If we depend too much on investment income from our investment portfolio during our retirement; it can be quite disruptive and not sustainable across market and economic cycles. We really need to have other sources of stable income before entering retirement or FIRE. It is NOT like when our investment income exceeds household expenses; we are ready to FIRE! Chun bo?
2021 H1 dividends are all counted and also includes some trading income. It is about 6.7% and hope that 2021 will NOT be setting a new low below 8%. A new low in the retirement will be super sianz!
Posts
Hi Uncle8888,
ReplyDelete"It is NOT like when our investment income exceeds household expenses; we are ready to FIRE! Chun bo?"
Yup, got to be more nuanced. 2nd level thinking (actually maybe 1.5 level thinking ... it's not that complicated).
- How much excess investment income > household expenses? Ideally 50% more.
- This benchmark household expenses ... izit the bare minimum? Or includes discretionary like nice holidays & weekly hotel buffets? More discretionary items allows you to cut back & tighten belt during bear markets.
- As usual, the basics of personal finance continues to apply during retirement e.g. emergency funds, diversified portfolio approach, healthy lifestyle, shield plan, maybe long-term disability plan or accident plan.
- Relying totally on stocks / reits / property rentals / trading for retirement income can probably be done by at most 25% of the population. Most people don't have the emotional stability for risk assets even when they have a steady full-time salary. Imagine when you no longer have a salary. 🤣
- Govt knows this. Why do you think got CPF Life? Lifetime annuities (including pensions) is something that countries all over the world have long recognised as essential for retirement (for over 100 years). Singapore govt was forced to join in when they realise (1) people actually don't save enough, (2) too much of their savings go to property, and (3) the filial piety tactic no longer works when more & more single children are supporting 2 parents & 2 in-laws [now more & more no children too].
E.g. China's 4-2-1 problem. Now they experiencing the (aspiring) middle-income curse --- getting old before enough of their population gets rich.
Last year's fall in our dividend income from $78,800 (in 2019) to $64,000 (2020) confirmed for us that we cannot depend on dividend income as a steady source to sustain us in our retirement. This year's dividend is not looking any better too. Thus far collected $13,000 for Jan to Apr 2021.
ReplyDeleteOur rental income has been dropping over the years from $3,400 a month in 2014 to $2,900 a month last year. The current tenancy agreement will expire in Jun and the tenant requested to extend his stay till end Jul this year. So rental income "secure" till Jul.
Our fall back is non other than the dear CPF savings. This is the only source of income where we see it increasing year after year. We havnt started withdrawing money from it, but it is certainly calming to see the interests earned each year.
Dividend income for Jan to Apr 2021 should be $15,700
Deletemysecretinvestment,
DeleteI think you should be the "poster child" of voluntary contributions to CPF the smart way ;)
Or that's how you do a Barbell strategy!
CPF is a poor hedge against the roaring inflation of the 70s. (Of course its not coming back; just like SPH will never fail)
During inflationary times, your properties and stocks OUTSIDE of CPF will hold up better. Inflation helps asset owners, provided we don't become Zimbabwe or Venezuela.
But if deflation happens instead like Japan's 80s bubble bursting, then you can seek solace that your CPF has gained purchasing power while watching the soul sapping declining prices of your property and stock assets...
That's the Barbell fully invested way.
Of course then there's the timing the market Pendulum or Teochew way - where got shade you go where!
Well, age has a strange effect on one's appetite for risks. Dont know if its just me, but I started to "love" the CPF scheme from around 55 years of age.
DeleteAnd from 55 yo, the OA & SA funds are like fixed deposits in a bank with decent interest except without the penalty for withdrawals.
Lately I have been agonizing over whether I should continue as a buy and hold dividend harvestor (when I retire) or to liquidate my shares and invest in something else. Question is invest in what?? Property is out because of the punitive ABSD and the children not willing to help me out here.
Annuities?? I am reading up more on the various offerings in the market. Some say this kind of products are better investment than property because one can also leverage, enjoy regular payout (like rentals) and still got lump sum at the end without the hassle of paying maintenance fees, property tax, dealing with tenants and repairs. Hmm!
FA/RM are selling leveraged annuities monthly payouts after 36th month like investing in new build property collecting rental. Leveraged annuity is unlike CPF Life; we will get nothing or little left from CPF Life. But, in leveraged annuity; we will still receive the guaranteed minimum surrender value at 27% of our own capital or at maturity with yearly bonus accumulated if any.
Deletemysecretinvestment,
DeleteYes, my risk appetite do change with age - I've noticed I'm taking on less risks in recent years myself.
Once upon a time, our community used to parrot - buy Term insurance, invest the rest. (Its on the assumption we can do better than the insurance companies)
Annuities are is like the reversed of Wholelife insurance policies. And just as "profitable" when it comes to commissions to the ones peddling it ;)
You think why you were "sold to"?
It appears some veterans now, despite having money making track record, are now questioning their own DIY abilities to beat the insurance companies? Or for that matter, CPF?
I can understand reducing risks when we are coming down the mountain.
But I don't think I've reached the stage where I start questioning or 2nd guessing how I climbed up the mountain in the first place...
Interesting....
Thks CW, I will check them out.
ReplyDeleteBought a leveraged annuity at end of 2019 to add another passive income stream to CPF, equity, bonds, unit trusts & rental. I consider leveraged annuity a safer investment instrument than property in terms of certainty of incomes (should be a consideration for retiree). Reasons: (a) loan is revolving, recurrent payments for interest only. As such, unlike property loan, no concern with inability to "service" the loan (as payouts from annuity should > interest payment, in most probabilities) (b) payouts from annuity is more predictable & stable than rental (albeit no upside).
