ANNUTIES-How can we use them?

[swakoo]

CPF Life has an insurance component so it cannot have a better payout than the old MSS in 20 years

To add-on base on CPF calculator online, to back-up specuvestor statement.

https://www.cpf.gov.sg/cpf_trans/ssl/fin...imator.asp

https://www.cpf.gov.sg/cpf_trans/ssl/fin...s_cal2.asp

For a Singaporean born in Mar 1951, with MS of S$90K in cash. MSS payout is S$711, while CPF life standard is $499 - $530

So MSS payout is higher but only for 20 years, but CPF life is for life.

Feel free to comment if any mistake.

No mistakes but think the CPF Life payout calculated assumes that the said Singaporean signs up for CPF Life now. Person is 62 already now and could have signed up earlier.

By signing up earlier the MS joins the CPF Life pool and gets annuitised earlier so that the future payout is higher. But if person kicks the bucket some time after signing up earlier, the amount going to dependents will be determined according to CPF Life scheme selected rather than MSS rules.

A better comparison will be for someone just reaching 55 now as there is then the standard 10 years for annuitising before reaching 65.

Eg for male Singaporean born in March 1958:
MS: $139K
MSS: $1240 per mth
CPF Life Std Plan: $1101-1219 per mth
The differential is much smaller.

[Temperament]

CPF Life has an insurance component so it cannot have a better payout than the old MSS in 20 years

To add-on base on CPF calculator online, to back-up specuvestor statement.

https://www.cpf.gov.sg/cpf_trans/ssl/fin...imator.asp

https://www.cpf.gov.sg/cpf_trans/ssl/fin...s_cal2.asp

For a Singaporean born in Mar 1951, with MS of S$90K in cash. MSS payout is S$711, while CPF life standard is $499 - $530

So MSS payout is higher but only for 20 years, but CPF life is for life.

Feel free to comment if any mistake.

No mistakes but think the CPF Life payout calculated assumes that the said Singaporean signs up for CPF Life now. Person is 62 already now and could have signed up earlier.

By signing up earlier the MS joins the CPF Life pool and gets annuitised earlier so that the future payout is higher. But if person kicks the bucket some time after signing up earlier, the amount going to dependents will be determined according to CPF Life scheme selected rather than MSS rules.

A better comparison will be for someone just reaching 55 now as there is then the standard 10 years for annuitising before reaching 65.

Eg for male Singaporean born in March 1958:
MS: $139K
MSS: $1240 per mth
CPF Life Std Plan: $1101-1219 per mth
The differential is much smaller.

i think those born after 1950s or 19XX have no choice but are forced to take one of the CPF LIFE's scheme?

[Drizzt]

David Merkel is a hedge fund manager who writes the Aleph blog and talk alot about insurance company investing. Here are some of his thoughts on annuities.

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http://alephblog.com/2013/03/14/on-insur...ng-part-5/

Some products cannot be underwritten. Anytime the insured knows more than the company, that is not a policy to write. As an example, I toss out Long-term care policies, where the insurance industry has lost and lost again. The insureds know their likely claims far better than the insurers do. I feel the same about credit and mortgage insurance, where losses are so correlated that in a real crisis the insurance company fails, and those relying on the insurance fail as well.

I feel the same way about variable annuity living benefits at present — a rising market sets up the losses for when the market falls.

Avoid investing in companies where the law of large numbers does not apply. This is true of all financial coverages. If there is one big macro factor that drives your business it is not a safe place to be.

---

here he answers a question on variable annuities

I read your blog quite frequently and really enjoy the work you put into it. It helps me to think about other opinions/concepts and always look at things in a different light. I’m a financial advisor in St. Louis for a small boutique firm and truly feel your blog helps me be a better financial advisor.

