Read? Just like our Work Income, Annuity Income is Addictive
"An annuity income stream worked better than an investment portfolio because even with an investment portfolio, we lack confidence the portfolio income will last us a lifetime."
"The problem for Singaporeans is… other than our CPF LIFE annuity income, there aren’t any private immediate annuity plans."
Hmm ....
Is there a problem for Singaporean?
Join 1M65 or 4M65 movement! No problem liao? LOL!
1M65 for lower spender and 4M65 for higher spender!
To be even better than this 1M65 movement; try upgrading yourself to 1M65+++ and supplement your fixed income from CPF with variable investment income from your investment portfolio for discretionary expenses and to fight year-on-year inflation!
Problem for Singaporeans solved?
Posts
Hi Uncle8888,
ReplyDeleteI think there are 1 or 2 insurance companies in Singapore that still offer the traditional lifetime immediate annuity plans. Problem is that they are so "ngiau" that the starting payouts are so freaking low.
E.g. One well known insurer's lifetime annuity pays a measly immediate $70/mth for every $100K lumpsum premium. That's an unbelievable 0.84% initial withdrawal rate (70 X 12 ÷ 100,000).
Even though they projected an annual increase of about 5.5% (non-guaranteed), the projected monthly payout after 20 yrs is still only $204 for every $100K lumpsum premium.
CPF Life has basically killed the local private lifetime annuity plans.
That's why insurers now focus on cashback endowments where people save for 10-20 yrs, and then the insurance companies payback for the next 20-30 yrs. Without the lifetime commitment, insurers can pay slightly higher payouts.
I think for those who can 1M65 or 4M65 thru just savings, that means they are of higher-income. Problem is the annual CPF interests for their excess OA & SA may not be enough for their higher-income lifestyle, if they aren't thrifty to begin with.
Most of them will still require funds/investments outside of their CPF to generate extra income.
Couple of days ago, I was wondering if a balanced portfolio can tahan a retiree during high inflation or stagflation environment.
ReplyDeleteEverybody has been saying 60/40 is dead.
I tested using US data that goes back to 1972. Initial withdrawal rate of 4% of portfolio, and adjusted yearly for inflation.
This is how a $100K 60/40 portfolio would have done from 1972 to 1982, with 4% initial annual withdrawal adjusted yearly for inflation.
Not easy as just 2 years into retirement, your portfolio already below the initial starting amount. In fact for this first 11 years, the portfolio is below $100K most of the time (8+ years).
But if the retiree survived till 1982, then her 60/40 portfolio basically never looked back. At the end of 2008, in the middle of GFC, the portfolio still had 2X the starting portfolio, even with the constant annual withdrawals throughout.
How about if a retiree retires at the start of the worst 10-year period in recent history?
In terms of total returns, 2000-2010 was worse than the Great Depression of 1930-1940. Job market was better, but surprisingly, US stock market was worse.
This is what a $100K 60/40 portfolio would look like, with 4% annual withdrawals adjusted yearly for inflation.
Worse than from 1972-1982.
But just like the above, if the retiree survived till 2010, the portfolio never looked back till today.
The question is do you think "This time is different"? Human nature dictates that we will think so.
Hence retirees will start messing with their portfolios as the markets go up & down.
So for better emotional control, people close to retirement should probably build up 3-5 years worth of household expenses in CASH. Then as actual retirement starts & progresses, slowly put some of the cash back into investment portfolio, leaving about 2 years worth of cash as current account for living expenses.
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ReplyDeleteHmmm, assuming we has a portfolio which provide returns and stay sustainable for 20 years between 45 years old-65 years old. At 65 the CPF RA and any other private life annuity start functioning, could help supplement the income. Theoretically it is possible to retire with a certain degree of security.
ReplyDeleteLifestyle changes naturally will occurred if we re not getting so much returns from a portfolio over the years, switch Starbucks to kopi, makan at hawker center instead of restaurant. go nearby tour instead of Japan tour, etc. Investment orientation might involve taking lesser risk and less adventurous.
Still, there are also danger of unforeseen events that might suddenly eat deeply into the portfolio like huge medical bills......
Its never a comfortable feeling to see one savings declining month on month, year on year, even when one is working with regular income, not to mention for retirees with no more work income.
