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Annuity - It's Income Insurance!
Thanks for doing up a nice summary on Value Investing Summit (VIS) Day 1. I left during lunch and not attending Day 2. Decided that the takeaways are too marginal for me to spend my weekend there. But I must say, VIS is really useful for those who are rather passive or inexperienced in financial planning. :)About the not buying annuity, I can't agree entirely. I used to hold the same perspective but when I got down to map out my retirement planning using CPF SA savings (please see attached), I had a different realisation.
From the computations on the last slide, you can see that $200,000 in the CPF SA transferred to RA at 55 years old could give us a monthly income of $1,325 to $1,479 till we konk off, regardless of rain or shine. How much is the FV of $200,000 at 65 years old? It's about $300,000. So that will be about 30% of the $1m which we need for retirement.
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Personally, I believe in diversifying my retirement income. I don't know for sure if my mental faculty can be as sharp when I grow old and for how long I'm still able to manage my investments. If I have to depend on my family to invest for me, wouldn't it be additional burden for them?
I take buying an annuity as some form of insurance on income. I would have some peace of mind if I were to live up to 100 years old (choy! touch wood, touch wood!!). If I don't and I konk off at 85, there is still $100k left as bequest. If I were to go even earlier at 75, there would still be $200k left. This is if I choose the CPF Life Basic Plan.
To balance the need to leave behind a larger legacy, I'll invest the $700,000 in different income generating assets. If I can achieve an average of 5% returns, that will be $35,000 a year, or $2,916 a month. At 6% returns, that will be $42,000 a year, or $3,500 a month. Add that to my annuity plan, I will have $1,325+($2,916 or $3,500) = $4,241 or $4,825 a month.
My point is, we must be clear of our financial planning/retirement objective. Do we expect passive income generation with absolutely no effort? Then there is a trade off on capital preservation. If otherwise, it would mean some work or a lot of work, depending on the monthly retirement income we are after.
My strategy is to build up the CPF SA savings to buy my income insurance, i.e. the CPF Life Basic Plan. If we have $150,000 in CPF SA at around 40 years old, and continue to have contributions up to 60 years old, we would have $600,000 at 65 years old if we delay our withdrawal.
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After buying the annuity, I would still have $300,000 available for other investments. If $1m is the target amount for retirement, technically, I should have accumulated $400,000 outside my CPF SA savings by 65 years old. Assuming I have no savings at all at 40 years old, I would need to save $9,600 each year or $800 per month, for the next 25 years, with a CAGR at 4%, to reach $400,000 at 65 years old.
The above calculation is based on the assumption of hitting the CPF contribution limit on $5,000 monthly income.
The Retirement Savings calculator and the Compound Interest calculator can be found on CPF's website:
New calculators on CPF's website:
https://www.cpf.gov.sg/members/tools/calculators
Related post:
A cornerstone in retirement funding...
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