Anyway, in trying to better myself and feel even more comfortable about recommendations I make for clients, I wanted to get your opinion on annuities. In short, I used to avoid these things like the plague early in my career. Now? I find myself using them quite a bit for a portion of clients money and I find that in the planning process, they are a great tool in which to be able to tell clients exactly how much income they can expect in 5 or 10 years when they retire. These riders and benefits are actually very useful in my opinion and have come a long way over the years. I guess where I struggled in the past was during the 2008 crisis when my nice, neat 60/40 allocation for clients still lost them money…..sure, I was charging 1% and that’s cheap compared to the cost of an annuity but I can’t help but think how far ahead of the game clients would be if they had a portion in a product that guaranteed their income. Of course, their account values might be down but their guaranteed income would still be intact.

So, with all that in mind and because of your background in the insurance business, I figured you might be the perfect person to fire away a few questions.

1) What’s your general opinion of guaranteed income riders? Do you think they are worth it? I know everything is relative to clients needs but from a pure practical standpoint, do you find that the benefit is still a good one?
2) What’s your opinion on contracts like with Jackson National or Metlife that offer a 5% guaranteed withdrawal AND a minimum death benefit combo of at least your initial contribution? You have to leave $1 dollar left in the contract for the death benefit to pay but it seems to me to be an attractive option….guaranteed 5% w/d’s with assurance you can pass at least the initial premium on to your spouse or heirs
3) Lastly, what’s your take on this recent article? Maybe for clients not wishing to pass money to heirs, this might be a good strategy? Seems smart actually when they lay it out this way…..
http://www.advisorone.com/2013/02/22/mil...-benefit-n

I’m sure you are extremely busy. I appreciate any feedback. Sorry to ramble, just wanted to get my thoughts across.

the answer

When a Variable Annuity is popular, it is because the secondary benefit is underpriced. Many life insurance companies sell such policies; that is one reason why I don’t invest in them. The other reason is that GAAP accounting for life insurers is too liberal, particularly with guarantees on variable products.

There are many attractive benefits that have been offered in the past with variable annuities. If an insurance company offers to buy you out of an annuity with such benefits, refuse them, unless you know better than they do that you will die soon.

There are some attractive benefits out there, and insurers that have underpriced the benefits. Where you find attractive benefits, have clients invest in them.

Finally, if the living benefit is attractive, exercise the option. Think in your own interests. What will give you the best payoff? At a time like this, where equity values are high, converting asset value into income could be a great idea.

[edragon]

i think those born after 1950s or 19XX have no choice but are forced to take one of the CPF LIFE's scheme?

I think 1957 is the last lot.

[NTL]

From what I know, at the moment, only NTUC Income offer pure annuity which is single premium, and increase in payment (non-guarantee) over the years. The product information can be found here.

http://www.income.com.sg/insurance/Annuity/index.asp

The other insurers offer endowment plans that look like annuity, but i will not classified them as pure annuity, as the plans have surrender value, death benefits, etc. One that I personally took up is from TM Life that pay for life from 60/65, cover me and my spouse, having surrender value (if we intend to terminate for watever reasons), and death benefit.

The other insurers plans are in the links below.

http://www.aia.com.sg/en/individuals/pro..._plan.html

http://www.aviva.com.sg/retirement/for-i...ement.html

http://www.axalife.com.sg/retirement/retire-happy

http://www.tokiomarine-life.sg/individua...ment-life/

Not sure if I miss out any...

Just found out that Great Eastern is also having 4 annuities plans, either immediate or deferred, with option of including disability insurance (based on 2 out of 6 ADLs).

http://www.greateasternlife.com/sg/en/so...ndex.shtml

[Drizzt]

hi Uncle Temperament, would such a product fit your needs? http://www.investmentmoats.com/budgeting...ty-policy/

[NTL]

Round

hi Uncle Temperament, would such a product fit your needs? http://www.investmentmoats.com/budgeting...ty-policy/

Hi Drizzt,

This is the one that I get for myself, joint-life with my wife. Sad to find it no longer available.

From my understanding of the product, the minimum premium period is 5yrs, and payout starts latest at 65. This means the latest entry age is 59? uncle Temperament will not be illegible.