ReplyDeleteIn this respect it is thus not surprising to see retirees cutting back on their lifestyle in retirement for fear of outliving their savings, at a time when they should be pampering themselves and indulging a bit to live out their golden years.
I am not sure if having passive income can help alleviate this fear of spending to maintain a certain lifestyle. But it will certainly help when you see the principal savings amount remain untouched or even grow, after spending the passive income.
It was in part to address the fear of outliving our retirement savings that we have been building up 5 streams of passive incomes. The 5 streams comprise some non-drawdown (namely interest from our CPF OA&SA, rental income and dividends) and drawdown sources such as our SRS and CPF Life.
We did a "test run" to spend our passive income in 2019. In Jul 2019, our cumulative passive income hit $1M after 8 years 7 months since we started tracking it in 2011. We bought a new car, renovated our home, spent two weeks holiday in S Korea and bought two new handphones to the tune of $180,000. The passive income for 2019 came in at $196,000.
It was a good feeling no doubt, but the real test would be to really rely solely on passive income to maintain our desired lifestyle in retirement without active work income.
In Investment Moat's article, annuity is considered a source of "secured" & "predictable" passive income, allowing retirees to spend more "confidently" in their golden years.
ReplyDeleteAgree with Investment Moat on most points but not an important one. Private annuity and RSS/CPF Life have one key difference - RSS/CPF Life are depreciating resources with nothing left at the "end". Annuity is capital protected, will get back the principal (plus a small growth element) on policy expiry or on surrendering (when cash is needed) after the "lock-in" period . Annuity is more akin to withdrawing interest from OA/SA periodically without touching the principal. Based on current environments, annuity return is expected to be slightly over 2%, below OA interest. So, if you have the extra cash & "owe" CPF a sum withdrawn for property purchases, better option for "secured" & "predictable" incomes will be to "return" the money to CPF, which also has no "lock-in" period to worry about. Alternatively, consider annuity as extra long term fixed deposit with higher interest as reward.
For us, "secured" & "predictable" retirement passive incomes comprise RSS payouts, interests from OA/SA and payouts from bond funds. Thankfully, our current retirement needs of min $10,000/month are satisfied by these "secured" & "predictable" incomes alone. Problem is these are "fixed" incomes, therefore not "futured proof" against inflation. Inflation will need to be catered for by more "risky" & "irregular" incomes.
Have invested in annuity with heavy leverage. Consider leveraged annuity as a source of "unsecured" & "unpredictable" (but higher yielding) passive income stream, together with equity (which currently takes up ~30% of our total wealth including properties/CPF and contributes ~50% of total secured/unsecured passive income), leveraged bond, rental etc. Income from leveraged annuity will vary according to movement in short term interest (SIBOR/SORA), thus not "secured" & "predictable".
Being capital protected, leveraged annuity is much less "risky" than equity (so long no surrendering of policy within the lock in period, a risk within control). Despite less risky, depending on the short term interest movement, amount of leverage, cost of borrowing (lower than property loan, since annuity portfolio is a more secured collateral than property) etc., yield of leveraged annuity could be comparable to, or even higher than, the 7% return commonly cited for equity. Risk/reward is attractive.
Congrats that you stop work at your own choice 10 years ago & enjoy it. I semi-retire at 65, although financially I can do so much earlier. We are not spendthrift, but somehow find it easier to pass time with a job!
ReplyDeleteYES, in the old days, one could accumulate great wealth through property if one had gut (or for the matter, ignorance of the risk at issue) to take on leverage. yes, freehold landed used to be much cheaper than current 3 room HDB . My in-laws bought their 6,500 sq ft freehold semi-D for $80,000 in late 1960s! (unfortunately had "right sized" to a terrace upon their retirement). We bought our first home, a 1,900 sq. ft. freehold intermediate terrace for just over $300,000 in 1987, squeezing the last dollar of our combined CPF to service the mortgage. Made a handsome profit when we sold it in 1996. Ignorance (初生牛犊不怕虎), not acumen in property investment.
Yes, should avoid if you are uncomfortable with use of leverage. I learned to use leverage with equity loan for corporate bonds investment some 10 years ago, took a few cycles to develop the comfort