An annuity proposal: A case study.

I would like to share this exchange which happened on Facebook just now and see if readers who do not follow me on Facebook have anything to say:

"I happened to ask for an annuity proposal recently. put in one lump sum at 50 and start drawing down at 55. AK, do you think this is a good deal?"

Click to enlarge.

My response:

"Basically, we are giving them $150,000 and letting it accumulate for 5 years before they start paying us.

"Conservatively, if we were to invest $150,000 for just a 4% dividend yield which is doable, we would receive $6,000 a year or $30,000 in 5 years, assuming we do not re-invest.





"So, in this case, at age 55, we should have $180,000 in the kitty (assuming investment value stays the same but I believe this is something of academic interest since we won't be able to sell the annuity and so, we have to assume, we won't need to sell the dividend paying stocks).

"Now, if we were to receive a 4% yield on $180,000 at age 55 onwards, we would get $7,200 a year. This is quite a bit more than the annuity payment of $530 x 12 = $6,360 a year. 

"Of course, we can argue that there is a non-guaranteed portion to the annuity. 

"Well, whether that portion will be paid or not is almost in the realm of speculation, isn't it?






"This annuity is, in my opinion, probably a good choice for people who are not very savvy when it comes to investments.

"I will also say that they want to consider a quarterly, half yearly or yearly payout instead of a monthly pay-out.

"If they choose a yearly pay-out, they get $20 more a month.

"They have to be quite disciplined and, of course, don't fall prey to the "magic stone sect"."Just for the sake of comparison, for someone who is currently 55 years old and who has $155,000 in his CPF-RA, 10 years later, at age 65, under the CPF Life Standard Plan, he would be able to withdraw $1,221 a month. (This is more than double that of the private annuity plan.)





"If you like, ask the insurance company which proposed this annuity plan to provide another table which allows an accumulation period of 10 years instead of 5 years so that you can directly compare against the CPF Life which we are automatically covered under."

CPF Life Estimator.

I am just sharing my own thoughts and this is not meant to be any sort of advice.

If you have any thoughts on the matter, please leave a comment. 

I am sure we will all appreciate a constructive and civil discussion on the matter. :)




Related posts:
1. An annuity plan for retirement needs.
2. Achieving level 1 financial security.
3. Retiring before 60 is not a dream.

9 wealth building blog posts!

"Most people believe the key to wealth is a high-paying job.

"Yes, it's easier to amass assets if you have more money coming in each month, but the true secret to increasing your net worth is to spend less than you make.

"It is a cliche; but it is the fundamental, absolute, non-negotiable reality of money.

"To escape this trap, you need to understand that income is not wealth.





"The level of your wealth should be measured by the length of time you could maintain your standard of living without an additional paycheck." J. Kennon

I see, I want, I buy?

Want to see how someone in his 20s is becoming wealthier by the day?

I am talking about Matthew Seah.

The chart he shared with me will blow your mind away:


Becoming a millionaire next door.





It is about saving as much money as we can by keeping expenses low.

This means that we should not buy luxury goods especially not in order to impress people when we have made some money!

I understand that we are human and sometimes we need to pamper ourselves a bit but, please, don't go  Buying a $500,000 watch after 3 years of work to make a point.






The long and short of it, If we are not rich, don't act rich.

Chances are that once we are rich, we won't bother.


Finally, don't get tempted by the dark side. Learn The secret to avoiding financial ruin.







5 more and we make 9 wealth building blog posts complete:
1. Two questions to help us build wealth.
2. An essential habit to becoming richer.
3. The millionaire next door.
4. A fast track to wealth building.
5. From rich to broke?