I had done my calculation on my own plan, the guarantee return is around 3.3%pa if I intend to surrender at 85. Else hold till I meet my wife again elsewhere, then my kids will reap the benefit.

When I took up the plan, I thought that TM seems to make it too good. A ridiculous example quoted is of a 60yr old joint life with 20yr old In this case, the 20yr old will be receiving payout from 25. Imagine is this person live until 85, that is 60yrs of payout! Plus the death benefit that roll for 60yrs.... TM going broke!!!


Well... There is a good reason for them to withdraw.

[Temperament]

Round

hi Uncle Temperament, would such a product fit your needs? http://www.investmentmoats.com/budgeting...ty-policy/

Hi Drizzt,

This is the one that I get for myself, joint-life with my wife. Sad to find it no longer available.

From my understanding of the product, the minimum premium period is 5yrs, and payout starts latest at 65. This means the latest entry age is 59? uncle Temperament will not be illegible.

I had done my calculation on my own plan, the guarantee return is around 3.3%pa if I intend to surrender at 85. Else hold till I meet my wife again elsewhere, then my kids will reap the benefit.

When I took up the plan, I thought that TM seems to make it too good. A ridiculous example quoted is of a 60yr old joint life with 20yr old In this case, the 20yr old will be receiving payout from 25. Imagine is this person live until 85, that is 60yrs of payout! Plus the death benefit that roll for 60yrs.... TM going broke!!!


Well... There is a good reason for them to withdraw.

Thank you for all the sharing.
i think the only thing CPF LIFE has a big advantage over private insurance companies on annuity products is that CPF LIFE captures a continuous population of people to join automatically. (Papy is really "brilliant" with our money.) As it is compulsory to join for all who contributes to MS after born 19XX. Though the "returns" are suck-eggs, it does seem to be more "solid" than private insurance companies.
i just wonder if there is a change of GOV. , what happens then?
Cheers!

[Drizzt]

hi ntl thanks for sharing. i think the caveat is this part

So why the difference? Immediate annuities work off of the idea that a lot of people will die, and money from their annuities is reallocated to the living (minus a profit for the insurer, on average). The insurer earns 4.5% on its investments, and additional money of 3.5-5.0% from deaths of annuitants supports the payments of those living, with 1% to cover commissions, administration, and profits.
So, they advertise that they are paying you 7-8%+, when they are really paying you 4.0-4.5%, and exposing you to the risk of inflation, because that payment will never rise. Ask them for payout levels on inflation-adjusted immediate annuities, and watch your jaw drop as you see how relatively low the payments are.

[NTL]

hi ntl thanks for sharing. i think the caveat is this part

So why the difference? Immediate annuities work off of the idea that a lot of people will die, and money from their annuities is reallocated to the living (minus a profit for the insurer, on average). The insurer earns 4.5% on its investments, and additional money of 3.5-5.0% from deaths of annuitants supports the payments of those living, with 1% to cover commissions, administration, and profits.
So, they advertise that they are paying you 7-8%+, when they are really paying you 4.0-4.5%, and exposing you to the risk of inflation, because that payment will never rise. Ask them for payout levels on inflation-adjusted immediate annuities, and watch your jaw drop as you see how relatively low the payments are.

Hi Drizzt,

Ya, the 7-8% looks big, but I always try to put all on the same playing field, that is, what is the compunded return per year? Of course, when determine how much I need, I factor possible inflation over the next 20+ yrs. so when I work out this plan give me 3.3%pa on guarantee, I think it should be good enough for me.

Recently notice that Axa also came out with their retirement plan, so I went to their website to take a look. Their plan do provide option for 3.5% increase in payout yearly. But their guarantee return is only 2.75%pa for a 25yr old. Since I older than that, it will be even lower. To me, it is not attractive enough.

Anyway, annuities only make up a small part of my retirement income. The rest will come from CPF Life, dividends as well as rental. I do hope that I can build up more sources of income so that I can retire more at ease.