ReplyDeleteI think the bank also considers leveraged annuity as safe as (if not safer than) property (a)the loan is ringfenced, with bank holding the annuity plan as collateral (b)spread is lower than property loan, especially considering that there is no drawdown on the principal sum. At the end of the loan period (mine until age 99), the principal sum will be significantly lower in NPV terms!
I negotiated with the bank & got a borrowing cost (1 month SIBOR + x%) lower than the lowest housing loan currently available in the market (the quantum plays a part in the negotiation, being a "safe" instrument, should max out)
With leverage, return will be higher if you live longer. For my case, with my borrowing cost & projected average SIBOR for next 15 years, return is >10% if I live to age 80.
It is Leveraged annuity plan through Premium Financing which is something close to property loan financing; and financing our loan size which is comfortable to our risk appetite!
ReplyDeleteRead? When Your Bank RM Called??? (6)
The concept of leverage annuity is very similar to property investment, with up front cash outlay makes up of, say 20%, of the price, the rest is financed through a mortgage loan.
ReplyDeleteReturn of a leverage annuity plan depends on several factors (a) how much leverage? (mine is ~85% after negotiation, i.e., upfront cash is ~15%), (b) future movement of SIBOR. I assume AVERAGE 1.8% (1 month SIBOR) over a 15~20 period in my calculation: if it goes below, I will get more payout, and vice versa. Based on my estimate, The breakeven is ~2.7%, above which interest payment could > annuity payout; (c)the spread, the +x%; (d) payout of annuity. I assume 3.75% return (for the insurer, actual payout is less than this, as the insurer has to account for the cost for managing the portfolio, profit, overheads etc. There is usually a minimum "guaranteed return, which varies from insurer to insurer, usually 1+%). For annuity, insurer invest mostly in defensive instrument such as long term sovereign/investment grade bonds, with small % allocated to more risky assets such as property & equity. Such a portfolio should be fairly stable, 3.75% over the long term (i.e., the "time in the market" concept applies not only to equity, but also to other investment instruments) should be readily achievable (e) how long you live
The main investment risk associated with leveraged annuity is movement of SIBOR, which is the same risk confronting property investment (but property also has risk/reward in price movement, which is less of a case for annuity due to the difference in portfolio). My take is that the risk/award for leveraged annuity is attractive. If SIBOR (or its short term % equivalent) moves up, then annuity return should also move up in tandem. Must be a very poor fund manager if SIBOR is 3.5% and portfolio return is only 3.75%! Putting money in fixed deposit could give higher return! In any case, overall risk is much lower than property investment. A nightmare scenario for property investor if SIBOR (or % in general) goes up, property prices go down, and you can't afford to service the loan anymore. A case of mortgagee sale at a time of market downturn! Surrendering a leveraged annuity plan halfway (because SIBOR exceptionally high for a prolonged period, return of annuity not matching) is significantly less painful
This is just my personal analysis, could be other risks or considerations I am not aware of.
The main risk for any insurance par fund product is the historically low interest rates today.
ReplyDeleteInsurance par funds are 2/3 to 3/4 in bonds (mostly long dated) and will be compromised if interest rates normalise in the next 10-20 years.
If using leverage, then will be double whammy as Sibor will also rise.
Best case is if interest rates remain at current levels for 20 yrs (or go negative), which is kinda unlikely.
So as usual, stay diversified & don't go overboard on leveraged annuity (actually more of endowment plan than annuity).
Yes, bond yield will up & price down if interest is up. This is a concern for bond trader. Personally have held & am still holding several long dated & perpetual corporate bonds (for higher yields). Held & will hold them till maturity. For perpetual, choose only those with resetting mechanism, am prepared to hold them "forever" if need be (though so far all were redeemed at their first call dates, without need to activate Plan B). Credit risk is my concern, not the daily/monthly/yearly fluctuations. Trust the annuity portfolio (which are ultra long term) managers adopt similar approach.
ReplyDeleteYes, short term interest is an issue & agree the current low interests is unlikely to stay this low for another 5 or more years. My base case is SIBOR @1.8%, double the current rate. Will still benefit from the leverage if SIBOR is >1.8%, albeit with lesser return (if events turn out according to base case, return is ~10%, if live to age 80). Leverage will be "useless" when SIBOR reaches ~2.8%, beyond that I will "loose" money. Over a ~20 year period (hope I can live up to 86), chances for AVERAGE SIBOR to be ABOVE ~2.8% is low (have already benefited from ~1.5 year of <1% SIBOR thank to COVID, with interest saving of >$2,000/month) If AVERAGE SIBOR > 2.8% against the odds, will just surrender the policy, no big deal. If I don't even have 10 more years to live, my life insurance will kick in (life insurance works the opposite way, the shorter you live, the more you "benefitted"). No investment is risk free, the risk/reward for leveraged annuity is better than most. Annuity is different from Endowment. Endowment will give you a lump sum at the end of the "insured" period, annuity will give you monthly income.
For readers chanced upon this conversation, I am not advocating putting all, even a high portion, of your wealth in leveraged annuity, despite the suggestion that this product is better than most investment in terms of risk/reward (having went through different types of investments - properties, equities, bonds, forex etc., some give higher return at higher volatility & vice versa). Diversified portfolio is the safest approach for long term passive income stability (the concept is the basis of a Nobel prize award in Economics). My retirement incomes come from several sources, with annuity constitutes only a small portion for diversity sake - CPF (Mrs. & own RSS topped up to Enhanced, OA/SA interests), Singapore equity (dividends of which make up ~50% of family total passive incomes), foreign equity (mostly ETF & unit trust, Asian biased, am a believer in the long term growth story of Asian economies versus other regions, including the US) bonds & bond funds (mostly high yield & emerging market), property rentals & leveraged annuity