have a basic retirement income that is predictable.





In case my investments do not perform well enough in certain years, I have a well I can depend on. 

Having a well helps us to live well.

Sorry, I couldn't resist it.

Really.

No Evian? At least have well water.

That is what an annuity like CPF Life can do for us.

AK anyhow draw one.

Peace of mind is priceless.




Related posts:
1. An annuity.
2. CPF Life Escalating Plan.